22-Microsoft Office Versus Google Apps

Posted 5/19/08

Microsoft has problems getting its stock price up where it thinks it belongs. Some analysts believe that the reason, in part, is that Google has introduced free substitutes for the Microsoft Office products. These substitutes are called Google Apps and include spreadsheet and word processing applications. The fear is that Google’s advertising-supported free applications will force Microsoft to reduce prices on Office products where it enjoys a 70% gross margin. These fears are premature and probably overblown.

Google Apps is a long way from offering a true challenge to the Microsoft Office programs. They do now, and probably will for the long-term future, appeal only to small customers. By small customers, we mean customers who buy in very small quantities and account for less than 10% of the total market (see Basic Strategy Guide Step 2). The big buyers are likely to stay with Microsoft for a long time. If history is any guide, Microsoft will have to suffer Reliability problems with its Office programs, failing its customers, before a low-end competitor is likely to gain much market share (see Basic Strategy Guide Step 7).

When, and if, it must respond, Microsoft has a number of options (see “Turmoil Below: Confronting Low End Competition” in the StrategyStreet/Tools/Perspectives section.) One option is to duplicate exactly the Google business model. Microsoft would introduce a product with the same features as the Google Apps product. It would offer the product for free and rely on advertising to pay for the product. Given Microsoft’s much longer experience with Office-type products, their Features and Reliability are likely to be easily as good as, and more likely much better than, Google Apps. If “free” is what the customer wants, and in return the customer is willing to put up with advertising and somewhat stripped features, reliability and convenience, Microsoft should be able to match Google with little problem. This would effectively end the Google challenge to Microsoft.

Will this hurt Microsoft’s margins? It is unlikely, providing Microsoft does this soon. Microsoft could design a product specifically for smaller customers and use advertising to support it. These are customers that are not likely to buy the Microsoft Office product anyway. Or at least they wouldn’t buy it for themselves. They may already use Office at work. Microsoft is probably on pretty sure footing, as long as it acts expeditiously.

 

UPDATE 060925

 

Google emerged as an unexpected Next Leader (A competitor or product that offers much better than industry-standard performance for a low price to a specific subset of the industry customers) in the office application market by pioneering a space that others, including Microsoft, had largely overlooked: online collaboration. Initially launching an online word processor with real-time collaboration in 2006, Google gradually expanded its Function offerings, introducing a suite of integrated productivity tools that eventually rivaled Microsoft Office in both breadth and capability. As Google’s suite of apps grew, it began to pose a genuine threat to Microsoft’s dominance, especially as it added compatibility with Microsoft formats, third party services, cloud storage, and seamless file sharing. However, Microsoft responded effectively.

 

Google’s product strategy emphasized Function innovations to create seamless, cloud-native collaboration. This focus set it apart from all competitors in 2008. Over time, Google integrated additional features such as mail, calendar, chat, intranets, and team websites. By 2016, Google had rebranded its product as G Suite targeted for larger customers and introduced Google Meet and Chat, tightly integrated with its other office tools. In 2020, Google launched Google Workspace, further consolidating its suite and adding new features and third-party service integration. This online collaboration focus paid enormous dividends as Covid massively expanded the market for remote work.

 

Google employed an aggressive pricing strategy—offering collaboration tools for as little as four dollars per user per month.  Low prices gave it a significant advantage among educational and small business users, because Microsoft offered its products only on a one-time purchase basis. Google’s cloud-native approach also meant that users benefited from continuous, automatic updates without compatibility concerns. This low price and small customer focus strategy allowed Google to achieve significant economies of scale in the online collaboration market.

 

By 2013, Microsoft recognized both the potential and the risks of this emerging market and responded by introducing Office 365, its own cloud-based subscription service that enabled online collaboration across the full Office suite. This Function innovation ensured that Microsoft would retain the loyalty of its largest customers, a successful response to the Google challenge.

 

From 2013 until 2025, Google evolved from being a niche Next Leader player to a formidable Standard Leader (A competitor or product that sets the standard for performance and price in an industry) challenger, competing with Microsoft on nearly equal footing in product features and pricing. Throughout this period, both companies introduced continuous Function innovations: Google strengthened its integrated online collaboration tools, while Microsoft worked to protect its large enterprise customer base by enhancing its cloud offerings and rebranding its products as Microsoft 365 in 2020, which consolidated its cloud and desktop offerings.

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