Apps vs. Office: Google Ups the Ante

The search king's free Web-based business software has 100,000 small-biz clients. But will big corporate fish bite for a paid "premier" version?

by Aaron Ricadela

Noah Sachs, general counsel, business development director, and resident computer expert at a biotechnology startup named Enzymatics, has one word for the holdouts who still use Microsoft Office to create documents and spreadsheets. They're "curmudgeons," he sniffs.

Most of the people at the 10-employee company use Web-based software from Google (GOOG) for these tasks and e-mail. Since they're all delivered online, "any computer I sit down at becomes my computer," says Sachs. Enzymatics, based in Beverly, Mass., is experimenting with other Google software, too, including a specialized search engine that combs competitors' Web sites for information on rival products and prices. To build such a tool from scratch using Microsoft (MSFT) software would have entailed buying multiple product licenses. "I have enough on my plate without having to worry about that," he says.

So apparently do some 100,000 small businesses and organizations that use Google's productivity and communications software. Even larger corporations, such as General Electric (GE) and Procter & Gamble (PG), are becoming adherents.

For now, Google's revenue from business applications is so minimal—perhaps $40 million out of last year's total of $10.6 billion, analysts estimate—that the company doesn't even break it out when it reports quarterly earnings. By contrast, Microsoft's business division alone, which includes its Office suite and accounting software for small companies, is expected to generate about $16.2 billion in revenues for the fiscal year that ended June 30.

enormous potential

But in as little as five years, Google's broadening suite of applications could generate a sizable chunk of the company's escalating revenue, says Dave Girouard, general manager in charge of Google's business products. "Over a five- or 10-year time period, we think there's potential for this to be an enormous business that would be material to Google," he says.

The push puts Google on yet another collision course with Microsoft, which boasts more than a half-billion users of its long-successful Office suite and is spending heavily to protect that franchise. And while Google has proven it can run the most profitable Web search business, that's no guarantee of success in a market as established as business software.

Notably, the Google Apps initiative veers from the free, ad-supported nature of the company's core business model. Instead, the focus is on selling per-user subscriptions, and Google says it expects to hook its first corporate customer with 100,000 users within a few months.

Until recently there was no charge for using the Google Apps suite. Starting in June, though, companies and organizations needing plenty of online storage and the ability to customize applications for their networks were asked to sign up for a "Premier" version of Apps. The charge is $50 per user annually for a package that includes Gmail, Google Calendar, Docs & Spreadsheets, and Google Talk (see BusinessWeek.com, 2/12/07, " Google Steps Into Microsoft's Office"). The University of North Carolina and Northwestern University have signed on as Premier subscribers, but Google would build even more credibility among IT managers with a big corporate win.

a corporate youtube

To give its suite more sheen, Google is developing new features while adding others through a series of acquisitions. For example, the company is preparing a corporate version of YouTube to create videos for training and employee communications. Also on the drawing board: a plan to expand the programming tools that a customer's software developers can use to incorporate other Google offerings, such as online search and maps. Similarly, on July 17, Google launched a paid service called "Custom Search Business Edition" that provides a search engine for any Web site. The service will cost as little as $100 per year for a site with up to 5,000 pages, and won't display ads or steer traffic elsewhere like Google's free search engine.

On the acquisition front, Google spent $625 million on July 9 to buy an e-mail security company named Postini, its third-largest acquisition ever (see BusinessWeek.com, 7/10/07, "Google's Latest App: Postini"). Postini's Web-delivered software is designed to protect its 35,000 customers from spam and computer viruses while encrypting and archiving e-mail messages.