Microsoft Office Live Workspace: A good hedge

What would you do if you had a cash cow that's raking in dough yet could see competition looming from well funded rivals in the future?First, you build a moat to protect the cash cow.
Written by Larry Dignan, Contributor

What would you do if you had a cash cow that's raking in dough yet could see competition looming from well funded rivals in the future?

First, you build a moat to protect the cash cow. Then, you hedge your bets just in case the blogger echo chamber happens to be right.

That aforementioned plan is the context that should be used to view Microsoft's Office Live Workspace strategy. As Mary Jo Foley reports, Office Live Workspace is Microsoft's answer to Google Docs & Spreadsheets (also see Techmeme). It's also Microsoft's answer to other developments such as Adobe's acquisition of Buzzword, which could also be a rival at some point.

Microsoft's strategy boils down to this: The client is still where the Office game is played, but Web services can extend the functionality. Translated into business sense that statement would boil down to this: Microsoft has a juggernaut in Office, but some folks may someday want Web applications. Microsoft is giving these people a reason to stay with Office.

This strategy is ridiculed by those that don't happen to run Microsoft's Office unit, but let's get real here.

Consider this statement from TechCrunch:

Google and other Office competitors will be breathing a sigh of relief this morning - this is not a decisive move by Microsoft to crush the competition as they did with Netscape more than a decade ago. Microsoft has failed to understand the real power of Google Docs - easy, no hassle document creation, collaboration and access from the browser. And it will take them another two years of fidgeting before they really get scared and react properly. Microsoft is falling into the classic trap of failing to realize the disruptive nature of a new competitive technology, instead focusing on the massive revenues it generates from their aging Office suite. Google docs is tearing the Office wall down, and Microsoft has failed to respond. What a bummer - it would be a good fight if Microsoft would actually get into the ring.

So let me get this straight. Microsoft should basically punt on Office and run to this new model because Google Docs is the future.

If Microsoft made this move it could very well be more entertaining than the software giant's current course. But it wouldn't make a whole lot of sense. Why? I haven't seen any profit, loss and revenue statements for Google Docs. Where's the financial breakdown for this alleged future juggernaut? What's the advertising revenue generated because of Google Docs and Spreadsheets? How many enterprises have adopted these Web tools? How many large enterprises have jumped into bed with Google Docs and dropped Microsoft Office forever? Where's the evidence that the Office wall is crumbling? Are early adopters really the best way to gauge future adoption?

I'm optimistic about all of these Web document efforts, but why should Microsoft get into the ring at this very moment? You could dig up a few answers to those aforementioned questions. Google's partnership with CapGemini could get enterprise traction and adoption rates are gaining. But most folks are guessing about Web doc traction.

What is available is Office's annual revenue. For the fiscal year ended June 30, Microsoft's business division, which roughly translates into Office and associated products, reported annual revenue of $16.4 billion with operating income of $10.84 billion. For fiscal 2006, the business division reported revenue of $14.5 billion and operating income of $9.6 billion. For context, Google's revenue is projected to be $15.7 billion for 2008, according to Thomson Financial. In other words, all of Google isn't as large as Microsoft's business division.

Where was this crumbling wall again?

Bottom line: Microsoft doesn't have to make a big plunge into the Web document business. Time is on Microsoft's side. If these many Web doc rivals do take market share--just 1 percent of Microsoft's Office pie would be a helluva business--Microsoft could make its big plunge. In other words Microsoft will wake up when IDC's 95 percent market share tally for Office turns to 93 percent or so. Before then Microsoft's strategy--build a moat and hedge a bit--makes a lot of sense.

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