Software Wars: Microsoft’s Free Web Office Software (MSFT, GOOG, ORCL)

Today’s launch introduces the business version of Office. The consumer version is due out next month. The desktop version of Office is currently owned by about 500 million users, and Microsoft can ill afford seriously to cannibalize the software that accounts for 29% of the company’s revenues and more than 50% of its operating income.

The free online Office suite will be a crippled version of the desktop suite. The business version will be available to purchasers of Office’s license, and the consumer version will be advertising-supported … think the Google-model.

Microsoft, as it often does, is planting its flag in an area (cloud computing) where it can at least sow some confusion and doubt about who the eventual winner will be. Right now, Google Docs is used by only about 4% of companies, compared with 81% of companies that bought Microsoft’s last version of Office in 2007.

Microsoft’s strength in the emerging cloud computing field lies in the interoperability of the web apps with the desktop apps. Most people are still not willing to depend on only a web-based application to create and store documents, especially business-critical documents. Microsoft’s server products already support the basic private cloud components of virtualization, centralized management, and hosted data centers.

What Microsoft lacks is the desire to move decisively into the cloud. To do so would mean that its desktop operating system and apps would have to be phased out as the new model takes over. The company can’t do that for a couple of reasons. First of all, it would put Microsoft too far ahead of its customers, who are not clamoring for such a shift. Second, their revenue stream from desktop programs would dry up with nothing to replace them. Google, which derives almost all its revenue from advertising, can survive with fee web apps. Microsoft, which thrives on licensing fees, can’t pull in enough ads to replace all those fees.

Microsoft’s new Office suite is not a game-changer. It gives the company a stake in the ground in cloud computing. That’s all it needs to do for now.

Paul Ausick