Microsoft, which has tiptoed into offering online versions of various Office products for years, leapt into cloud-based productivity applications in a big way today.
The company, a service that offers customers the chance to pay a monthly fee to use its most familiar applications--Word, Excel, PowerPoint--as well as server software--such as its Exchange e-mail program, its SharePoint collaboration software, and its Lync communications technology. The service will be hosted by Microsoft and a handful of telecom partners.
The opportunity may be huge, but the risk isn't insignificant either. More than a billion people use Office. The new service, which may be less expensive than existing Office licenses, could cannibalize that business.
What's more, Microsoft rival Google has helped push the online productivity business forward with its Google Apps service. It continues to add new corporate customers. Office, which largely competed with previous versions of itself when new versions debut, now has a deep-pocketed competitor that's gaining traction.
The president of Microsoft's Office division, Kurt DelBene, spoke with CNET after today's product launch. Below is an edited transcript of that conversation.
Q: Is Office 365 really about making the Office server tools that are familiar to large enterprise customers available to small and medium-size businesses?
DelBene: Absolutely. To make those experiences available to small and medium-size businesses is a huge opportunity for us. If you think about it, small and medium-size businesses have many of the same needs that our enterprise customers have in terms of having rich calendaring, a rich e-mail system, world-class collaboration, rich, unified communications capabilities. Those things are not unique to a 25,000-user company. If I run a 25-person engineering firm, I have many of the same needs. I have the need to make sure we're well coordinated for events so that we all show up at the same meeting at the same time. We have meeting rooms and we'd like to book those meeting rooms in the same way we book the participants of that meeting. We have the same need to have rich collaboration spaces.
What we don't think is appropriate is to take a consumer-oriented service and say, "Oh, since you're a small or medium-size business, that's the appropriate experience for you."
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Is there a risk of cannibalization of the Office business as a whole because big businesses can use this too? The pricing might not be as favorable for Microsoft for big businesses to shift to a lower-cost subscription model.
DelBene: We've created offerings that are specific and hit the needs of particular customer sizes. We've done that not out of a point of view of cannibalization, but rather from a point of view of if you're a small business of less than 50 customers, let's create an offering that's tailored for you. If you're a large customer that does Active Directory synchronization that wants rich archival, then we'll figure out an offering that's specific to them as well. We think we've done a pretty good job of focusing on offerings that are unique to specific business segments.
What are the financial implications for Microsoft, though, if large corporations shift their Enterprise Agreements to Office 365? I'm assuming it will be cheaper for them in some cases.
DelBene: If you look at total cost of ownership, it is cheaper for them. We have heard over and over again that savings for enterprise customers is up to 50 percent of the cost they spend for those services today. Also, toward the end of last year, we changed the Enterprise Agreement to be "cloud ready." Customers can sign an EA with us to transition some of their users or all of their users to the cloud on the schedule they are looking for.
But then what are the implications for the Office business as a whole? Is it conceivable that revenue for the Office business could decline because of this?
DelBene: No. It's actually a positive business opportunity for us. It's a positive business opportunity in terms of existing customers, and it's a positive business opportunity in terms of small and medium businesses, where today we compete for about 15 percent of their spending. This is an opportunity to make that five times (greater).
A lot of companies are beginning to use Google Apps. Have you learned anything from what Google has done that you thought was interesting and worth considering?
DelBene: We're more focused on what we think users are looking for. We've been very focused on taking the server-based capabilities that people know and love--SharePoint, Exchange, and Lync--and delivering them as a rich cloud service. We try not to take the perspective of saying we want to do what the other person does. We think we understand customers well and we understand the value proposition we're trying to deliver to them.
Google has been at this for a while now. So why is now the right time for Microsoft to pursue this as opposed to, say, four years ago?
DelBene: We actually started the pursuit of this six years ago. This has not been a new path for us. Even back then, it was clear that the opportunity for all of our business customers to get all of the richness we provide in our on-premises products in a cloud service was a better value proposition for them because they get out of the business of having to maintain that software. The industry was moving and the connectivity to the Internet was getting good enough that you could imagine that day six or eight years ago when that was going to be the way that people consumed our software experiences. It has not been about reacting to competitive situations.
But the interest in this today, the fact that you hosted a launch event in New York, suggests that this offering is a level above what you've already done.
DelBene: It is.
So then why is the time right for this current offering, as opposed to launching it earlier?
DelBene: There's part of it that's an evolution of where we are in the development process. But then, there's a piece of it that says as the cloud becomes a natural part of what people do on a day-to-day basis, it becomes safer and more expected to have business-class e-mail in the cloud and collaboration experiences in the cloud. The expectations of customers have evolved to where it's a natural thing for them to expect as well.
What are the metrics you'll look at to measure the success of Office 365?
DelBene: There are a few things. There is the business success--how do we get growth of users. And even there, there are a couple of metrics. People move through trying the beta, and then seeing what that experience looks like, and then deciding to move onto the service. When they move onto the service, they don't often move on all at once, certainly not if you're a medium- or large-size business. You bring one part of your organization on before you bring your whole organization on.
We will look to total numbers of users. We will look to numbers of trials. Conversions from trials will be an important metric. We'll just as much look at the feedback from the experience itself. Where are the places we need to improve our customer service, our documentation?
Office right now has over a billion seats. Is there a number you think Office 365 will hit a year from now?
DelBene: We aren't making actual projections. There's not an enterprise customer I talk to that we don't talk about the service, and talk about their plans to transition over to the service over a period of time. If I look further out, I think we'll move to a world where the majority of our users overall will be using the online service versus the on-premise software.
What date will that be? Two years? Five years?
DelBene: I get asked that question a lot. I get asked the question internally a lot. I tell my development teams, act as if it will be soon because you will do the right things.