Microsoft: Beyond 'Software Plus Services'

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Little Impact from Office Live

Merrill Lynch analyst Kash Rangan thinks Microsoft's various cloud-services initiatives could mean $5 billion to $10 billion in additional sales over the next few years. He figures the profit margin on these sales will be about 20%, far less than Microsoft's traditional margin of around 45%. (While the company makes nearly pure profit off Windows and Office, it has lost billions in Internet search, consumer electronics, and other markets.) All told, this could bring Microsoft's total operating margin down to around 31%. "It's not the worst thing in the world for them," he says, since Microsofit clearly will never enjoy the profitability it had when the PC was king. "Microsoft will never be the Microsoft of 2000 again," he says.

Many of Microsoft's competitors say they doubt the company is ready to push forward with this risky bet. "They're not out aggressively pitching their cloud computing story—except to companies that have made it clear they are moving in that direction and evaluating our offerings," says Google's Girouard, who runs Google Apps, an Office-like suite of online applications that, he says, is Google's fastest growing business.

This isn't the first time the company has professed to be cloud-friendly. In 2000 it rolled out a Web hosting service called bCentral, only to scrap it in 2004. It then introduced Office Live in 2007, providing a place Office users could store their documents, spreadsheets, and such. Office Live has made so little impact that it's now being folded in with Windows Live, a portal consumers can use to see their e-mail, instant messages, Facebook feeds, and other Net fare. And despite the increasing number of announcements, most customers still don't have a clear understanding of the broader "software plus services" message, says ISI Group analyst Bill Whyman. "It's too complicated. Nobody understands it."

Elop says he's fine with the doubts surrounding Microsoft's efforts. "This is one of the most successful businesses in the history of the world, so we can't screw that up," he says of his efforts to shake up Office. "But I think a lot of people are going to be surprised at the degree to which we're really going for it."

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.

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