Why Microsoft's Elop Isn't Afraid of Google

Microsoft's Business Division oversees one of its most successful products, the Office productivity suite, as well as the company's lucrative server and enterprise software businesses. However, like the rest of the company, the division has not been immune to the pressure of the recession, and revenue fell 13 percent in the quarter ending in June.

Business Division President Stephen Elop, however, said in an interview with the IDG News Service that he's confident the unit can overcome the pressures that face the business. These include not only the economy but also competition in the productivity and collaboration software market from Web-based applications from Google and others. To answer this challenge, Microsoft is set to offer Web-based versions of its Word, Excel, PowerPoint and OneNote software as part of the Office 2010 launch early next year.

Those applications are part of Microsoft's general transition to "software plus services" with its Business Productivity Online Suite -- which includes Exchange Online, SharePoint Online, Office Live Meeting and Office Communications Online -- a product and transition Elop's division also oversees.

In an interview with IDG News Service Senior Writer Elizabeth Montalbano, Elop said he's confident Office 2010 has enough new features, including integration with Microsoft's Web-based applications, to convince businesses and consumers to stick with Microsoft for their productivity and collaboration needs. He also noted bright spots in the division's portfolio -- its SharePoint and CRM (customer relationship management) products -- and discussed how Microsoft itself, not Google, remains the company's biggest competitor in the productivity market. Below is an edited version of the conversation.

IDGNS: What trends did you see with Business Division customers during the recession?

Elop: To understand it best you have to break the division down a little bit in terms of the customers we serve. Sixty percent of our revenue is derived from medium and large enterprises, who tend to make longer-term strategic decisions about the technology they're going to buy. About 20 percent of our business are smaller businesses, small and lower mid-sized businesses who tend to buy new PCs when they hire a new employee or they make do on an upgrade cycle. And our third category of customers are consumers, so people buying for home use or perhaps they're running a small business out of their home.

If you look at each of those three categories, very different things were going on. Consumers generally were buying far fewer traditional PCs. They're buying fewer PCs, they're buying fewer copies of Windows, fewer copies of Office. ...That led to a decline in revenue in the consumer segment. Small-to-medium businesses -- a very similar situation where the number of PCs that are being purchased by small businesses dropped quite a lot, translating into a decline in our revenue in that segment that was north of 30 percent, which is a significant decline. ...There's fewer small businesses starting up, so there's fewer companies saying, "Hey, I need three PCs or five PCs to get my business going."

Now the enterprise segment year over year was a very different story. It was modest growth. It wasn't exciting growth -- it was modest growth. Really what's going on there is customers continue to make decisions about the long term about what they want to invest in, combined with the fact that we have a number of products in the enterprise that even with tough economic times are growing very aggressively. So SharePoint for collaboration, document management and other workloads like that -- the SharePoint product is north of a billion dollars and it's growing at double-digit rates during the worst economic calamity we've ever seen.

IDGNS: Why do you think that's true?

Elop: A key reason for that is it helps businesses even if they're contracting to figure out how to save money, how to get people communicating and collaborating more effectively. Another example is around unified communications -- things like e-mail and instant messaging, voice, video conferencing. In tough economic times when a company says "look, we've got to reduce our travel expenses," what do people do? Well I still have to talk to them, I still have to get around to the team around the world. How do I do that? They turn to our product. Well our OCS product, our Office Communications Server product -- double-digit growth year on year during the worst economic circumstances we've all faced. Dynamics CRM -- customer relationship management. We may be contracting as an industry in a particular business, but you say, "I have to get closer to my customer, I have to manage every lead for a sales opportunity tighter than I did before." So it's growing very substantially as well.

IDGNS: Here's how I see the challenges for Office 2010. On the business side of things, you've talked about the "good enough problem," in which people think what they have is good enough. This is especially true now when people have cut back on IT spending. How would you address these challenges?

Elop: One of the interesting things, with every release of software we've ever issued, we've faced the "good enough" problem. Forget about the competitors -- we always have the previous version of software. So our whole process, our whole plan for the interaction we do with customers is ensuring the value is there in the times in which we exist to encourage customers to say, what I have is the best that was available before, there's now something else. You could say, "Oh, maybe what was good enough before is still good enough." But all of a sudden they see, for example, opportunities to save money or to solve a business problem that hasn't been solved before. And of course that's what we're focused on, the capabilities we've introduced in 2010.

One example of this does relate to software plus services. One of the big things around Office 2010 is it's the release that really plays off the cloud-based experience. It's very well-demonstrated already to enterprises that take advantage of the cloud and have some real advantages to it, technically and from a cost-management perspective. So when they say, "Oh wouldn't it be great if I could use the cloud with this particular activity. If I could take Exchange into the cloud with our exchange online product, or SharePoint online." We've done all sorts of work in Office 2010 to better enable that type of activities.

IDGNS: I see the cloud-based products and Office 2010 as separate. Where is the intersection?

Elop: While people tend to think about different products as standing on their own, and each one of them does, our real focus is having them all work better together, interoperating in a way that one reinforces the other where the whole is greater than the sum of the parts. So when you're using Office 2010, the ability to work within Word 2010 and say, "Hey, am I storing that document locally or am I putting it up into a cloud-based environment of SharePoint or am I posting it to the Web?" All of those types of things are brought together in a way that makes sense to the user and allows the company to take advantage of some of those products. So we're very deliberate about creating an environment where we can move these things forward.

IDGNS: With Office 2010 as far as the consumers go, there are some that believe Google Apps and others are a challenge on that side of the market. Do you worry about that?

Elop: We think about it very differently. It's the combination of the applications in the browser environment focusing them there. But we also recognize and believe that people will think, "Hey, the browser is great for this and that activity, but I want that rich client application for something else I'm doing." That is the case today if you go talk to a whole bunch of those users of competitive products in the browser and find out if they're using Office for other things they still need to get done.

The thing to really recognize is that some people look at a Google or whatever and say, "Oh, man, they're got free applications and they've got some number of people using them." We have way, way, way, way more people using free versions of Word, Excel, PowerPoint, Outlook, what have you -- way more than Google has or will in a long time using the Google Docs applications. Of the 500 million copies of Office in use today, half of those have been paid for. The other half have been free. Obviously, I'm tipping a hat to people who might "borrow" software. Those 250 million people who are familiar with the Office experience, as we introduce them to the Web applications, instead of downloading something from BitTorrent or whatever, they're going to come to our Web site and make use of those applications. And some percentage of them might see an ad along the way and say, "Hey, I'm really impressed with the latest functionality -- instead of the old version I sort of downloaded and didn't pay for, I'm going to pay."

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