For many years, Microsoft (NASDAQ:MSFT) Office was the undisputed king of the productivity software market. In 2012, Gartner put Microsoft's market share in the business productivity software market at 90%, a dominance that made Office Microsoft's largest source of profits.
It took a shift in how software companies sell their products for Microsoft's near-monopoly to be genuinely challenged. The rise of software-as-a-service, where software is bought as an ongoing subscription, often delivered via the cloud, instead of as a one-time perpetual license, has forced many companies with profitable legacy software products to adapt to the new business model.
Microsoft launched Office 365, its SaaS version of Office, in 2011, in response to competition from Google (NASDAQ:GOOG)(NASDAQ:GOOGL). It's taken a few years, but the shift toward cloud-based productivity suites in the enterprise is picking up steam. According to a survey done by Bitglass, 48% of enterprises are now using cloud-based productivity and email products. For organizations with more than 1,000 employees, adoption is now at 57%, up from just 18% one year ago.
One year ago, Google Apps were well ahead of Office 365 in the enterprise, claiming a 16.3% enterprise adoption rate, compared to just 7.7% for Office 365, according to the same survey. Microsoft still dominated the portion of the market that wasn't cloud-based, but the market for productivity software was shifting under Microsoft's feet. It appeared at the time that Google would be the one to finally dethrone Microsoft Office, potentially killing Microsoft's biggest cash cow.
That's not exactly how things have played out.
Not so fast
According to Bitglass, adoption of Office 365 has exploded over the past year, with Microsoft's offering surpassing Google Apps in terms of enterprise adoption. Office 365 adoption has more than tripled, rising to 25.2% of enterprises, compared to Google's 22.8%. According to a different survey, Office 365 is now the most widely used business cloud application of any type, surpassing even cloud giants like Salesforce.com.
How did Office 365 go from a distant second to the cloud application to beat? I think there are two factors in play. First, Microsoft's strategy of supporting platforms other than Windows, as well as striking integration deals with other cloud software companies, has eliminated much of the downside to choosing Office 365. Microsoft has launched Office apps for iPhone, iPad, and Android devices, and the company has treated these apps like first-class citizens. Even the Mac version of Office has been updated, the first update since Office 2011 for the platform.
Had Microsoft chosen to ignore non-Windows platforms, organizations using a variety of devices, ranging from Windows PCs to Android or iOS mobile devices, would have had a very good reason to choose Google Apps instead. By embracing the devices that people and companies use, Microsoft has ensured that Office 365 doesn't come with a built-in disadvantage.
Microsoft has also struck integration deals with rival companies. Cloud storage companies Box and Dropbox, both of which compete with Microsoft's OneDrive, have now integrated their products into Office 365. For Microsoft, the success of Office 365 is far more important that driving OneDrive usage, so supporting the competition makes sense. Microsoft has even formed a partnership with Salesforce, despite the fact that Microsoft's Dynamics CRM software is a direct competitor.
Beyond making Office 365 more accessible and compatible, Microsoft has one major advantage over Google. Since Microsoft's market share in the non-cloud productivity suite market is so large, for companies that already use Office, Office 365 is the path of least resistance. Now that Office 365 supports every major platform, the main differences between Office 365 and Google Apps are features and price. While the higher-end Office 365 plans are more expensive than Google Apps, they also come with far more functionality.
Disrupting the disruptor
As organizations continue to move to cloud-based productivity suites, Microsoft has ensured that its enterprise customers have little reason to choose anything other than Office 365. Microsoft's traditional enterprise Office business is now declining, driven by this shift to the cloud, but the good news is that Office 365 should be able to pick up the slack.
Google Apps have certainly been disruptive to Microsoft's most important business, but Microsoft has managed to rapidly adjust. Once most companies have moved to cloud-based productivity suites, Microsoft may not enjoy the same level of dominance as it has in the past, given that Google is still a major player. But Microsoft Office is alive and well, and any predictions of its demise are premature.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns and recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Microsoft. The Motley Fool recommends Gartner and Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.