Written by Jay Fortner and edited by Richard MacManus

With the consumer release today of Microsoft Office 2007, it's a good time to look at the online office space - and what, if anything, Microsoft will do to address this growing market.

In 2007 we expect to see good progress in the adoption of Internet-based productivity applications, such as Google Docs & Spreadsheets and Zimbra. At this point, the 'Web Office' space is in its infancy - but the market is maturing quickly. Already online suites such as those offered by Thinkfree and Zoho are starting to get some traction as cheaper, hosted alternatives to the Microsoft Office desktop suite of products. Online office services are usually free, you can easily share and edit with others, and you can access them from anywhere with an internet connection. But still, people will have to get over security and server concerns; as well as interface and usability differences.

Perhaps the real question here is: what will Microsoft do to defend its office software turf from online office services? We know they are keeping close tabs on online office products. For example in August 2006, Microsoft listed ThinkFree (a web-based word processing and spreadsheet program company) as one of its competitors in its annual 10-K filing.

To help frame the question of how Microsoft will respond to Web-based office software, here is a SWOT analysis of where Microsoft is, where it could be, and some things it could consider looking at - in 2007 and beyond.

Microsoft's strengths

  • Large amounts of capital and available resources that dwarfs competitors (except for Google)
  • MS is the established leader for office software, with significant mainstream brand equity
  • Large and very significant influence over partners and complementary suppliers
  • Interoperability amongst office products and ancillary lines of business
  • MS appeals to corporations and large institutions
  • It has yet to be proven that free Internet-based Office products can survive, when currently little revenue is generated

Microsoft's weaknesses

  • Not free and in fact can be very expensive for a small business, non-profit, or emerging market
  • No easy-to-use collaboration tools that rival the leaders in the Online office space
  • Web-based delivery is not a core competency. MS would potentially need to reorganize operation.

Opportunities in the online office space

  • Offer exactly what the Online office leaders offer, and leverage their desktop market share monopoly. This is equivalent to Blockbuster offering both an online and bricks and mortar offering.
  • Offer a low cost, bare bones online option for individuals and small businesses; and eventually up-sell. This may be their intention with Microsoft Works Online (see below).

Threats that could erode Microsoft's market share

  • Competitors such as Google, Zoho, and AjaxWriter could build critical mass through the installed base of former Microsoft users. Obviously Google is by far the biggest threat here.
  • Fragmentation of the office software market could severely hurt Microsoft's stock price.
  • If Google puts it all together and provides a compelling online office suite, then it has the brand equity to really damage Microsoft's main revenue source.

How is Microsoft responding to the threats?

  • In September 2006, BusinessWeek reported that Microsoft "is developing a strategy to put some of the technology from its Works software - the barebones word-processing and spreadsheet program that often ships with new consumer PCs - at the heart of a new online offering".
  • Within a month of Google's Docs & Spreadsheets release, Bill Gates was telling the Financial Times that "Microsoft would itself match services such as those offered by Google" - although he still claimed that online tools would only ever represent "a small part of the market."

Options available to Microsoft to protect its turf

1) Offer comparable MS online office products, using free ad based and/or subscription business models (may cannibalize existing strategy and core competency).

2) Blur the line between online and offline apps in the existing Microsoft Office desktop suite (appears to be where they're headed)

3) Buy the online competition (ThinkFree, Zoho, et al)

4) Block any interoperability between online office competitors and MSOffice (isn't that how they usually play ball?)

5) Continue with current business model and ignore the competition (not wise, in our opinion)

It could also be a combination of these strategies - and more. Please add other options that Microsoft has, in the comments section.