Microsoft's Office 365 Could Validate Cloud Strategy

Microsoft's Office 365 marks a substantial foray into cloud computing and carries some substantial risks for the company.

For quite some time now, Microsoft CEO Steve Ballmer and his executives have been touting an "all in" strategy regarding the cloud.

That strategy predicts a gradual transition from desktop-based software to online subscription services, with businesses eventually paying a set amount per month to store their data and launch applications from Microsoft's servers. In theory, this benefits businesses by reducing the need for on-premises servers and other IT infrastructure (and spares them the sometimes onerous process of updating their own software, since those updates are ported over the cloud). It also benefits Microsoft by turning customers into monthly subscribers, ensuring a steady revenue stream.

Office 365, released in its final version near the end of June, represents Microsoft's boldest attempt yet at enacting this "all in" strategy. A rebranding of the company's BPOS (Business Productivity Online Suite), Office 365 links Microsoft Office, SharePoint Online, Exchange Online and Lync Online into a platform that costs between $2 and $27 per month, depending on options. It comes with an Office 365 Marketplace loaded with productivity apps and professional services.

On June 28, Ballmer took to a New York City stage to roll out the final version of Office 365. "We believe effective collaboration is a lot more than good group dynamics," he told the assembled audience of media, analysts and business owners. "It's instant access to relevant information ... and the right people taking the right action at the right time."

During that launch event, and in its accompanying press materials, Microsoft seemed intent on angling Office 365 as primarily a solution for small- to midsize businesses. That would also place the new service on a collision course with Google Apps, for which SMBs are considered to a key demographic.

The question is whether Microsoft can leverage its longstanding presence within the business community to squelch Google's attempts in the productivity arena. According to analysts, that seems unlikely, at least in the short term.

"While Office 365 does put Microsoft in mortal combat with Google," Matthew Cain, an analyst with Gartner, wrote in a June 28 email to eWEEK, "it is not really an existential threat for Google since Microsoft is essentially validating the model that Google pioneered with Google Apps."

He also suggested that Office 365 could end up drawing added attention to Google Apps as a viable alternative. Even so, it could be some time before companies choose to submit more wholeheartedly to the cloud-productivity model. "The first ingredient we need for companies to wholly embrace cloud-based personal productivity and collaboration tools is time," Cain wrote.

However, according to another analyst, Microsoft needs to make its cloud case sooner rather than later.

"Microsoft is struggling to show value given that Google is preaching -free,'" Rob Enderle, principal analyst of the Enderle Group, wrote in a June 27 email to eWEEK. "They need to reeducate their market quickly. But [they] don't see this as a marketing problem but as a product problem-and they are playing Google's game as a result." 

Microsoft's traditional lines of business have been performing relatively well, with strong sales of Office 2010 and Windows 7 contributing substantially to the company's bottom line. However, there are precious few signs in those balance sheets indicating that cloud initiatives will translate into substantial revenues in the near-term. Microsoft executives have been reluctant to discuss any hard metrics for business-cloud adoption. If Office 365 turns out to be a success, it could start Microsoft down the road to profitability in its cloud-based efforts-and validate that "all in" strategy.