22-Microsoft Office Versus Google Apps
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.
Google succeeded remarkably well. Statista reported in May 2021 that Microsoft’s Office 365 controlled around 47 percent of the market share for major office suite technologies worldwide. Google’s office suite, the other major competitor in the market recently lost the share lead to Office 365. Both serve thousands of businesses. In the 2022 US market, Google’s G Suite leads the market with 59% share, office 365 follows at 40%
In late 2021, Versus found that Google Workspace starts at $6 per user, per month and Microsoft 365 starts at $5 per user, per month. However, the two base plans are not totally comparable for those looking for business email, since the lowest-tier Microsoft plan doesn’t include Outlook.
In higher-tier plans, Google Workspace remains the best value with a lower price for comparable apps, plus it offers double the storage. A Google Workspace plan does not require an annual contract, whereas Microsoft’s subscriptions are only billed on an annual basis.
This superb success of Google in Microsoft’s backyard is just as much a reflection of Microsoft’s failure as it is Google’s success. Google started with a lesser product at very low pricing. It clearly had far less economies of scale than had Microsoft in the space. Google used its low pricing to gain a great deal of market share and achieve economies of scale as good as or better than Microsoft in the office suite space. Google then use the profits from its increasing market share to develop an excellent product, one easily capable of matching up with Microsoft. Microsoft had to allow this low pricing strategy to succeed. Had Microsoft responded aggressively with its own low pricing and low price product, Google never could have achieved the success it has realized over the last few years.
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