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    G00233554

    Google Upsetting Microsoft's Cloud-Office

    System AmbitionsPublished: 8 May 2012

    Analyst(s): Tom Austin, Michael A. Silver, Hanns Koehler-Kruener

    Google Apps is taking more business away from Microsoft than we

    expected, raising its stature as an enterprise provider. Microsoft's

    dominance on-premises prevails but, ultimately, it may face a serious threat

    to its Office franchise.

    Key Findings Google is cutting into Microsoft's business for both email and personal productivity suites (the

    latter, by slow attrition rather than direct replacement). Compared with Microsoft, Google

    appears to be winning one-third to one-half of new, paid-for, cloud-based office system seats.

    Microsoft is dominant on-premises, but its marketing-driven strategy basing new offers on

    cloud-based instances of its enterprise on-premises systems may have lulled too many

    existing Microsoft customers into doing nothing with Office 365.

    Google's call to action is appealing to organizations generally not pleased with their current

    situation. It drives deep and thoughtful re-examination of what to invest in and why.

    Primarily, the disaffected are moving to Google Apps, legitimizing that choice, and helping

    Google grow its base and defy all the early predictions of Google's defeat.

    Recommendations Google Apps customers: Continue to invest in Microsoft Office offerings, at least for some

    applications and some key users.

    Microsoft Office 365 and Google Apps customers: IT should maintain and evolve pilots of the

    other vendor's offerings for non-IT users, monitoring visible and hidden costs and user benefits.

    All: Pilot additional service providers' cloud-based office systems while continuing to treat the

    full Microsoft Office suite (on PCs) as critical to a large number of users, even though Web-

    based suites and alternative device apps will continue to increase in importance.

    Large enterprises: Consider whether you can afford the luxury of supporting multiple

    independent technology streams, opting (where appropriate) for best-of-breed components and

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    subsystems to optimize user effectiveness instead of best-integrated suites that optimize IT

    efficiency. (Smaller organizations may not be able to afford this luxury.)

    Table of Contents

    Analysis..................................................................................................................................................2

    Microsoft Strengths and Advantages................................................................................................3

    Microsoft Dominates On-Premises............................................................................................. 3

    Microsoft's Cloud Office System Marketing Strategy Looks Brilliant............................................4

    Microsoft Cloud Infrastructure Approach.................................................................................... 4

    Microsoft User-Facing Technologies...........................................................................................4

    Microsoft Meets Most of Its Aspirations...................................................................................... 5

    Google Weaknesses and Disadvantages.......................................................................................... 5

    Simple Summary Technology (Service Offering) Assessment............................................................ 7

    Missed Expectations........................................................................................................................ 8

    What Did We Miss and What Changed?...........................................................................................9

    Microsoft's Brilliant Marketing Strategy May Be Inhibiting Office 365 Adoption............................9

    Microsoft's Cloud Office System Business Decisions Are Chilling Its Ecosystem.......................10

    Google Docs Is Seen by Some Enterprises as a Partial Office Replacement............................. 11

    Microsoft's Pricing and Other Business Practices Leave Room for Google............................... 12

    What Should Enterprises Do About It?............................................................................................15

    Recommended Reading.......................................................................................................................16

    AnalysisThis document was revised on 22 May 2012. The document you are viewing is the corrected

    version. For more information, see the Corrections page on gartner.com.

    The challenger, Google, was essentially a "nobody" in enterprise software. Since 2006, when

    Microsoft first tipped its SaaS hand, the early indicators were lined up to assure continued

    Microsoft domination. It's not quite working out that way. Here's our take on why and what to do

    about it.1

    There is a broad range of office technologies available today, ones that go far past the older office

    automation metaphors. In a sense, the term "office" is pass because more and more people are

    working outside the office, outside of office hours and using a whole range of tools, some of which

    they own, some of which the enterprise owns and some of which others own. However, the word

    "office" is also a good catchall term because it can cover a broad range of capabilities; therefore,

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    we're going to use it in this research as a surrogate for all of the following modern office system

    technology subsystems:

    Content creation tools, also known as personal productivity tools (such as word processors,

    spreadsheets and presentation graphics tools)

    Communication tools (such as real-time and store-and-forward voice, short text message

    services, broadcast communication tools, multipoint video and the perennial enterprise

    communication pickup truck email)

    Collaboration tools (including team sites, project sites, communities and real-time multiparty

    editing)

    Social tools (including walls and personal sites, activity streams and rating tools)

    Coordination tools (including calendaring, task delegation and tracking, and meeting

    management tools)

    Expertise location, social network analysis and other, still-emerging adjuncts that make people

    primarily white-collar workers more effective and productive

    Microsoft is the dominant, powerful owner of the office system market in enterprises today. It built

    the franchise over the last 25 years, successfully knocking out one competitor after the other, first

    with a GUI-based spreadsheet (initially on the Mac) Excel then with Word for Windows,

    PowerPoint, Outlook and a broad range of other capabilities.

    Microsoft Strengths and Advantages

    Microsoft Dominates On-PremisesBased on the number of users in enterprises in the developed world with more than 500 employees,

    we informally estimate that Microsoft has well over 90% of the personal productivity suite, desktop

    operating system and notebook operating system markets, and over 80% of the email and

    calendaring market (see Note 1). SharePoint adoption rocketed with the introduction of SharePoint

    2010 to become the single largest new enterprise office system investment area. (A consequence of

    Microsoft's cross-technology integration is increased vendor lock-in.) All are telltale signs of

    Microsoft being the "category killer." That does not mean, however, that Microsoft is outstanding or

    even present in every major category. For example, Microsoft lags in the social software market

    but it can point to third-party add-ins to SharePoint that can obviate many of its products' social

    shortcomings. In our view, Microsoft owes much of its success to the broad and deep ecosystem of

    professionals and third parties that have built their careers and businesses adding value to

    Microsoft's offerings.

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    Microsoft's Cloud Office System Marketing Strategy Looks Brilliant

    Microsoft's cloud office system strategy, represented by Business Productivity Online Services

    (BPOS) in 2008 and Office 365 in 2011, looks like a brilliant marketing strategy. By aspiring to offer

    the same technology on-premises or in the Microsoft cloud, Microsoft chose to emphasize:

    Familiarity users would need no retraining

    Minimal disruption users wouldn't have to change their tools

    Transparency no one should need to know whether their servers were on-premises or in the

    Microsoft cloud

    Investment protection whatever you were doing with Microsoft's office system technologies

    before, you could still do, whether provisioned from on-premises or cloud-based systems

    Enterprise control at least on-premises, the IT organization would be in complete control

    and, with a hybrid implementation (some on-premises, some in the cloud), IT could decide what

    it wanted to intimately control and what it would let Microsoft manage

    As a bonus, Microsoft could get its cloud-based office system to market far more quickly than if it

    took a clean-sheet approach to building and offering this system. (This is very similar to the

    marketing brilliance Microsoft displayed in the Windows versus OS/2 wars of the 1990s see Note

    2.)

    Microsoft Cloud Infrastructure Approach

    For cloud-based infrastructure, Microsoft chose to extend existing (and upcoming) versions of

    enterprise-class servers (Exchange, SharePoint, Office Communications Server and Lync) to be

    more manageable for millions upon millions of users. It's not that Microsoft lacked the technology togo toe-to-toe with Google's infrastructure; it was working on Azure and had a depth of expertise

    with Hotmail and other Microsoft Live properties. Microsoft pursued a brilliant marketing approach,

    offering gradual migration to the cloud, starting with something everyone already knew and most

    used. Building an entirely new infrastructure for cloud-based office systems would take far too long,

    diminish the value of its huge installed base and cost Microsoft far more than it had cost Google to

    get Google Apps to market. (Google chose not to emulate the Microsoft Office Suite, offering

    something quite different instead.)

    (For the sake of simplicity in this research, we are including both Microsoft's dedicated-hosted

    services and its multitenant services in the term "cloud-based office systems," even though the

    dedicated-hosted services do not match our formal definition of cloud-based services.)

    Microsoft User-Facing Technologies

    On the user interface or client side, Microsoft leads with the familiar full Microsoft Office suite plus

    Outlook and Lync, the gold standard for rich, programmable, general-purpose personal productivity

    tools and communication and collaboration clients. It continues to evolve all of these tools. For

    example, Microsoft has announced it is extending its Office suite to Windows 8-based tablets, likely

    by 4Q12. Office Web Apps, which are part of Office 365, feel like relatively fast follower products,

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    not class-leading offerings. They include lightweight Web-based versions of Word, Excel,

    PowerPoint, OneNote and Outlook. Office Web Apps attempt to take the wind out of Google's sails.

    Office Web Apps beat Google Docs in terms of similarity to and compatibility with the full Microsoft

    Office suite but, in other respects, Google Docs is far more capable than Office Web Apps and far

    less capable than the full Microsoft Office suite. (The comparison is not really this simple however.

    In places, Google Docs is superior to the full Office suite. On the other hand, some organizations

    are so broadly and heavily invested in the full Office suite as an integral part of their business

    processes that migration to anything else is virtually impossible.) Additional analysis on Google

    Docs versus Office is below.

    Microsoft Meets Most of Its Aspirations

    Microsoft is doing a good job addressing its conceptual aspirations. Office 365 provides many of

    the advantages that Microsoft sought to emphasize in comparison to Google Apps. For example:

    User tools are familiar to users.

    There is minimal disruption to users' routines (this is more true for the minority of enterprises

    that run up-to-date versions of these tools already).

    There is a reasonable level of provisioning transparency. Outlook users might not be able to

    determine whether their Exchange servers are on enterprise or Microsoft premises, but the

    promise has not (yet) been fully realized for SharePoint or Lync.

    Investment protection is a mixed bag. Organizations that had built applications on top of

    SharePoint face barriers moving them to the Microsoft cloud. This has caused angst among

    some early adopters, but they do have the option of running them on-premises while also using

    other Microsoft cloud-based services.

    Enterprises can retain control where they want and use Microsoft services where IT does not

    need complete control via a hybrid deployment model.

    Microsoft's strategic rationale for investing in cloud-based office system offerings predates any

    competitive announcements from Google (see Note 3), but Google is its primary competitor for

    cloud-based office services. (There are other competitors but they have yet to make their mark.)

    Google Weaknesses and Disadvantages

    Google entered the enterprise office system fray in February 2007 with an effective, installed base of

    zero and a set of barely suitable tools designed not for enterprises, but for consumers. It did

    everything opposite of the way most enterprise IT professionals would accept: It offered beta toolsfor production purposes, it updated the software often (seemingly when it felt like it) and it did not

    seem oriented to listening to enterprise requirements.

    For Google, office systems for enterprises (business, government and large educational institutions)

    is a rounding error in its business model. In July 2010, we estimated Google office system revenue

    at 0.3% of total Google revenue (see "Exploit the Differing Business Models of Google and

    Microsoft for Cloud Office, Email and Collaboration Services"). We estimate that as of August 2011,

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    Google office system revenue had grown to 0.8% of Google's revenue. It's still a rounding error for

    Google, which gets 96% to 97% of its revenue from advertising-related services. Here are two

    forward-looking hypotheses:

    If Google continues to maintain its current apparent win rate, Google Apps could grow to be 5%

    of Google's revenue in 2017. That's a very big number on the order of magnitude of $5 billion and a very big "if."

    If, on the other hand, Google's mainstream (advertising-related) businesses falter in the short

    term, its investments in Google Apps could be at risk.

    These two hypotheses represent boundary conditions; that is, they are polar extremes. The most

    likely reality is somewhere between, with a positive scenario much more likely than not, but a

    negative outcome cannot be completely ruled out.

    Microsoft understands and responds to enterprise requirements and has been attentive and

    responsive to enterprise needs since at least the mid-1990s (when the prevailing criticism among

    enterprise IT managers was that "Microsoft doesn't get the enterprise"). Microsoft has come a long

    way in this area. Google managed to (finally) rip the "beta label" off Gmail in 2009, two years after

    starting its Google Apps sales campaigns belated progress.

    To many, it seems as though Google deliberately ignores enterprise needs. We believe that is

    sometimes the case, but Google has taken and is taking steps to better support enterprise

    requirements. In reality, Google appears to carefully triage enterprise requirements those that

    have broad appeal move to the top of the list, but those that are critical to some companies but

    have limited appeal such as converting WordPerfect documents to Google docs are unlikely

    to make the cut.

    We can point to many examples that reinforce the appearance that Google is insensitive toenterprise needs. Consider, for example, Google's decision to terminate offline support of Gmail via

    browsers because it did not want to make any additional investments in the Google Gears

    technologies. It could have waited to deliver newer HTML5-based capabilities and then phased out

    Google Gears support, but that is not what Google did. It just pulled the plug. (Google did a similar

    thing with its Email Continuity Service, announced in 2010, terminated in 2011, and Google Labs,

    terminated in 2011.) There's nothing wrong with terminating unpopular offerings or capabilities, but

    the abrupt way in which Google made these changes does not make enterprise prospects

    particularly those that may have been considering offline capabilities in Gmail and Docs very

    comfortable, especially when compared with Microsoft, which has matured to offer long and well-

    documented product life cycles. The same can also be said for partner products that relied on

    Google Gears for their own products to continue functioning.

    The dividing line between Google's experiments and products is often unclear. There are other

    examples of Google changing its technology stack or discontinuing development projects or

    products that did not seem to achieve the company's goals. Google terminated Wave (although the

    technology continues to be used in various other products), and Google Buzz was axed, as were

    other development projects, lab work, betas and real products or services that did not seem to

    meet Google's expectations.

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    Google does not share long-term road maps with its customers. (It does, under nondisclosure

    agreement [NDA], share six-month road maps. Six months may be long-term to a firm that changes

    its Web properties by the minute, but it is short-term to enterprises with planning horizons of several

    years.) This is a huge mismatch that can give enterprise buyers due cause for concern.

    Google has made concessions to smooth the path for enterprises. For example, it allows enterpriseadministrators to gate the rate at which changes automatically propagate to enterprise users.

    (Microsoft does this as well with Office 365.)

    Google also argues that when compared to a triennial "fork lift" release and upgrade process for on-

    premises software, its "fortnightly" release approach:

    Minimizes user disruption

    Lowers training and help desk costs

    Allows it to evolve capability more rapidly

    Ensures that changes are based on live testing with real users (not preplanned years earlier)

    The downside to fortnightly (or other high frequency) release cycles is that users have been known

    to comment that the tools look different every time they use them. Managing the stream of updates

    can be problematic. Administrators cannot block all updates. They can delay some updates for a

    limited period of time but Google will push some through automatically. Other updates are optional

    either administrators or users must act to turn them on. These varied paths pose a challenge to

    technical staff (and users) expecting far-less-frequent changes.

    (Microsoft also offers frequent updates for Office 365. Its recent updates are listed at http://

    community.office365.com/en-us/w/office_365_service_updates/974.aspx, while Google's list of

    recent changes is at http://googleappsupdates.blogspot.com/.)

    It is challenging for typical enterprises to deal with Google's seemingly haphazard approach: the

    lack of visibility into clear, long-term road maps, clear dividing lines between products and

    experiments, commitments to long-term technology and service life cycles, and well-defined

    release schedules. This vacuum engenders distrust among many. Google can do more to meet

    enterprise requirements without compromising the underlying methodologies that can make it more

    innovative than more-traditional competitors.

    There's a bargain for enterprises in using Google: They must take Google on its own terms. Those

    that have, have learned to live with it, embrace it and thrive.

    Simple Summary Technology (Service Offering) Assessment

    From a technology point of view, consider our take on Google's offerings:

    Gartner has rated Gmail as meeting enterprise requirements since August 2010 (see

    "MarketScope for Email Systems") and on par with Microsoft's cloud-based email services (but

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    http://googleappsupdates.blogspot.com/http://googleappsupdates.blogspot.com/http://community.office365.com/en-us/w/office_365_service_updates/974.aspxhttp://community.office365.com/en-us/w/office_365_service_updates/974.aspx
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    we've rated on-premises Exchange one significant step better than either firm's cloud-based

    service). Gmail is as dependable and usable as Exchange online.

    The Gmail browser client leads Microsoft Outlook in automatically prioritizing users' inboxes,

    but lags Outlook in selected offline use cases. Outlook leads in most complex calendaring

    scenarios, but Google Calendar has some appealing features that Outlook lacks (for example,the ability to flag certain times as "open for appointments").

    Google Docs (a document processor, spreadsheet and presentation package that is included in

    Google Apps) is not an adequate replacement for the full Microsoft Office suite, but it beats the

    Office suite in terms of collaboration and real-time editing. Nonetheless, it is still inferior, overall,

    to the full Microsoft Office suite of products. Google Docs is far more capable than Microsoft's

    Office Web Apps and can meet the needs of many people in many organizations. Document

    fidelity issues across Docs and Office remain the biggest concern. Preservation of document

    fidelity is improving but it can still be a serious impediment.

    Google Sites has not caught up in its capabilities with SharePoint 2010 and continues to lag

    generations behind the full Microsoft SharePoint product (it is roughly comparable to Windows

    SharePoint Services [WSS] 2007). Even though SharePoint 2010 trumps Google Sites, Sites

    may be just good enough for users of WSS.

    Google Hangouts (part of Google+) has a very attractive feature set for organizations that need

    small team video conferencing. Microsoft has acquired Skype and will likely use it, along with

    Lync, to compete with Google Hangouts and Google Voice. (Treat with due caution any

    services that are available, such as Hangouts or Skype, but are not part of the official enterprise

    offering, such as Google Apps and Office 365.)

    Missed Expectations

    By all rights, given all of Microsoft's strengths and Google's weaknesses, Microsoft should be

    garnering the lion's share of the paid-for cloud-based office system market, comparable to (or

    better than) its absolutely dominant on-premises position. They should be, but they are not.

    In our own informal internal modeling in 2007, we expected Microsoft to take nine paid seats (or

    more) for its cloud-based email services for every paid seat Google won. (These rough projections

    are for business and government accounts and exclude the education market segment.)

    By 2009, we adjusted our thinking, based on observing what our clients' expectations seemed to be

    for the then-upcoming Office 365. At that point, we had expected Microsoft's cloud-based office

    systems services to outsell Google's by at least 4 to 1 during the 2011-2015 period (based on

    numbers of users, not dollars).

    In May 2012, we believe that Microsoft is winning one to two paid-for cloud-based seats for every

    paid-for seat that Google wins. And while we still think that, in this decade, Microsoft will win a

    majority of seats in the cloud-based office system market (see "The Cloud Email and Collaboration

    Services Market, 2011 Update"), we do not believe it will dominate the way it dominates the on-

    premises enterprise office system business today.

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    Despite its handicaps, Google is winning significant cloud-based office system business. Google is

    winning and holding onto accounts that Microsoft wants. Recent wins in financial services (such as

    the Spanish retail banking firm Banco Bilbao Vizcaya Argentaria, with 110,000 users in 26

    countries), pharmaceuticals (such as the Roche Group with 90,000 users worldwide) and the

    government sector (such as the U.S. National Oceanic and Atmospheric Administration, with 25,000

    users) have added to earlier wins, including the city of Los Angeles, the General Services

    Administration, Ahold and others. While both Google and Microsoft have had pilots that failed to

    progress to business, rumors that a significant number of users are dissatisfied with "going Google"

    have not, on close examination, panned out (see "Google Gmail Emerges as a Significant Threat to

    Microsoft in the Enterprise").

    Given its advantages, Microsoft is winning significant cloud-based office system business.

    Microsoft is winning and holding onto accounts that Google wants. For example, Microsoft

    announced wins at the U.S. Department of Agriculture (120,000 users), the State of Minnesota

    (39,000 users), Toyota (27,800 users) and JetBlue (33,000 users).

    Note: The point of this section is not to enumerate wins. Rather, our central point is that both sidesare taking significant wins from each other and the battle is much closer than we had expected it to

    be. Microsoft has not crushed Google in the early stages of this emerging market (see "The Cloud

    Email and Collaboration Services Market, 2011 Update"). Google's market performance has

    continued to exceed our expectations, even as we have adjusted those expectations upward across

    the last five years.

    What Did We Miss and What Changed?

    We have identified four factors contributing to Google exceeding our expectations. Most of these

    fall under our assumption that, by optimizing its own financial performance, Microsoft is

    unintentionally leaving room for Google. That gives Google the opportunity to build a large enoughpresence in the market segment to make itself a permanent and viable competitor to

    Microsoft. The four factors are:

    Microsoft's brilliant marketing strategy may be inhibiting Office 365 adoption.

    Microsoft's cloud office system business decisions are chilling its ecosystem.

    Google Docs is seen by some enterprises as a partial Office replacement.

    Microsoft's pricing and other business practices leave room for Google.

    Microsoft's Brilliant Marketing Strategy May Be Inhibiting Office 365 Adoption

    By promising transparency, minimum disruption and the use of the same technology on-premises

    as in the cloud, Microsoft is making its most loyal customers comfortable with its future intentions.

    It also may be making them comfortable with staying on-premises for the next few years.

    On the other hand, enterprises that have gone to Google have been seeking change.

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    If you buy into Google's vision, you have to take action. If you buy into Microsoft's vision and you're

    already a Microsoft office system customer (with an on-premises implementation), you do not have

    to do anything. The lack of a compelling reason a major forcing function driving Microsoft

    customers (particularly the larger ones) to immediately move to Office 365 has opened the door to

    increasing legitimacy for Google as it posts a growing number of wins.

    This increased legitimacy for Google will likely cost Microsoft more in the longer term because the

    gaps between Google and Microsoft continue to narrow over time as Google adjusts to enterprises'

    needs and continues its rapid pace of innovation.

    Microsoft's Cloud Office System Business Decisions Are Chilling Its Ecosystem

    The Microsoft ecosystem (which includes deep expertise on Microsoft platforms in both enterprises

    and the job market) is the strongest factor nourishing Microsoft's business. It is much easier to find

    people with Microsoft-related skills and third parties with technologies and services.

    As the industry evolves, members of the ecosystem have to continually adapt and adjust theirbusiness plans to succeed. With Microsoft's Office 365 and related cloud-based office system

    offerings, we believe that some parties in the Microsoft ecosystem see themselves as being

    sidestepped or somewhat neutralized. For example, Microsoft does not support more complex

    custom third-party application add-ins to SharePoint in the cloud. We believe this limitation drives

    some customers to resist moving to multitenant implementations of Office 365 and motivates third

    parties to be less enthusiastic about that cloud-based offering. Unlike SharePoint in Microsoft's

    multitenant Office 365 offering, other cloud-based multitenant offerings (such as Azure from

    Microsoft, Google App Engine and Google Sites from Google and Force.com from salesforce.com)

    do support complex custom applications in a multitenant world.

    Microsoft may also be demotivating some partners who might have otherwise promoted and soldOffice 365 by offering lower lifetime commissions than Google, whose partners receive a 20%

    commission on the list price of Google Apps virtually in perpetuity (at least as of now). In

    comparison, Microsoft commission rates are smaller in year one and significantly smaller in years

    two and following. (Given its higher price points, Microsoft could rationalize year one commissions

    as just as rich for partners as a Google deal. There are many types of partners and rates will vary

    based on specific conditions.)

    There are always business risks inherent in doing business in the shadow of a giant. The specific

    issue with Office 365 is that we believe Microsoft could do more to motivate the channel to invest in

    helping companies that want to move to, get on board with, maintain and extend their Office 365

    implementations.

    From all outward appearances, Microsoft believes third parties should earn their revenue by selling

    value added on top of Microsoft platforms. Lack of support for in-depth customizations of

    SharePoint in the cloud has been a sticking point, particularly given the way SharePoint in general

    has been heavily promoted by Microsoft. We believe Microsoft might be better served in the cloud if

    it leaves more money "on the table" for its ecosystem.

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    Note: The purpose of this analysis is to identify factors that may account for the surprising Google

    momentum. It is not an attempt to model and analyze future revenue, cash or profit streams for

    these two vendors. For example, Microsoft may have very legitimate business reasons for paying

    smaller second-year commissions. It's just that we conclude that it could result in a lower level of

    investment, by the ecosystem, in making Office 365 as big a success as it could be.

    Microsoft also made the business decision to not allow external entities to host Office 365. Only

    Microsoft can make money running it. Long term, that disenfranchises all the partners who provide

    low-cost hosting. It does leave open opportunities for them to move into specialized or heavily

    customized vertical instances of premises-class servers (high-cost hosting), but Microsoft has

    shrunken the aggregate playing field for its partners. Microsoft partners can still implement their

    own instances of Exchange, SharePoint and Lync, but they will not be able to compete long term in

    the low-cost hosting business against the economies of scale Microsoft can achieve via the

    multitenant technology that is available only to Microsoft.

    Google does not let anyone host its Google Apps either, but by mirroring that model, Microsoft is

    reducing the beneficial impact of one of its advantages over Google: its large and powerfulecosystem.

    Google Docs Is Seen by Some Enterprises as a Partial Office Replacement

    When Google Apps was originally announced (February 2007), Docs was amateurish and very few

    enterprises were interested in employing them after initial pilot tests. Sixty-three months have

    passed since then, along with hundreds upon hundreds of upgrades. Some enterprises are now

    looking at Docs as a way, over time, to reduce overall spending on the Microsoft Office suite.

    This is part of the new financial framework some organizations are using to evaluate Google versus

    Office 365.

    The scary scenario for Microsoft is playing out as follows: Some firms are assuming everyone will

    keep whatever versions of Microsoft Office suite that they have while moving to Gmail. Microsoft

    Office suite upgrades would only be approved for those in specific roles and departments where

    there is a real justification (e.g., finance, contracts, legal and marketing). This Docs-plus-Office

    approach drives down cost if the organization has a reasonably large user base (perhaps 5,000 or

    more users) and a substantial number of users (thousands) who do not need Office upgrades. The

    thinking and this appears to be borne out in some organizations is that, over time, people who

    do not need it will just stop using the Microsoft Office suite.

    Clearly, Google Docs is not the same as the full Microsoft Office suite. Just as clearly, not everyoneneeds the features of the full Microsoft Office suite. Dealing with both suites poses management

    (and political) complexities. Unless it is easy to cleanly segment people into those who need the full

    capabilities of the Office suite versus those who need only Docs to get their jobs done, Google

    Docs adoption might spell chaos. But we are talking to large enterprises that have figured out the

    segmentation puzzle and have moved forward with a Google Docs plus Microsoft Office suite

    strategy and are comfortable with what they have done.

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    Microsoft has not responded to the issue in any substantive way other than to point out why the full

    Microsoft Office suite is superior to Google Docs. Just as Google might argue that a top-of-the-line,

    go-anywhere, heavy duty SUV (such as the Mercedes-Benz G class or the luxurious Range Rover) is

    superior to a small, low-cost economy car (such as a Honda Fit or a Volkswagen Polo), but there is

    room in the market for both classes of automobile.

    We see Google Docs eroding (although, not everywhere) Microsoft's Office suite revenue, but there

    is a strong enough tendency on the part of those organizations that moved to Google Apps for

    Gmail to also decide to get off the Microsoft Office suite upgrade cycle by keeping current versions

    of the Office suite in place and allowing their Microsoft service agreements (if any) to lapse. They are

    not replacing Office with Docs, but are encouraging most users to get comfortable with Docs and

    use it where it fits. Displacement of the full Microsoft Office suite by Docs, wholesale, for everyone,

    is rarely seen.

    Some Gartner clients report that, in certain cases, Microsoft appears willing to do almost whatever it

    takes to meet or beat Google on the price of cloud-based email and some other services, but we

    have not seen evidence that it is willing to give away the full Microsoft Office suite.

    The new financial framework within which enterprises are considering reduced spending on the full

    Microsoft Office suite is a serious threat to the Microsoft business model in enterprises.

    In our opinion, it appears that Microsoft's position is that Office Web Apps are not meant to function

    as full-fledged competition for Google Docs. In Microsoft's vernacular, they are only "companion

    apps" for use when an Office suite user doesn't have access to the full suite. In our estimation,

    Office Web Apps do not evaluate well against Docs Docs is a superior offering (and the full Office

    suite is superior to Docs). This is not a simple comparison, however, since we know of large

    enterprises where a majority of users rely on Docs and a smaller contingent rely on Microsoft Office,

    and the enterprise believes it has the best of both worlds at a far lower cost than if it hadstandardized only on one vendor's offering. (We await the arrival of the next versions of Microsoft's

    Office technologies and services to see how far up the capabilities scale Microsoft pushes its Office

    Web Apps and, potentially, native mobile device apps. Google appears to only be pursuing HTML5-

    based apps.)

    The economics of managing two suites gets more problematic the smaller the organization is and

    the less clean the separation between user segments. (The situation must continue to be monitored

    to fully understand the costs and consequences of managing two office systems, classifying users,

    and exchanging documents.)

    This threat is not widespread yet. We are still in the early days of cloud-based office systems.

    Microsoft has time to respond, but the risk will mount over time as some organizations succeed

    with this mixed Docs-plus-Office strategy and those successes add a sense of legitimacy to

    Google's place in the office system market.

    Microsoft's Pricing and Other Business Practices Leave Room for Google

    Customer concerns about continued upward creep in Microsoft pricing, seemingly inflexible terms

    in the cloud and unexpected price increases (once early-stage "sweetheart" deals expire) can open

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    the door further for Google. These customer-reported concerns are certainly not universal, but they

    are being raised frequently enough that they are giving Google the opportunity to grow more and

    more competitive with Microsoft.

    Price Creep On-Premises and in the Cloud

    Microsoft keeps adding to and refining the capabilities of its products and linking them together to

    drive demand for additional components of its strategy. For some, these changes are valuable; for

    others, not so much, which generates price frustration with Microsoft in a subset of the market. The

    annual total amount of money paid to Microsoft keeps rising, or so it seems, and some

    organizations tell us they are reaching their breaking points, using the words "abusive" and

    "frustrating" when talking about Microsoft's pricing power.

    A large proportion of firms that decide to move to Google Apps do so as part of a re-examination of

    whether they want to sign a new, large contract with Microsoft. More often than not, those moving

    to Google are running older versions of the Microsoft Office suite and have a difficult time justifying

    upgrades or maintenance agreements. (Microsoft contracts sometimes serve as a forcing function,getting its customers to consider moving to Google.)

    Microsoft Pricing Response

    Microsoft is known to compete aggressively, cutting its cloud-based office system prices (even for

    email alone) when the buyer is deemed to be extremely important to Microsoft's position in a

    particular market segment.

    Beyond tactical discounting, Microsoft has been responding on pricing on the Office 365 front. On

    14 March 2012, Microsoft dropped prices for Office 365. Typical price cuts announced were 20%

    (with a range from 11% to 92%), which is good (and they follow earlier Microsoft price cuts onAzure services).

    Google critics have raised two pricing issues as objections to Google pricing practices:

    The price for Google Apps has remained the same over the last five years, but Google

    substantially raised Google App Engine (GAE) prices late last year, opposite to Microsoft's

    pricing directions on Azure.

    Google cut the number of users who can use the free version of Google Apps, forcing

    enterprises with more than 10 users to move to the paid version; the limit had previously been

    50.

    We believe neither of these objections is material to a decision on Google Apps versus Microsoft

    Office 365. Neither move appears to have had an impact on Google's success with Google Apps for

    Business (or Google Apps for Government). We are not yet seeing a substantial amount of either

    GAE or Azure development by independent software vendors (ISVs) or enterprises aimed at tying

    into either Google Apps or Office 365, respectively.

    Gartner, Inc. | G00233554 Page 13 of 19

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    Net Cost Differences Between Google and Microsoft

    Most organizations that have made the decision to go with Google Apps tell us Microsoft would

    have cost them two to five times as much as Google. Those that go with Office 365 and not Google

    tell us that Microsoft is less risky and no more expensive than Google. Just as "beauty is in the eye

    of the beholder," entities on both sides of the question are probably suffering from someconfirmation bias (the tendency to look for evidence supporting their position and ignore evidence

    that contradicts it). They also differ in terms of assumptions behind their cost analysis. Do they:

    Factor in the cost of the full Microsoft Office suite? Should they?

    Include the cost of migration off the winning bidder's offer in the future? Early BPOS adopters

    saw sharp price increases when they began to move to Office 365 (when compared to the deep

    discounts Microsoft offered in competition with Google for the initial deal). The March 2012

    price cuts don't go far enough.

    Less-Than-Perfect Service Agreement Penetration Signals Opportunities Google Is Exploiting

    We estimate the worldwide level of penetration of Microsoft Software Assurance on Microsoft Office

    products at somewhat less than 50%, with penetration under 30% in SMBs and around 70% in

    large enterprises. That indicates a lack of interest among some customers in increasing their

    commitments to Microsoft, a perception of a lack of value in its maintenance offerings, and further

    frustration in some organizations with the total amount Microsoft would like every enterprise to pay.

    Consider the large-enterprise case. Seventy percent of Software Assurance agreement penetration

    in the largest enterprises means 30% may be prime targets for Google, while the other 70% may be

    content to stay where they are (that is, with on-premises services only). As Google picks up a good

    share of these action-oriented opportunities, its legitimacy grows.

    Power Shifts in Vendor Negotiations

    It's not just that some enterprises feel as though they are paying a lot for Microsoft technology and

    support. Many larger organizations have developed a long-standing working relationship with their

    Microsoft account teams, wherein they have been able to work together to meet the enterprise's

    unique needs. That's part of Microsoft enterprise savvy. These same organizations report back to

    us that, for cloud-based office systems, Microsoft is relatively unwilling to negotiate terms and

    customize agreements.

    We believe some of this is inevitable with a move to commodity-like cloud services (where a service

    provider can't customize a lot of things and sustain the type of volume business it's aiming for), but

    this can neutralize some of the enterprise-sensitivity quotient of the Microsoft brand and diminish

    (but probably not negate) the value added by the long-standing customer relationships Microsoft

    has built.

    Google is also seen as unwilling to meet enterprise needs in its contracts, but there is little

    enterprise-sensitivity brand equity for the company to lose.

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    What Should Enterprises Do About It?

    Assess your readiness to move to the cloud with any service provider. These are still relatively early

    days for what we believe is a 15-year or more migration cycle. Use Gartner's "Toolkit: Cloud Email

    Readiness Assessment" to evaluate whether and when your enterprise may be ready to move to the

    cloud for email and collaboration services.

    Use this period of change in the industry to determine when you will re-evaluate your assumptions

    and strategies for providing office system technology to your users. In some cases, enterprises are

    choosing to let some classes of users bring their own (BYO) in terms of both devices (for example,

    tablets) and applications. There are a lot of reasons why that can be a dangerous idea. For example,

    most banks would not approve tellers bringing their own software and most nuclear power plants

    would not approve their engineers bringing in their own hardware. It's just not done. There are also

    cases where users cannot be controlled 100%. For example, many attending physicians in U.S.

    hospitals use whatever technology they want for office system purposes, even if the institution

    they're affiliated with tries to control that. There are other cases where BYO is fine and the

    propensity in the market is to move more and more people to that model (see "The New PC Era:The Personal Cloud").

    Google Apps customers need to continue to invest in Microsoft Office offerings, at least for some

    applications and some key users. The vast preponderance of enterprises moving to Google Apps

    will, at some level, still need to use Microsoft Office offerings. Today, it is a struggle to find a good

    substitute for certain applications (such as Access and Visio), and certain classes of employees will

    depend on applications built on top of Excel and Word for the foreseeable future. It may be

    necessary to maintain a small, on-premises installation of Microsoft Exchange (or other on-premises

    email technology) to ensure that the enterprise's chief legal officer can determine how to react to

    court orders for senior executives' emails. While both Google and Microsoft promise to be sensitive

    to the needs of their customers, your chief legal officer (and senior executives) will probably feelmore comfortable with selected emails purely under his or her department's control. (This type of

    hybrid operation some on-premises and some in the cloud is easier to effectuate with

    Microsoft, but some organizations that have switched to Google report they've resolved it in other

    ways.)

    Microsoft Office 365 and Google Apps customers need to maintain and evolve a pilot facility

    outside of IT, running the other vendor's offering and monitoring visible and hidden costs and user

    benefits. Familiarity breeds insularity. If you are too familiar with any one vendor's technology,

    you're likely to be inadequately knowledgeable of another's. It's also easier to fall victim of

    confirmation bias. Unless the enterprise is very small, Office 365 customers can benefit from a bit of

    forced heterogeneity to remain current on the alternatives. Likewise for Google Apps customers.

    Maintaining a heterogeneous operation also ensures you can gain at least a little more power in

    negotiations with both vendors.

    Pilot additional cloud-based office systems services providers; for example, IBM Docs (in beta

    today) provides new cloud-based collaboration capabilities unavailable from either Google or

    Microsoft.

    Gartner, Inc. | G00233554 Page 15 of 19

    https://www.lotuslive.com/en/catalog/index.php?id=labs&tab=symphonyhttps://www.lotuslive.com/en/catalog/index.php?id=labs&tab=symphony
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    Large enterprises can afford the luxury of supporting multiple independent technology streams,

    picking best-of-breed components and subsystems, where appropriate, to optimize user

    effectiveness instead of a best-integrated suite (the best choice to optimize IT efficiency). Smaller

    organizations may not be able to afford this luxury.

    Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

    "Google Gmail Emerges as a Significant Threat to Microsoft in the Enterprise"

    "The Cloud Email and Collaboration Services Market, 2011 Update"

    "Toolkit: Cloud Email Readiness Assessment"

    "How Will the Office Suite Evolve, and Will Microsoft Continue to Dominate the Market?"

    "Contractual Issues When Subscribing to Microsoft's Office 365"

    Evidence

    1This research is based on our discussions with Gartner clients. Annually, we have spoken with

    hundreds of Gartner clients evaluating Google versus Microsoft for some or all of what we describe

    as office system technologies (including email, collaboration and content creation and editing tools).

    We also talk with scores of third parties active in the Microsoft office system related ecosystem.

    These interactions occur over the phone as well as face-to-face (at Gartner and other events). Our

    user clients are typically larger-than-average entities and include multinationals headquartered on

    almost every continent. Many of these clients are large or extremely large enterprises (including

    some with hundreds of thousands of employees). The following industries illustrate the breadth of

    clients that have influenced the thinking in this research:

    Media, advertising and publishing

    Federal, state and local governments

    Architecture, engineering and construction

    Discrete and continuous process manufacturers at various supply chain levels

    Utilities Business services

    Food production and distribution

    Retail and hospitality

    Distribution

    Medical services, pharmaceuticals, healthcare providers and insurers

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    Financial services (global banking, property and casual insurance, retail)

    Transportation

    Software vendors, system integrators, consultants and service providers

    Note 1 Market Estimates

    The numbers we cite in this research are informal, rough estimates based on dialogs with clients in

    various forums, as well as secondary information from other sources. They are not meant to be

    definitive, only suggestive. We are using these informal numbers when Gartner does not have

    definitive numbers on markets. Where available (for example, see "Market Share: All Software

    Markets, Worldwide, 2011") our definitive numbers are what clients should focus on.

    Note 2 Comparison to OS/2 Versus Windows in the 1990s

    In the early 1990s, Microsoft Windows beat the Microsoft-IBM joint venture known as OS/2 by

    better sustaining the ISVs who had invested in earlier versions of Windows and concentrating on aproduct with more modest hardware requirements that was better tuned to the typical PC of the

    era. Microsoft's early 1990s marketing strategy (that beat OS/2) used gradual evolution and

    migration to trump the revolutionary, disruptive and incomplete reinvention (OS/2) that would

    seriously tax the ISVs' resources. In the current era, with BPOS and Office 365, Microsoft is using a

    similar approach, again promising a gradual, easy evolution to some or all cloud-based office

    services as preferable to the revolutionary, disruptive and incomplete reinvention (Google Apps) that

    could pose serious risks for the IT organization. In short, it exploits desire for the known over fear of

    the unknown (and different).

    Note 3 Microsoft Business RationaleAs its growth began to top out at the turn of the century, Microsoft tried to emulate more-traditional

    vendors' shift toward raising recurring revenue as a proportion of total revenue. The traditional

    systems and software vendors (and investors) came to favor recurring revenue streams and the

    huge, steady, long-term cash flows they provided.

    Toward that end, in the early part of this century, Microsoft tried to woo organizations that had

    bought Microsoft products once every three to six years with new, less expensive annual

    subscription agreements. In that approach, buyers would not have perpetual rights to products

    they would have to pay Microsoft every year what amounts to a software rental fee to continue

    using them. There were few market forces supporting such a move and relatively few organizations

    signed up.

    With Office 365, Microsoft is trying again to shift its business model to collect a more reliable stream

    of recurring payment and incremental revenue by capturing new, per-user services revenue to

    supplement license and maintenance fees.

    This is part of a set of related research. See the following for an overview:

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    Social and the Nexus of Forces: Supporting People's Interactions

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