Microsoft Office Online and Attacking The Innovator's Dilemma

Nick Carr has a lead on the story that we all knew was coming eventually: Key Microsoft applications, including Office, may be moving online, soon. Carr’s source says to look for enterprise applications to move online as web services with Salesforce-like usage fees, popular PC applications to move online with advertising support, and expansion of its data center network to provide storage for everything.

In short, they’re responding to Google Apps and Google Docs, which now account, according to analysts, for up to 2-3% of Google’s total revenue (call it $400m a year, up from $40m a year ago) (note: I can’t find a source for this, but it was quoted to me by a senior Google employee last week). That’s still pennies compared to Microsoft’s $16b or so in annual Office revenue, but the trend is pretty clear – users like free, and they like the ability to collaborate on documents. Today, Google offers what is in many ways a superior product to Office and they don’t charge users for it.

That’s created a textbook Innovator’s Dilemma for Microsoft. And the people up in Redmond are probably smart enough not to simply roll over and die.

The obvious time to do it is at the Mix conference later this week. Where, we hear, Microsoft may also be announcing an offline version of Silverlight to compete with Adobe Air. Would Microsoft release online versions of office via the Silverlight platform? Perhaps… Adobe has their own version, called Buzzword.

In the middle of this sits Salesforce, the king of software on demand. At some point Google or Microsoft will make a serious move to acquire them, and at that point the other will respond with a counter. That at least partially explains why Salesforce continues to be valued by the market at an absurd P/E ratio of over 600 (their continued revenue growth is another reason).