Microsoft Office 2010 Could Be a Revenue Boon or Bomb

Microsoft Office 2010 marks the transition of the productivity suite from primarily desktop-based applications to products served for free from either the cloud or a combination of cloud and on-premises data center. Considering that a large portion of Microsoft's bottom-line revenue is derived from its productivity and business products, the inevitable question arises: How will Office's transition to the cloud affect the company's bottom line?

The shift of Microsoft Office 2010 from a primarily desktop to cloud-based application suite was a fairly radical one for Microsoft, which is looking for a strategic advantage over Google and other companies that have launched online productivity products.  

Once released, Office 2010 will allow Microsoft Live subscribers to access stripped-down versions of OneNote, Excel, Word and PowerPoint for free. Microsoft is also planning to offer the application suite as both a hosted subscription service and an on-premises application for an as-yet-undisclosed price.

Microsoft will demonstrate Office 2010, which has now hit the technical preview engineering milestone, at the Worldwide Partner Conference in New Orleans from July 13-16. Other flagship software being rolled out at the event includes Windows 7, Windows Mobile 6.5 and Windows Server 2008.

However, the release of Office 2010 as a free Web-based product does bring up the question of revenue. According to a recent Wall Street Journal article, Office sales made up the majority of the $19 billion that Microsoft's business division earned in 2008; the piece further quotes analysts who estimate that nearly a quarter of those sales were due to consumers. If consumers can now access the application for free, what does that mean for Microsoft's bottom line, not to mention its market share?

"They're using this as a weapon against Google," Tom Austin, an analyst with Gartner, said in an interview with eWEEK. "But as Microsoft does that, and puts their collaboration capabilities in the cloud, they're going to increase revenue but put pressure on their margins."

That increased revenue would come from selling those collaboration capabilities, along with e-mail, to enterprise-based customers.

"Microsoft will make more money than they do today," Austin suggested. "But they'll have a challenge to maintain the same level of products. Microsoft is going to position themselves as more functional than Google, but with an offering that's less functional than the full Office."

Microsoft's proposal of a hybrid model for Office 2010 could also give it greater appeal to the enterprise, potentially dissuading business customers from jumping ship to Google or another company's offerings.

"The really interesting thing about this whole battle is the hybrid provisioning model where you can deploy [Office] from the server, and rely on things coming from the Microsoft cloud," Austin said. "In the end, I don't think companies will go with the hybrid model, but the choice could be appealing to executives; if it's on-premises and something blows, you can fix it yourself."

The ability to store documents and other business-related data locally may prove to be a deciding factor to much of the enterprise when deciding between Web-based productivity suites.

"Google and Zoho don't have an internally based Web-based hosted access," Sheri McLeish, an analyst with Forrester Research, said in an interview with eWEEK. The ability for users to keep their information locally on a desktop or server "may be particularly appealing to enterprises that want to retain content."

"On the business side, it's about integration and interoperability. Costs are a factor but not an overriding one; the bigger issues are around support and minimizing risk," McLeish said. The enterprise's uptake of cloud-based productivity tools has been slower because of the perception that it's safer to keep a company's intellectual property and business processes close at hand: "It's easier for companies to provision their employees with a desktop with the same tools.

"The challenge for Microsoft is not to cannibalize itself, and balance their product portfolio to ensure its value," she added. Microsoft might see a dip in revenue as a certain percentage of consumers migrate to the free options offered through Microsoft Live, but "they were probably going to lose at least some of those people anyway."

In addition to Office 2010, Microsoft will likely move other aspects of its business onto the Web in a bid to challenge Google and other companies. Soon after Google announced plans for the Google Chrome OS, an operating system intended for mininotebooks (known popularly as "netbooks"), rumors circulated that Microsoft would find a way to release its own stripped-down operating system, a project code-named Gazelle.

However, Microsoft has given no official word on when Gazelle might reach a commercial stage, even as the Chrome OS is scheduled to make its big rollout in the second half of 2010. By that point, analysts predict, the battle between Microsoft, Google and other companies over Web-based applications and platforms will likely have become even more intense.

"2010 is an exciting year for productivity tools," McLeish said. "It's a wide-open playing field."