On the same day that the state of New York published a report supporting open formats for electronic documents, mighty Microsoft (NASDAQ:MSFT) said that it would support the open-source ODF format in Office 2007. Redmond's own Open Office XML specification may be heading for the great Recycle Bin in the sky, never to come back.

What happened?
The twin developments are noteworthy to astute investors for multiple rasons. While several European countries, the EU itself, and the state of Massachusetts have distanced themselves from proprietary document formats like Word's .doc text documents and Excel's .xls spreadsheets, the same scene looks much more dramatic from the lofty heights of the Empire State.

Across the continent, Mr. Softy rarely throws in the towel until he knows that he's been beaten. Just look at the measures the company is willing to take to stay in the online search fight, despite being thoroughly dominated by Google (NASDAQ:GOOG) and even Yahoo! (NASDAQ:YHOO). Redmond's hardly fond of wasting its resources, because the company has a pretty good track record in these extra-innings showdowns. But its winning streak only makes its surrender here that much more glaring, especially when the company's backing down on turf it actually created years ago.

Why is this a big deal?
Office apps are big business for Microsoft. The Microsoft business division, where Office sales make up the bulk of the operation, provided $18.3 billion out of the company's $58 billion in sales in the past year. The business division also brought in $11.9 billion out of $20.8 billion in operating profit. If the golden Office goose leaves the building, Mr. Softy will be very sad indeed.

That's why Microsoft has been so keen to keep the inner workings of its file formats secret, so that upstarts like Corel (NASDAQ:CREL) WordPerfect or IBM's (NYSE:IBM) Lotus Office would never get the details quite right. It seems that the open-source ODF format, first spawned by Sun Microsystems (NASDAQ:JAVA) and popularized by the free OpenOffice.org office suite, has finally broken the camel's back.

To be sure, various legal challenges to the Microsoft monopoly also helped, and perhaps some other third-party specification would have received this newfound support if ODF wasn't there. The antitrust departments domestically and abroad might have played a large part in forcing Microsoft's hand here. In the end, this can't be good for Microsoft's ego -- or its business.

It's a new world, baby
Most of the Office alternatives that support ODF files today have a serious price advantage over Microsoft's products (you can't beat free). And while their support for true-blue Microft-generated files is good, it's not perfect. In that light, you can understand why there must have been a lot of hair-pulling and tooth-gnashing -- maybe even some chair-throwing -- in Redmond before Microsoft made this difficult decision.

When creating business documents in Google Docs, ZoHo, or OpenOffice and sharing them with users of vanilla MS Office becomes both simple and a guaranteed success, there will be much less reason for users to cling to proprietary, locked-in formats. After that, users and IT managers can choose alternative office suites without alienating the regular Office users of the world, and Microsoft will have to protect its cash cow through excellent support, great design, and useful new features, rather than just guarding the well-worn standard upgrade path.

I can't say that Google or Sun or anybody else just won a bigger share of the office software market, and if they did, it won't help their revenue or profits directly anyway. But it's clear as day that Microsoft just took a serious hit, and the impact may take a long time to make itself felt but it will come.

The company's biggest revenue generator may be a shadow of its former self in a few years. I just hope that Microsoft has some alternative business prospects on tap -- and no, tackling Google's search hulk head-on doesn't count.

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