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, 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:


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:

  • (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.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.