Desktop versions? Computers? Who still uses those things? That's a question Microsoft has been grappling with for the past few years, and it's one of the biggest challenges facing new CEO Satya Nadella, who made his first public appearance in his new role as part of today's event. Office has long been one of Microsoft's biggest sources of revenue; in the company's 2013 fiscal year, business software brought in $25 billion. And Office is still used by as many as 90 percent of businesses, according to one recent study. But that doesn't mean Microsoft isn't worried about the future of its cash cow.
Office is, despite today's launch, primarily a product designed to be used on traditional PCs. But PC shipments have been dropping for years, and 2013 saw the steepest plunge ever, with a decline of almost 10 percent. Mobile devices now outsell PCs, and other than the small number of tablets running Windows 8, they don't support the full version of Microsoft Office. And cloud-based services like Google Apps appeal to users with multiple devices, who know they can access the latest version of their work anywhere, and effortlessly share it with anyone. That's why today's Microsoft event, despite being teased and leaked as the Office for iPad launch, was as much about Office 365 and enterprise cloud services as anything else.
Office 365, along with its online components and mobile apps like the new iPad version, is Microsoft's attempt to hold onto the productivity software business even as the market around it is rapidly changing. Designed to appeal to corporate IT managers who might be tempted to switch to Google Apps, small businesses that want industrial-strength software without the overhead of a support team and consumers who can't bear to give up those complex Excel macros, Office 365's subscription plan is a good deal when compared with Office's traditional pricing model, if you make full use of the entire Office suite on multiple desktop and mobile devices and upgrade to each new version on schedule.
However, for users who rely primarily on mobile devices, or computers like Chromebooks, which account for as much as 20 percent of commercial laptop sales, Office 365 is a harder sell, and Office for iPad isn't going to help there, at least not on its own. If you don't use 365's desktop components, there's little incentive to pay for access to the online versions or Office for iPad, especially when other apps, which can read and write Office docs, are available for free. But that dynamic may change, especially as paying for premium versions of other cloud-based services becomes more common. Evernote estimates that as many as 25 percent of its customers convert to its premium service over time, and Google has managed to sign up 5 million businesses for the premium version of Google Apps.
Office 365 isn't the only piece of Microsoft's cloud strategy, and Nadella, who ran the company's cloud business before ascending to the CEO role, spent as much time today talking about enterprise services and developer tools as he did about Office for iPad. But Office has long been the product, even more than Windows, that defined the company for millions of consumers and business customers around the world. Today's launch shows that Microsoft is making an effort to address the new realities of a productivity software market being driven by mobile devices and cloud storage.
Analysts who follow Microsoft see Office 365 subscription revenues approaching $3 billion a year in the near future. That's a far cry from Microsoft's $25 billion business software revenue, and the company is now in the middle of a delicate balancing act, as it tries to transition to the new cloud- and mobile-based world, without cannibalizing its existing, and still highly lucrative, desktop business. The fact that Nadella is now in the driver's seat seems to indicate that the company knows which direction to take. The only question is, can Nadella get there fast enough?