Brent Frei

Innovation and Online are the most important terms in business applications today. Because Microsoft has to date failed to get innovative business applications online, it has left its fat margins exposed.

What is it about Microsoft that drives innovative online business application vendors away from partnering and toward competition? The answer condensed into one sentence is:

Microsoft’s failure to fundamentally re-invent its blockbuster products on behalf of preserving its high-margin businesses is what is creating the market opportunity for rivals.

Microsoft has been dealing with four hurdles in the online business application arena:

1. Web-enabling its desktop apps in their current form does not produce leading online applications

2. Deeper product features sets rather than dissolving products together into integrated services is trending them away from the mass markets

3. Application re-invention of its blockbuster products threatens some of its highest margins

4. This lack of online innovation forces ISVs to lug along complex and expensive Microsoft products not needed with other platforms

So what’s a local startup to do? Partner with a giant rival who also sees huge opportunity to feast on the fat of bloated products. Google is finding success in directly targeting some of Microsoft’s productivity suite and by opening up pathways for ISV partners in others.

Cost savings and usability improvements offered by Google trump Microsoft’s in-depth feature set by a wide margin when viewed from the perspective of most business budgets. My prediction: Google and its suite of partners will continue to expand market share in the business applications space. A few examples:

Email and Calendar

Google and Microsoft have been trading heavy fire along the Messaging front for some time. And, by all accounts, Google has been faring pretty well even in the enterprise ranks. The administration ease of setting up a domain and web site is a wash, but the cost savings of Google’s Mail offering make it a very compelling alternative to Microsoft’s feature rich Exchange.

If we run a quick comparison for a 25 person company we get:

The hidden ‘aha’ not visible in this simple math of cost savings is the usability hurdle. For an IT Manager, switching a company’s mail server to Gmail from Exchange is not only easy, it diverts a lot of maintenance and updates that would otherwise be necessary. In addition, users have become so accustomed to the Gmail form factor from a couple years of personal use that the change hurdle is almost non-existent.

Productivity Tools

Many business people concede that Google Documents, Presentations and Spreadsheets aren’t a wholesale replacement for Word, Excel or PowerPoint just yet. However, Microsoft’s online offerings in this area aren’t strong either. Some require installation of SharePoint in order to take advantage of online document sharing which is a big part of Google’s allure. Regardless, the available revenue in “just good enough” in Office tools will likely continue to occupy Google … at least for the time being.

A cursory review of other productivity tools reveals some large succulent targets. Take the un-holy trio of excessive cost and user adoption resistance - MS Project, SharePoint and MS CRM. Implementation, maintenance, and user training are typically someone’s full time job (to be fair, these are hard categories for any vendor). Google’s core infrastructure and current product line offer a perfect opportunity for an ISV to feast on that fat.

Perform a quick survey within your company. Most of the time you will uncover sales pipelines, marketing events, projects, inventory lists, task lists and/or business goals tracked in spreadsheets and email folders. An innovative company could capture a massive share of the people transitioning beyond those spreadsheet-email folder approaches and into SharePoint, MS CRM or MS Project by fortifying their current spreadsheet with the most used powers of those three tools.

Partnering to Fill the Holes

Google’s Solution Marketplace, like Intuit’s Workplace and Salesforce’s AppExchange, are serious distribution mechanisms and technology infrastructure put in place to promote ISVs into their entire markets. To be very clear, the distribution aspects of the marketplaces are more important than the technologies provided (a point Microsoft seems blind to). And, the models employed by these marketplaces enhance their own revenue streams rather than cannibalize them.

I’ll use my company, Smartsheet, as an example. Take a common spreadsheet and imbue it with rich data fields, hierarchy, threaded discussions, file attachments, alerts, Gantt and Calendar views. Then hook it in tightly with all the Google Apps capabilities. What you now have are simple versions of MS Project, SharePoint and MS CRM in one app at 5% the price.

If it’s this simple, you might ask why wouldn’t Microsoft just do it themselves. Refer back to the first 3 hurdles and an insightful post by Dick Brass detailing the trials of innovative internal product groups. Even simple innovation as described here finds incredible resistance inside Microsoft. As I stated in my post on Innovation Resistance:

“We (at Smartsheet) don’t have to appeal to the MS Project team to be allowed to incorporate a Gantt chart into our project spreadsheet. We don’t have to lobby the SharePoint product manager to permit including document storage and sharing. We don’t have to navigate the MS CRM team to structure a simple sales pipeline manager. And, most importantly, we don’t have to overcome the CFO’s objection to cannibalizing 95 percent of the existing products’ price points.”

When it’s another company’s high margins you are eating, it’s a feast. When it’s your own high margins, its cannibalism. It’s not surprising Microsoft hasn’t had the stomach for core product innovation.

Brent Frei is the Chairman of Smartsheet.com and former Chief Executive of Onyx Software. He worked in Microsoft's Information Technology Group in the early 1990s. You can read more of his writings on work management and crowdsourcing on the Smartsheet blog. (Guest posts are the opinions of their authors and don't necessarily reflect the views of TechFlash or its staff.)