"Office is the Browser" - Microsoft

Hosted office applications are getting better, and are providing more and more functionality that is generally available on Office Desktop applications. Suites like GAPE and Zoho are providing functionality that is pretty close to what most people expect and use.

As Google, Zoho and a number of other SaaS firms bet on the providing rich functionality over the browser, Microsoft is attempting a contrarian strategy.

According to Microsoft, Office applications like Word, Excel and Outlook can be front ends for more complex back-end applications like SAP etc. This integration benefits

• the back-end application vendors through additional seat license sales, and consulting revenue through integration,
• increases Microsoft Office sales,
• and makes it more difficult for enterprises to switch to another Office application easily later.

Most firms have been using Excel to query and analyze databases and create usable reports, and Office Business Applications formalizes this process. However, the success of this strategy depends how competitive SaaS offerings can be to Microsoft Excel, which has been the undisputed leader in its class.

I see 2 key challenges to Microsoft Excel's dominance in the market.

• Google's ability to outprice Microsoft in its "free hotdogs, just buy mustard" offering.
• Office 2007 - which has been a significant change - and has not been adopted widely among the the most common users yet, and upgrades are likely to take some time to verify that integrations with previous Office versions work with the newer version as well.

Office 2007 has a significantly different look and feel, and there is a learning curve associated with using Excel 2007, after you have become used to the previous version. Also, Enterprise IT organizations have been waiting for any significant problems to show up and be fixed in Service Packs before adopting the new version. Given this uncertainty around Office 2007, both Google and Zoho have a unique window of opportunity to push and get SME's to adopt their solution instead of Excel.

Google and Microsoft

Google seems to have perfected the art of attacking its competitors cash cows. Attacking cash cows is a good strategy for two reasons – it makes the company being attacked move to a defensive role. Once in a defensive role, you are reacting to the competitor's threats, rather than focus on adding value to the customer and others in the value chain. Second, a loss of revenues means that there is less investment available for other projects that help the company retain competitive advantage.

Google has done this often and rather successfully. First, it took on Paypal. Google Checkout's price promotions in the 2006 holiday season and throughout 2007, have led to significant adoption in the marketplace, and has forced Paypal to spend additional product development dollars or lose market share.

It has also done this with Microsoft – with GAPE (Google Applications Professional Edition), which bundles the equivalent of Office and Exchange in a SaaS solution at a price of $50/user/year. Exchange and Office costs of ownership are significantly higher.

The unchallenged competitive advantage Google has as a market maker for ads makes it possible for Google to finance these strategic initiatives.

SWOT Analysis for Microsoft

Strengths	Weaknesses
Closest to customer	Hard to convey incremental value to customer
Solid Development platform	Execution
Established ecosystem of partners	Partners capturing too much value
Lots more experience in managing value chain
Opportunities	Threats
Better Development Tools	Google - Office
Publisher Ad incentives	Open source - Servers
international markets	Virtualization – Can they make server OS' irrelevant? Adobe?
Enterprise software

SWOT Analysis for Google

Strengths	Weaknesses
Execution	Dependent on network operators and PC OS's
Unchallenged Ad market making	Single source for revenues
Established ecosystem of publishers and advertisers
Major SEM tools integrated
Traffic cop for the internet
Opportunities	Threats
Mobile SEM	Can execution be sustained?
Making other advertising markets efficient	Can someone incentivize publishers to move elsewhere?

For Microsoft to retain competitive advantage and the ability to price products without significant competitive pressure, it must act to somehow dilute Google's source of revenues. As most of you already know, Google a significant portion of ad inventory where Google Ads are served is on non-Google sites. If Microsoft were able to convert these publishers to use their own version of an ad network, codenamed Gatineau, or at the very least undermine the use of the Google Adsense program (through legitimate means, of course). Microsoft can do this in 2 ways – buying a stake in publishers –like Facebook – which it has already done, offers a potential for a significant amount of ad inventory that is out of Google's hands. The second, possibly more difficult option, is to provide ads cheaper to advertisers, and pay more to publishers – and take less of a margin or no margin at all in brokering the transaction. While this doesn't help Microsoft's bottom-line directly, it helps by impede Google's ability to invest in high projects that will continue to offer it competitive advantage.

The Malaise at Microsoft

In a business school case (Rohm & Haas), we learned about how channels of distribution were critical to a new product's success. I have added a brief description of the case below.

Joan Macey, Rohm and Haas' market manager for Metalworking Fluid Biocides, found that sales of a new biocide, Kathon MWX, was utterly disappointing. This was all the more puzzling since sales of her other product--Kathon 886 MW, a liquid biocide used only in large-capacity tanks--was well on target and held a steady 30% market share. In May 1984, about five months after the new product was launched, Joan Macey was reviewing her entire marketing strategy with a view to bringing Kathon MWX sales closer to target. Of particular concern to her were the distribution and communication strategies used for the new product.

Designed for Channel, not the end-user. The better product apparently cannibalized strong service revenue retailers were getting, and retailers really didn't have any incentive to sell the new product. Obviously, Microsoft has learned this lesson too well. That is the problem. It is obviously not enough that a product exist to help players in the value chain capture value, it has to create substantial value to the customer too.

Products don't solve a problem: Most products (including Vista) primarily seem to be designed to push more products and services to customers who really don't see a problem being solved.

Products create problems. In fact, most people I know have gone back to XP because all their software and peripherals (Camcorder, Palm software etc.) work with XP but not with Vista. These are people who prefer function to form.

Advice to product managers: talk to end users for product requirements, not just to channel partners.

How much is it again? Licensing is confusing. Now, that is an understatement. Because a lot of Microsoft products are sold through channel, Microsoft has to list really ridiculous list prices for their software. Other software vendors like Oracle also do so, but Oracle primarily deals with large enterprises, whereas Microsoft has a lot of small business customers. If I don't understand pricing, as an IT manager, I will go to a vendor who has a more transparent pricing model.

The licensing tool is an attempt to help with your pricing confusion and perhaps anchor a ridiculously high price as a reference point for you to begin bargaining.

Segmentation Gone Wild
Microsoft Dynamics, after several confusing name changes, has 7 products and each product has an average of 3 editions. Not only is this challenging for the customer to navigate through, it is challenging for the sales staff who has to be up to date on the features of each of those products. Is it really cost-effective to extract every ounce (or more) of value from your customers? Or is it poor post-merger integration?

Peanut Butter with your OS?
Yahoo executive Brad Garlinghouse wrote the Peanut Butter manifesto for Yahoo, but it applies to Microsoft as well. The software maker recently launched Real Live Moms, a Live Spaces site that exhorts moms to be "the most spirited mom in the block" (sic) and other spaces to promote its "community." It may be time for a talk about the problem of spreading resources too thin and shoddy execution on products.

Outlook: I'm moving to GAPE!
As SAAS offerings like Google Applications Premier Edition are beginning to provide rich functionality, avoid issues like local storage, and provide a clear pricing structure ($50/user annually), I expect more small businesses to move to such products. Also, improvements to Google Gears may take care of times when your network go offline for brief periods.