Microsoft
Two years into his career as head of Microsofts business software unit, Elop says cloud computing and social-networking sites have created a “constructive disruption” that could be more of an opportunity than a threat. Office 2010, due by June, will include a free Web-based version for the first time, matching similar software from Google. Future updates may add Twitter-like functions that allow users to post short messages.
The dilemma for Elop, 46, is how to embrace Web-based software while protecting his units 64 percent profit margin. Under the cloud-computing model, Microsoft would store Office programs on its own servers and deliver them to customers online, which costs the company more than supplying software installed on computers. Elop says the shift will mean businesses actually end up spending more money with Microsoft.
“In that cloud environment, we are not only selling them software but we are also saying, Well take care of your networking, your hardware your operations, your customer support,” Elop said in an interview. “Were doing much more work for the customer. What that does is increases revenue and allows us to participate in more profit.”
Elops Office unit is Microsofts biggest business, accounting for a third of the companys $58.4 billion in sales last fiscal year. The shift to Internet-based versions of Office may cut margins by 5 to 10 percentage points, said Matt Rosoff, an analyst at Directions on Microsoft in Kirkland, Washington.
Have to Do Something
“Elops challenge is to move carefully and not undercut the traditional software business,” Rosoff said. “You dont want to give everybody free Office over the Web because that jeopardizes a highly profitable business, but you have to do something.”
Microsoft, based in Redmond, Washington, rose 55 cents to $28.35 yesterday on the Nasdaq Stock Market. After gaining 57 percent last year, the shares have lost 7 percent in 2010.
Microsofts Office division, which dominates the word- processing, spreadsheet and presentation software market, reported a 2.8 percent drop in revenue last quarter, with sales to businesses falling 6 percent. Consumer revenue rose 12 percent — a slower pace than personal-computer sales, the company said.
Free Version
Microsoft is projecting that consumer and small-business sales will pick up with the release of Office 2010. The program will offer Web features, such as the ability to collaborate and share documents over the Internet. There also will be a free version included on some PCs and a student offer thats two- thirds the price of the current product, which starts at $149.
That will attract consumers who might otherwise be reluctant to upgrade, Elop said. A record 4.5 million people have downloaded a test version of Office 2010, said Chris Capossela, a senior vice president who works for Elop.
Dell Inc. plans to install the new Office on at least 25,000 of its employees computers by year-end. It will rely on the software to help engineers and sales teams share notes and collaborate on projects over the Web, said Tom Piegat, a manager in Round Rock, Texas-based Dells information-technology department. Microsoft is taking the right steps to let employees work, save and share on the Internet, he said.
Jury Is Still Out
“Whether that promise gets completely fulfilled with Office 2010, Im not sure about that — the jury is still out,” Piegat said. “But the building blocks are there.”
Offices Web-based features are unlikely to generate significant additional revenue for the next few years and investors may not like the narrowing profit margins that result, said Heather Bellini, an analyst at ISI Group in New York.
“Its a market they need to be involved in — if thats the way the industry is going, you dont want customers to rip out Microsoft and go to a Google solution,” Bellini said. “But I question whether well be able to have a company where the stock will go up even though margins are going down.”
Margins Shrink
Microsoft is selling more of its software as a service, which may hurt profit margins, said Bellini, who hasnt yet calculated by how much. Besides the Web-based Office project, the company started charging this year for its Azure cloud- computing services, which store and run programs on behalf of customers.