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Originally published December 25, 2012 at 6:27 PM | Page modified December 26, 2012 at 6:59 AM

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Google gains on Microsoft turf

In the last year, Google has scored impressive gains in software for businesses — it may be cutting into Microsoft’s strengths.

The New York Times

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SAN FRANCISCO — It has taken years, but Google seems to be cutting into Microsoft’s stronghold — businesses.

Google’s software for businesses, Google Apps, consists of applications for document writing, collaboration, and text and video communications — all cloud-based, so that none of the software is on an office worker’s computer. Google has been promoting the idea for more than six years, and it seemed that it was going to appeal mostly to small businesses and tech startups.

But the notion is catching on with larger enterprises. In the last year Google has scored an impressive string of wins, including at the Swiss drugmaker Hoffmann-La Roche, where more than 80,000 employees use the package, and at the Interior Department, where 90,000 use it.

One big reason is price. Google charges $50 a year for each person using its product, a price that has not changed since it made its commercial debut, even though Google has added features. This year, for example, Google added the ability to work offline, as well as security and data management that comply with more stringent European standards. That made it much easier to sell the product to multinationals and companies in Europe.

Many companies that sell software over the cloud add features without raising prices, but also break from traditional industry practice by rarely offering discounts from the list price.

Microsoft’s Office suite of software, which does not include email, is installed on a desktop PC or laptop. In 2013, the list price for businesses will be $400 per computer, but many companies pay half that after negotiating a volume deal.

Prices vary

At the same time, Microsoft has built its business on raising prices for extra features and services. The 2013 version of Office, for example, costs up to $50 more than its predecessor.

“Google is getting traction” on Microsoft, said Melissa Webster, an analyst with IDC. “Its ‘good enough’ product has become pretty good. It looks like 2013 is going to be the year for content and collaboration in the cloud.”

Microsoft has also jumped on the office-in-the-cloud trend. In June 2011, it released Office 365, and now offers its software in both a cloud version and a hybrid version that uses cloud computing and conventional servers. Office 365 starts at a list price of $72 a year, per person, and can cost as much as $240 a person annually, in versions that offer many more features and software-development capabilities. Microsoft says it offers more than Google for the money, but the product has not won many converts from Google.

In a recent report, Gartner, the information-technology research company, called Google “the only strong competitor” to Microsoft in cloud-based business-productivity software, though it warned that “enterprise concerns may not be of paramount importance to the search giant.”

Shaw Industries, a carpet maker in Dalton, Ga., with about 30,000 employees, switched to Google Apps this year for communication tools like email and videoconferencing. Jim Nielsen, the company’s manager of enterprise technology, calculated that using Google instead of similar Microsoft products would cost, over seven years, about one-thirteenth Microsoft’s price.

Shaw is a subsidiary of Berkshire Hathaway, run by Warren Buffett, but the close friendship of Buffett and Microsoft’s founder, Bill Gates, did not sway Nielsen. “When you add it up, the numbers are pretty compelling,” he said.

Simpler model

In addition to the lower price, Google has simplicity in pricing. Nielsen said he had to sort through 11 pricing models to figure out what he would pay Microsoft.

But his prime motive in choosing Google, he said, was online collaboration. “As people in their daily lives become more electronically social, they want to bring that into the office,” Nielsen said. “Video is more appealing than a written letter.”

Google, he said, is “constantly making it better for teams to work, inside and outside the company, with controlled access.”

Microsoft says it does not yet see a threat. Google “has not yet shown they are truly serious,” said Julia White, a general manager in Microsoft’s business division. “From the outside, they are an advertising company.”

Although she would not break out numbers, White said Office 365 was “on track to be our fastest-growing business.” She said that Google, to be a threat, would need to “provide a quality enterprise experience” in areas like “privacy, data handling and security.”

But according to the General Services Administration, out of 42 federal government contracts for which Google and Microsoft competed in 2012, Google won 23 deals, and Microsoft 10. The rest went to another company, Zimbra, which is owned by VMware, a maker of cloud software.

Microsoft’s biggest and most profitable sector, its business division, brought in nearly $24 billion in the 2012 fiscal year that ended in June. Almost none of that came from Office 365, but from the familiar older-style software that depends on computers within the corporation.

As the two behemoths slug it out in the enterprise market, their cloud-computing software is changing the way businesses operate. Internet-based computing makes it easier to communicate both within and outside a company. Fixing software and adding features can be done automatically, the way consumers get the latest version of Facebook.

“People were looking for cheap email at first, but now it’s about collaboration, calendaring and data storage online,” said Webster of IDC.

Over time, her firm says, software revenue will be at least 50 percent from the cloud, which could challenge the complex way Microsoft prices and discounts its products.

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