SEATTLE – Microsoft’s Stephen Elop is preparing for the biggest shakeup to the $19 billion Office business in a decade as the company races Google to sell Internet-based programs.
Two years into his career as head of Microsoft’s 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 unit’s 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, ‘We’ll take care of your networking, your hardware your operations, your customer support,’ ” Elop said in an interview. “We’re doing much more work for the customer. What that does is increases revenue and allows us to participate in more profit.”
Elop’s Office unit is Microsoft’s biggest business, accounting for a third of the company’s $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, Wash.
“Elop’s challenge is to move carefully and not undercut the traditional software business,” Rosoff said. “You don’t want to give everybody free Office over the Web because that jeopardizes a highly profitable business, but you have to do something.”
Microsoft’s 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.
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 that’s 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.
The U.S. Olympic Committee used Office 2010 to set up a Web site for reporters covering the Winter Games in Vancouver, allowing them to access the latest information on hometown athletes and follow their Twitter feeds.
Dell plans to install the new Office on at least 25,000 of its employees’ computers by year’s 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 Dell’s information-technology department. Microsoft is taking the right steps to let employees work, save and share on the Internet, he said.
“Whether that promise gets completely fulfilled with Office 2010, I’m not sure about that – the jury is still out,” Piegat said. “But the building blocks are there.”
