The Cloud and the Future of Microsoft Office: Steve Ballmer Remakes Microsoft's Most Successful Product

By | Jul 18, 2012

Executives at Microsoft revealed significant changes for its Microsoft Office product line, one of the company's most important products. Office 2013 and Office 365 will be the commercial names for the flagship products, which had been code-named Office 15, and both will sport refreshed user interfaces and business models.

"It's now your Office, not your machine's Office," said Chris Pratley, general manager for Microsoft Office Labs, Planning, and Design, according to Wired. Pratley indicated that the architecture of the new Office products will have files and settings residing in the cloud and be synced with any device--those you own, those you use at work, or those you borrow.

The importance of the Office makeover cannot be underestimated. It has been a key driver to the success of Microsoft, generating 30% of the company's revenues and 25% of its profits. Horace Dediu at Asymco published a fascinating analysis of Microsoft's business. Using inputs of 336 million Windows PCs sold in 2011, the analysis shows Microsoft had $19 billion in Windows OS revenues and $23 billion in Office revenues. That translates to about $55 of OS revenues and $68 of Office revenues per each Windows PC sold. More revealing is the profitability analysis that shows each PC sold translates to about $78 of Microsoft profit per PC sold, $35 from OS licenses and $43 from Office licenses.

Pricing for the new Office products was not announced, but pressures from open-source, startup and freeware competitors, including Google, will force Microsoft to think very carefully about pricing models.

Microsoft's Office Strategy Decisions Are Critical

The Asymco analysis, combined with sales data of traditional PCs and mobile products, suggests several uncomfortable realities for Microsoft CEO Steve Ballmer. It should also give midsize organizations reasons to carefully watch developments at the company.

First, Ballmer and company must get Office right. Product, pricing, positioning, and performance must be winners. Office is overweighted as a revenue and profit contributor to the current and future health of Microsoft. A mistake or misstep with Office could do severe harm to the company. Early reviews suggest that Ballmer is trying to pivot Office to make it cloud-centric as well as integrate it into the Windows 8 Metro-based UI. Those early reviews indicate that the design criteria appear to be well-conceived and well-executed thus far.

Second, flat Windows PC sales mean flat revenues and profits for both Windows OS and Office products. Tablets, mobile, and BYOD trends--in particular, IOS based devices--are feasting on the weakness of traditional PC sales. But with more than 300 million PCs shipped last year, the business is still significant. The trends, however, place a direct and unmistakable challenge on Microsoft's core businesses, and Office must be perceived as a better choice for consumers, enterprises, and midsize companies.

Microsoft is also rumored to be building an Apple-like "app store" for Office products. Apple's IOS-based devices have a four-year head start and an undeniable leadership position on the app concept. For Microsoft to make a difference, it must quickly achieve par level performance, at a minimum, if it expects to wrestle market share from Apple. While possible, Microsoft's objective may be to simply protect its base, rather than growing it.

Surface is an unknown factor at the moment. Can it successfully compete with Apple and the invasion of the Androids? Will Windows 8 and Metro be difference makers or just different products? For midsize organizations, the announcement and follow-on developments are certainly worth watching. The increasing mobility of work and workers, the growing presence and shadow of the cloud, the ascent of Apple and Android, open source, and the success of startups are giving Microsoft much with which to contend and defend. They are also giving midsize leaders an expanding range of viable options.

Are Office 13 and Office 365 Apple killers or simply Microsoft sustainers and protectors of its franchise, or something else? The specifics of product and pricing are yet to be released and fully evaluated, but Microsoft realizes its power to freeze spending decisions by these announcements. The specifics of specs, and the tests of time and technologies, will provide a clearer picture of what is a still evolving and developing image.

This post was written as part of the IBM for Midsize Business program, which provides midsize businesses with the tools, expertise and solutions they need to become engines of a smarter planet. Like us on Facebook. Follow us on Twitter.

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