Steve Ballmer Sticks It to Cloud-Computing Doubters

Still think cloud computing is nonsense? The undisputed King of Desktop Computing, Microsoft (Nasdaq: MSFT  ) , yesterday unveiled Office 365, the online version of its namesake productivity suite, at an event in New York.

Office 365 won't be universally available until next year. For now, Microsoft is keeping the suite in beta while selling two distinct versions to customers. A small-business edition gives companies with 25 or fewer employees access to the online editions of Microsoft's Office apps, SharePoint, and related services for $6 per user per month. A larger-scale version of the platform that includes email, voicemail, videoconferencing, around-the-clock support, and more sells for $24 per user per month.

Investors appear to like the idea. Shares of Microsoft rose more than 7% this week, outpacing the S&P 500.

Oh, the hoopla!
For its part, Microsoft is treating the rollout as a breakthrough. Go ahead, read the press release for yourself. In it, you'll find bloviating quotes like this one, from Kurt DelBene, who leads the Microsoft Office Division:

"With Office 365, your local bakery can get enterprise-caliber software and services for the first time, while a multinational pharmaceutical company can reduce costs and more easily stay current with the latest innovations. People can focus on their business, while we and our partners take care of the technology."

Woohoo! Hooray for small business! Oh, wait. This is what Google (Nasdaq: GOOG  ) has been providing for years with Google Apps and what Apple (Nasdaq: AAPL  ) is aiming for in replacing MobileMe with iCloud.

And even before there was a rush to cloud computing, there was the free OpenOffice.org, desktop software supported by the open-source community that provides similar functionality to Microsoft's Office productivity suite.

Can you handle the truth?
Let's call this what it really is, OK? It's Mr. Softy's attempt to preserve a product that accounted for 48% of operating profit last year, and which has seen growth stall as Google Apps has gone grown from a 2006 lab project to a legitimate Office alternative:

Year

Business Division Revenue*

Year-Over-Year Change

 

Business Division Operating Profit*

Year-Over-Year Change

FY 2010 $18,909 0.24% $11,664 1.83%
FY 2009 $18,864 (0.21%) $11,454 (1.94%)
FY 2008 $18,904 14.72% $11,681 8.59%
FY 2007 $16,478 13.95% $10,757 12.44%
FY 2006 $14,461 8.75% $9,567 4.60%

Source: Capital IQ, a division of Standard & Poor's.
*In millions.

Over the same period, Google Apps has grown to serve an estimated 30 million users -- 12 million of which are school staff and students, The New York Times reports -- while Gmail is purported to serve as many as 200 million users. All indications suggest that the Big G is tapping into a massive growth opportunity at Microsoft's expense, and that's despite upselling issues.

Why you shouldn't be surprised
But this isn't really surprising, is it? Among those surveyed for KPMG's annual report on technology-company revenue drivers, 65% said cloud computing was a top priority for IT spending. Only 54% of executives ranked the cloud as highly last year.

Investors paying attention can see the shift in reported results from several of the companies delivering business software through the cloud. Here's a sampling:

  • salesforce.com (NYSE: CRM  ) grew revenue 34% year over year in the most recent quarter. Deferred revenue grew 38% over the same period, an indicator of increased demand for its suite of customer-engagement tools.
  • Around the same time, NetSuite (NYSE: N  ) saw revenue improve 21% while non-GAAP profits soared 52% and contract signings -- what the company refers to as "calculated billings" -- rose 30%. Midsized businesses like what NetSuite offers.
  • SuccessFactors (Nasdaq: SFSF  ) may go heavy on the hyperbole, but its platform for online-talent management has a following. Revenue soared 52% in the latest quarter while deferred revenue improved 24%.

So let's give Microsoft credit. Mr. Softy may be late to the cloud-computing game, but it's nevertheless the right game to be in. Does it have the chops to compete? You tell me. Let us know what you think about Office 365 using the comments box below.

And if you care to learn more about cloud computing, I encourage you to try this free video report. You'll walk away with a winning pick from our Motley Fool Rule Breakers scorecard and a better understanding of how the Web is reshaping entire industries. Go ahead and check it out -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, Apple, Microsoft, and salesforce.com, creating a diagonal call position in Microsoft, creating a bull call spread position in Apple, and shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 02, 2011, at 3:48 PM, Futurist01 wrote:

    There is no doubt that the Cloud has arrived in the business place, and as usual, Microsoft is not the first company to arrive at the dance. However, this is fairly typical for a very large and diversified company. Mr Softy has both succeeded (Windows, Office, Explorer, X-Box) and failed (Kin cell phone, Zune media player, etc.) in terms launching new products.

    With Office 365, Microsoft is able to leverage their globally successful Office suite and offer it on the cloud platform. As long as the performance, user experience and pricing is superior or comparable to competitors, which is looks like it is, Microsoft's partner channel, marketing reach and vast customer base is likely to do the rest.

    Microsoft did finally wake up to the cloud revolution and luckily for them, businesses move a lot slower than all the cloud media and analyst hype, so they have plenty of time to now push, push, push and improve their Office 365 product to gain significant "cloud" market share.

    Here is another thing to think about, in certain fast growing markets in Asia, like China, Taiwan, Thailand, etc., software piracy is over 80% (it is actually over 90% in China!). The more companies move from internal use of software like Microsoft CRM and Microsoft Office and instead rent their software in the cloud, the less piracy there will be and the more Microsoft and its profit margin will benefit. Google, Salesforce.com, etc. has due to their cloud delivery, never had much loss to piracy due to their cloud delivery, so here Microsoft stands to gain ground on them from a revenue perspective. You can do your own calculations to guess how many billions of dollars extra Microsoft would make per year if they get the piracy rate in China down from 90 to 50% or less due to "non-piratable" cloud-based services....

    Now fast forward nine years, from July 2nd, 2011 (today) to July 2nd, 2020, do you think Microsoft has a significant cloud-based market share for solutions such as Office and CRM? I do. They are leaders in both areas today and by 2014 or so, you can expect to also see their leading ERP software in the cloud and tightly integrated with Office 365, and that will be in plenty of time to catch the vast majority of businesses that are still not using cloud-based business software.

    Now do I think the nurds from Redmond will take over the social media space in the same time frame? No, leave that to other companies that have better talents in this area than Microsoft! But, when it comes to more "boring" but highly profitable solutions like Spreadsheets, Word Processors, CRM, ERP, Operating Systems, E-mail, etc., Microsoft is a leader and will remain a leader for a very long time and they will end up benefitting from the cloud.

  • Report this Comment On July 02, 2011, at 9:26 PM, crutch145 wrote:

    $24 per user per month seems a little steep. I work for a company that employs over 100,000 people. That would cost $28 million per year. Is that really something most large companies can afford to spend just to use an office suite? Don't get me wrong, Office is great and can be really helpful to any company... but $28 million eats up a lot of revenue considering all the other expenses a large company has, e.g. healthcare benefits, paying employees, etc.

  • Report this Comment On July 02, 2011, at 10:17 PM, ativoj wrote:

    @crutch145. It looks like you have selective memory. Read ahain what is written in white and black above:

    "For now, Microsoft is keeping the suite in beta while selling two distinct versions to customers. A small-business edition gives companies with 25 or fewer employees access to the online editions of Microsoft's Office apps, SharePoint, and related services for $6 per user per month. A larger-scale version of the platform that includes email, voicemail, videoconferencing, around-the-clock support, and more sells for $24 per user per month."

    None of the other players offer voicemail, videoconferencing and most importantly "around-the-clock support". What Google offers for $5.00 does not even compare to what Microsoft offers for $6.00. Please, open your eyes or set aside biases.

  • Report this Comment On July 03, 2011, at 7:30 AM, Uruzone wrote:

    @ativoj, I think you're missing @crutch's point. $24/user/month = $28,800,000 per year for a large company. Volume licensing from Microsoft for that number of people to use Office is about $300,000. Email has zero cost to an enterprise of that size, so Microsoft is anticipating Voicemail, video conferencing and 24/7 support is worth twenty eight million, three hundred thousand dollars?

    Hmmm. Doesn't really add up. Has nothing to do with biases, brother. It's just math.

  • Report this Comment On July 03, 2011, at 8:36 AM, louchios50 wrote:

    where are you getting $24/mos from ?

  • Report this Comment On July 03, 2011, at 9:48 AM, wck59 wrote:

    $24 a month is for a lot more than just office. By using the cloud services a company will also save on staff, racks of servers and electrical bills. Additional it probably in valid to say $24 x 12 x 100k, there is bound to be a lot of workers that don't need the full level of the product.

    I don't have a good estimate of what the price would be, but I'm sure it is a lot less than the simplifed calcuation of $28.8 million.

  • Report this Comment On July 03, 2011, at 12:25 PM, baldheadeddork wrote:

    If you work in IT for a company with 100,000 Office users, you already know that you don't pay full retail for those licenses. It will be the same with Office 365.

    I think the threat from Google Apps has been greatly overblown. Thirty million users worldwide after five years isn't setting the world on fire. Having 40% of that in schools should be a warning sign, too. Apple has tried for decades to make product exposure in schools translate to adult usage and they're trying to hit a 10% market share.

    Also, and I know this is going to sound crazy, but maybe the lack of growth in Office sales since 2008 might have something to do with this little economic downturn you might have heard about. If millions of jobs have been lost, then maybe companies have pulled back on buying new computers and updated Office suites, too. Just a thought.

    Microsoft Office has the same role in its field that, say, gasoline does for transportation. It's not that God said you have to use a gasoline-powered car and nothing else. You can buy an electric car, take public transit or bike to work. In some ways those might be better. But they'll have shortcomings, too, and their rarity will present problems.

    The killer advantage of MS Office is that it is such a well-known product and experience. If you don't know how it works, someone within five feet of you does and they can help if you have problems or questions. If there's a serious problem, an entire industry has built up around supporting and maintaining Microsoft products in the workplace. If you run a company, it means that you don't have to hire people who know niche products or disrupt your business for months to retrain everyone. If you're a worker, competency in MS Office is a skill you can take anywhere.

    Techies and stock pickers are quick to overlook this simple and obvious fact, but it is far and away the #1 reason why most businesses will not give up MS Office even if the alternative is free. Office is the devil they know. The benefits of switching to Open Office or Google Apps aren't worth the frustration and lost productivity during the switch, and they don't have to worry about compatibility with all of their clients and partners who are still on MS Office.

    All that said, I don't know if Office 365 is going to do any better than Google Apps in living up to all the cloud hype. In trying to appeal to everything from a single user to enterprise operations, MS has made the plan structure needlessly complicated, and when you break down the numbers for a small business it's still more expensive than running a server in your office.

  • Report this Comment On July 03, 2011, at 12:26 PM, techy46 wrote:

    Microsoft increases Office division revenue 31% over 5 years making a total of $15.5 billion in additional revenue and you're questioning their late arrival to offering the products for less. CRM still isn't a $2 billion year threat. Why would they want to cannabilize their revenue any sooner? Being late to the party is usually a good thing especially if you're the most valuable guest. Just like Intel, I think they both know exactly what they're doing and when they want to do it. Lets' see who's the life of the party in 2012-13. Your analysis is flawed.

  • Report this Comment On July 03, 2011, at 8:39 PM, cloudcomputing wrote:

    Cloud computing is here to stay.

    <a href="http://www.whatisthecloud.us">Cloud computing</a>

  • Report this Comment On July 04, 2011, at 6:11 PM, techy46 wrote:

    So Caterpillar has 105,000 employees and does $46b a year in revuenue. CAT's IT budget could be 1-2% of revenue or $460-960 million, How much do you think they're spending on employee productivity software? I'll bet their ERP expenditures are $100-200 million year on SAP or something like it. So $30-40 million on office productivity wouldn't be that outrageous.

  • Report this Comment On July 05, 2011, at 9:22 AM, revealedin71 wrote:

    What about better-than-the-CIA security for the cloud? I cannot see a large financial institution (or even a small one) entrusting its customers' and the bank's info to a security risk like the cloud setup.

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