The Enterprise Wars: Who Will Win and Why it Matters
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT) has enjoyed a formidable moat, and perhaps even close to a monopoly, with its enterprise offerings for years. The cash cow known as Microsoft Office, however, now has an innovative competitor who wants to steal its market share. Google (NASDAQ: GOOG) is establishing itself as a legitimate threat to Office with its enterprise offerings, and plans to continue to put on the pressure. Will Google Apps take over and dominate Microsoft Office?
Why enterprise matters
It could be said that the enterprise and business market is currently more important to Microsoft than Google. Microsoft generates a significant amount of its revenue from its business division, which includes its Office software. 90% of the revenue generated in this division comes from the company's Office system, according to Microsoft. In fact, Microsoft's business division generated $5.5 billion (34%) of the company's $16 billion total revenues for Q1 2013:
How about Google? The search giant generated 94% of its total 2012 revenues through advertising from its Google websites and network members' websites. Only 6% was generated from other offerings in 2012. What appears to be a potentially huge threat to Microsoft (losing share in the business app/software world) also provides potential for huge upside for Google- if they can find a way to expand, and most importantly monetize, their enterprise offerings. As of now, Google makes most of its money from search and advertising, but an increase in enterprise revenue could boost the company's overall revenues in a more diversified fashion.
Enterprise and the cloud
As a college student, I noticed that we used Google Docs frequently as an alternative to Microsoft Office. Why you may ask? Because Google offered essentially the same thing as Office- even though the word processor and spreadsheet software wasn't as advanced. The advantage was that simultaneous, real-time collaboration was made possible by utilizing cloud computing. One partner in the group could upload a document and then the rest of the group could edit or add their own pieces of the project in the cloud, even at the same time from different computers. This innovation seemed like it would end Office's long run of monopolistic dominance, until Microsoft jumped into the cloud as well.
Now a free Microsoft Live account allows users to integrate Office files (such as word documents and excel spreadsheets) into the cloud, with their Office web app going the route of Google Docs- allowing users to share files and collaborate over the cloud. The company will also be releasing the new "Office as a service" as soon as the end of this month. Microsoft had the foresight to recreate its enterprising software to compete with Google Docs. Google, in order to monetize its enterprise offerings, will also be charging for its more advanced enterprise services, although at a more competitive price. In 2012, Google also took the lead with government contracts, gaining 23 contracts, as opposed to Microsoft's 10.
A potential wild card
There is also a potential X-factor: China. Microsoft can monetize the Chinese market in a way that Google cannot. Google has little presence in China because of the dominance of their Chinese counterpart, Baidu. Google Apps will most likely take a back seat to Microsoft in China, as well. By offering Office as a service and not a commodity capable of being pirated, Microsoft will be able to monetize Office more effectively. According to Al Hilwa, an analyst at IDC, Microsoft will be able to:
"[C]overt much of the pirated software base in its technologies into paying customers," and that Office as a service would make it "more accessible to customers otherwise unwilling to pay upfront software costs."
By forging a partnership with 21Vianet Group, the largest carrier-neutral Internet data center services provider in China, Microsoft will be able to offer Office 365 and its Azure cloud services to Chinese customers, with the first customer being the Shanghai government, according to MarketWatch.com.
The bottom line
In the United States, losing the monopolistic Office moat may very well be one of Microsoft's biggest threats. Enterprising for Google, however, could lead to huge growth in revenues- as well as diversification that will lead them away from relying so much on advertising and search. As a shareholder of Microsoft, Google makes me worry- especially with statements such as this, made by Amit Singh, VP and head of the Google's enterprise unit:
"Our goal is to get to the 90 percent of users who don’t need to have the most advanced features of Office... This was the year where we broke the barrier and got large-scale customer adoption..."
These users who don't need the full-blown Office features and services will most likely gravitate to the cheaper Google offerings, thus, Microsoft may lose a good amount of market share. As far as enterprise goes, however, Microsoft will most likely remain dominate. Office is generally the standard, and it is generally perceived that it is easier for businesses to continue using it. Google may someday steal this market away as well, but it is hard to convince a company to completely switch platforms or ecosystems. The big thing to take away from all of this, however, is that Google is going to wedge itself into Microsoft Office's territory and while this is a crucial threat to Microsoft, it has nothing but upside for Google.
Both companies will continue to battle for market share, and if Google can continue to improve and monetize their services and enterprise reputation, it may erode a large part of Microsoft's profits. For Microsoft, China may be a glimmer of hope, capable of providing a hedge of sorts for the company and their potential loss of enterprise market share to Google domestically here in the States. There may never be a clear "winner" in the enterprise wars, but it looks like Google will gain at the expense of Microsoft going into the future. Microsoft will continue to generate massive cash flow from its Office software, but will need to compete for this cash flow in a market that is moving from monopolistic to duopolistic.
Jharry1 owns shares of Microsoft. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!