Microsoft’s Cloud

A piece this week in the New York Times stated that Microsoft plans on, ” making available free software that connects its Windows operating system to software services delivered on the Internet, a practice increasingly referred to as ‘cloud’ computing.” Some see this as Microsoft trying to head-off Google, which has a similar product in it Web Apps, in a race they are losing, others question Google’s ability to compete against Microsoft in this arena. However, both companies are moving into somewhat untested waters, and each has challenges.

“Microsoft is still very much a thick-client software company,” says Matt Rosoff, an analyst at Directions on Microsoft. The company’s sales reflect this, “The groups that sell Windows, Office and server software accounted for $42.5 billion, 83 percent of the company’s revenue in the last fiscal year. These three offset losses in Microsoft’s other three business segments — including online services,” according to Knight Ridder. Losses in online services may be one reason Microsoft is making its move. The New York Times article notes that, “With this new approach, Microsoft hopes to shield its hundreds of millions of software customers from competitors like Google and Salesforce.com, which already offer software applications through the Internet.” In doing this Microsoft must be careful of its core business. The Times reports, “The release, though it includes the Windows Live Writer blogging application, carefully avoids cannibalizing two of Microsoft’s mainstays, the Word and Excel programs.”

Rather than just putting its Office products on the Web, Microsoft says it is attempting to connect browser-based applications to the desktop. Knight Ridder states, “The company is clearly aiming to connect its profitable desktop and server applications with its emerging services in the cloud to give users what it calls the best of both worlds, and to maintain the relevance of its highly profitable franchises.” Likewise, the Times states, “The initiative is part of an effort to connect Windows more seamlessly to a growing array of Internet services.” Microsoft, according to Brian Hall, general manager for Microsoft’s Windows Live services puts it this way, “We’re taking the communications and sharing components and creating a set of services that become what we believe is the one suite of services and applications for personal and community use across the PC, the Web and the phone.” By taking this tact, and holding off on presenting online versions of its mainstays, Microsoft may avoid the cannibalization effect; it also puts on hold a direct challenge to Google’s offerings.

While not directly going after Google may have some merit, it also puts Microsoft further behind in the race. (Google recently acquired two companies that allow for online slide presentations and the company has plans to rollout a product similar to Microsoft’s PowerPoint.) Though the roughly $40 million made from its Web Apps may not make up a huge chunk of its overall revenue, Google is moving ahead. Already the company has signed General Electric and Procter & Gamble as corporate users and expects to add more names to this list. Dave Girouard, general manager in charge of Google’s business products notes the relative infancy of the product, “Over a five- or 10-year time period, we think there’s potential for this to be an enormous business that would be material to Google.” In this area, what may become material to Google could challenge Microsoft. Bloomberg quotes Bill Whyman, of International Strategy and Investment, a Washington-based investment advice firm, “Google is clearly a threat to the Microsoft core business.” To some degree this thought is mirrored by Kenneth Wasch, president of the Software and Information Industry Association, who said of Google “To the extent that the industry is moving toward an on-demand business model, it poses a threat to Microsoft.”

However, the question of to exactly what extent the industry is moving in the ‘on-demand’ direction is still unanswered. In a piece from the Software Development Times, “With Google offering an entire office productivity suite through the Web, it’s becoming harder to make a case for not building applications there.” And the applications are not just sitting there, they are being utilized. Jeffrey Hammond, senior analyst with Forrester said, “I’m surprised at how rapidly these technologies are being adopted by what I would consider to be mainstream firms . . . Typically you see a crossing-the-canyon type of uptake. I’m seeing interest from large insurance companies, and any company that feels like it needs to win with its customers. The adoption curve here is going to be shorter than most people expect.

“There may be a shorter than expected adoption curve, but there are still questions and challenges; the need for the power of the desktop and Internet access are well noted. BusinessWeek notes, “Despite the convenience of accessing Google’s Apps from any computer with a Web browser, the company does see a need to borrow something from traditional software’s playbook: It plans to enable users to work offline with the suite, a nod to the reality that workers don’t always have Internet access.” There is also the fact that the desktop is seen as premier real estate. “Everybody wants to be on the desktop . . . People tend to forget about Web sites,” Martin Kay, chief executive of online music site Finetune, told BusinessWeek. “Perhaps most important for developers, the desktop’s advantage is that it is still the first thing users see when they turn on their computer. If your icon is there, it’s more likely that a user will opt to use your product—rather than the myriad other programs on the Web,” states BusinessWeek. Of course the possibility exists that the two platforms will simply co-exist. Coach Wei, CTO of Nexaweb, says that there is, “fundamentally a difference between what you can do in your browser versus what you can do in your desktop.” He notes that, “Obviously, we all believe browsers will become more powerful going forward, but browser makers should not expose the hard drive to Web applications, because that’s a serious security problem. There have to be some limitations for Web applications.”

Quoted in the Times is Shane Robison, executive vice president and chief strategy and technology officer at Hewlett-Packard, “I think Microsoft is going beyond search to a more sophisticated set of services . . . It will be a race, and who knows who will get there first?” And who know what the winner may find.

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in Northern Light’s Software, Computers, & Services Market Intelligence Center.

And in the following articles:

The Desktop Takes Center Stage Again
BusinessWeek, September 4, 2007
Rumors of the demise of the desktop have been greatly exaggerated. In recent years, bloggers, reporters, company executives, and others have exulted in the apparent obsolescence of the vast space on computers set aside for software. Why clutter a desktop with pricey programs for word processing, spreadsheet creation, and the like when many of those tools are becoming available, often at no cost, over the Web—or so the argument ran.

Software via the Internet: Microsoft in ‘Cloud’ Computing
New York Times, September 3, 2007
In 1995, Microsoft added a free Web browser to its operating system in an attempt to fend off new rivals, an effort ultimately blocked by the courts. This week, it plans to turn that strategy upside down, making available free software that connects its Windows operating system to software services delivered on the Internet, a practice increasingly referred to as “cloud” computing. The initiative is part of an effort to connect Windows more seamlessly to a growing array of Internet services.

Microsoft-Google Showdown Heats Up as Court Rule Ends
Bloomberg, August 30, 2007
That doesn’t necessarily mean a bonanza for Microsoft shareholders, analysts said. “Google is clearly a threat to the Microsoft core business,” said Bill Whyman, of International Strategy and Investment, a Washington-based investment advice firm. “The big challenge for Microsoft is to move from the PC to the Web.”

The Trouble with Web Apps
PC Magazine, August 1, 2007
Google and Apple recently made big bets that we’re all going online for our applications. But we aren’t, we won’t, and we shouldn’t. “Web-based applications” are at best kludges; more often the term is just a gussied-up way of describing the way Web pages should work in the first place—but too often don’t.

Apps vs. Office: Google Ups the Ante
BusinessWeek Online, July 17, 2007
Noah Sachs, general counsel, business development director, and resident computer expert at a biotechnology startup named Enzymatics, has one word for the holdouts who still use Microsoft Office to create documents and spreadsheets. They’re “curmudgeons,” he sniffs.

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