The announcement earlier this week that Microsoft would offer fully web-based versions of SharePoint and Exchange brought the software giant further into the fold of hosted application providers, allowing it to compete with competitors new (Salesforce.com, Google) and old (IBM). But for Microsoft, even after the launch, some questions remained. The big one: Why will a fully web-based version of Microsoft Office not hit the browser until late 2009? Also, how will the emergence of hosted applications affect the company's business model, which garners a good chunk of its revenue from the high margins of installed, on-premise software?
CIO's C.G. Lynch caught up with Stephen Elop, president of the Microsoft Business Division, after the launch presentation.
CIO: Say you're a Microsoft customer who has already invested in lots of on-premise software. Why should you consider switching to a hosted Exchange or SharePoint?
Elop: Microsoft [with online Exchange and SharePoint] can help the technology teams at companies by taking some of the workload that they have traditionally had and free them up from that, so they can focus on some more of the strategic IT challenges that companies are facing. I've been a CIO before. I know there's always a list much longer of important things you have get done relative to what you can actually get done, regardless of budgets. Microsoft can broaden its footstep in terms of the services we provide to the customer. Not only can we make available Exchange Online and Sharepoint Online, we can offload some of the aspects of maintaining that software and operating that environment and maintaining the service level, and do so at scale. So we can drive the cost down for you.
CIO: Does Microsoft foresee everything eventually moving to the cloud?
Elop: There is a big role for cloud-based computing. We're fully embracing that. If you saw the announcements at PDC and the announcements we're doing around Windows Azure, we're placing a huge bet on that. But very much our story is whether it's on a PC, a mobile device, a browser, however it is, all of those things need to work seamlessly together across on-premise computing as well as the cloud-based computing. So our value to the customer is to say, look, you want an environment that gives you choice across all of these environments. We're the company that can help you do that.
CIO: So on-premise, installed software lives on? Will the Salesforce.coms and Googles be proven wrong?
Elop: The reality is, people do need functionality on their clients. Could be a mobile device or it could be a PC. We've got experience delivering capability there. Combining that with the cloud is really resonating with customers. So we think something we call "software plus services" is a strong part of our value proposition.
There are certain things you do where certain elements of computing on a PC are an advantage. For example, if you use Microsoft Excel, you'll be able to use it in the cloud, on your phone or on your PC. So generally, that will be a good experience. However, when someone sends you the more complex model of things that have lots of iterative calculation, leveraging the rich capability of Excel, it's going to perform better on a local client no matter what anyone does in a cloud-based environment. It will always be the case that processing capacity, disc speed, memory access and graphical capabilities will be better when locally delivered. It is ever thus. It's just Moore's Law.
As technology advances, the things we do today might tomorrow be well-served in the cloud. But the things we're doing tomorrow on the client are going to be much more advanced too. There's always going to be this mix. That's why I made the comment on stage today that you're seeing these so-called 'cloud only' vendors taking steps to bring the technology down onto client machines. They recognize the same thing.
CIO: But doesn't this just mean that Microsoft, who has made the bulk of it's money from on-premise software, just doesn't want to fully change over? Won't hosted software cannibalize some of your core business?
Elop: Broadly, we look at this as an expansive opportunity, an opportunity to work for our customers. Microsoft Online services is a good example. While the cost for running e-mail and collaboration is lower in total to our customers, Microsoft's participation in the money that's spent there actually goes up. Not only are we "selling software"; we're also delivering a service. So that's market expanding for us. Another example is with our client software. Roughly estimated, there are about a half billion people who use Microsoft Office. About half of them have paid for it. So there's a big group of people out there who are pirating software or looking at various alternatives. They can use some of our technology in a browser and supported by ads as an example. That means they come into the family and contribute to the overall revenue base. There will be, at the margin, some cannibalization -- people who pay one way today choose to pay a different way tomorrow -- but I think broadly speaking we see it as a market expanding opportunity.
There's no hesitation. No one is going to write a story that Microsoft is hedging their bets. No, no, no. This is full on. We're embracing this. I believe all great companies, when those moments come of the next generation, have to make the really hard decisions and go for it and make that big leap forward. Microsoft went from DOS to Windows, from Windows client to Windows server, from the Internet and now to cloud based computing. It's shown the ability to make those big moves. And generally, the numbers have been going in the right direction as a result of this. So I'm sure years ago, people said the browser will kill Microsoft. Well, Microsoft has done well over the last few years.
CIO: You mention Online Office. It's not going to be available until late 2009. Meanwhile, Google for instance has had a fully Web-based productivity package, Google Apps, since 2007. Why is Microsoft so late here?
Elop: It's to make sure it's in line with what our customers expect. And also, we're held to a certain standard. And so, if one of our competitors issues a press release that says, hey we have "bolding" or "underlinining," that for whatever reason gets a lot of press. I'm not quite sure why, but it does. Great. There's been a PR hype machine going on there. When people say, Office is going to be available in a cloud environment, what customers expect is that the user experience between environments hangs together. The familiarity has to be there. Another thing they absolutely expect is that the fidelity of the documents is maintained. So if you take a Microsoft Word document on your PC, edit it in the cloud, ship it over to your mobile phone, change it on your mobile phone, and send it back to your PC, the expectation is that all aspects of that are perfectly preserved.
Right now, with competitor products, if you move documents into and out of their environments, it's like a meat grinder -- you don't recognize what comes out on the other side. We're held to a different standard. So both from the guidance we've received from our customers, and for what really is going to set the standard for this environment, we think this timing is an appropriate one.
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