The Great Google-Salesforce Mashup

It's official. Google and Salesforce.com hooked up, as in Web 2.0 to Web 2.0. Salesforce.com customers now have direct access to Google productivity applications, including hosted word processor, spreadsheet and e-mail applications.

The Google-Salesforce.com mashup is problematic for Microsoft on so many levels. The two Web 2.0 companies have put together a pretty compelling business suite that's sure to appeal to smaller shops. Think hosted CRM, Exchange, Office and SharePoint Server.

Microsoft executives will bark about the importance of software and how many more features products such as CRM, Exchange and Office deliver, locally, than Google and Salesforce.com hosted apps. Number of features isn't what matters. It's what features do users need—meaning what product delivers enough of them to be "good enough."

Commoditization is the Competitor
Google really isn't Microsoft's problem with Office, which is why the more-features argument fails. Commoditization is the Office killer. That's what makes the Google-Salesforce.com mashup such a problem for Microsoft.

Desktop productivity applications have been commoditizing for years, and word processing reached the status years ago. For example, most blogs, e-mail clients, instant messengers and social Web sites provide basic text formatting. No external word-processing program is required. Products such Money or Quicken put a friendly face on spreadsheets, which is a different but still relevant kind of commoditization. Photo slide shows cover the presentation functions that matter to most consumers and small businesses. For enterprises, collaboration applications have begun to subsume presentation application capabilities.

Commoditization is inevitable. It is a force Microsoft can resist but not stop. Typically, as products commoditize, prices drop. Office is a longtime exception because of monopoly. Microsoft's two desktop monopolies have allowed Microsoft to sustain Office pricing and enterprise adoption, even as common features commoditized. In some markets, commoditization of one product rapidly infects others, which is Microsoft's risk for Exchange and SharePoint Server.

Early in the new millennium, Microsoft first responded to increased productivity suite commoditization by releasing Office Student and Teacher Edition for the consumer and (unofficially) small-business markets. The software sold then, as does successor Home and Student Edition, for about $150, or about $250 to $300 less than feature-equivalent Office Standard. But the discount was much deeper, because Student and Teacher Edition could be activated on three PCs versus one for Office Standard, so the real world discount was more like $750 to $900.

Commoditization took a different form among enterprises, which simply kept using older Office versions for longer periods. According to Forrester Research, about 60 percent of enterprises still use Office XP. Microsoft released the software in May 2001. Microsoft responded to enterprise commoditization by adding new Office features with more server-side dependencies, part of re-imaging the productivity suite for business processes, collaboration and communications.

The New IBM Syndrome
But, as I said, commoditization is inevitable, and Microsoft has in Google a platform competitor that is ready to do to Microsoft what it did to many other companies—and perhaps more successfully. During the transition from mainframe to PC dominance, Microsoft could be nimble and aggressive in ways that IBM couldn't. IBM had a huge built-up corporate infrastructure and large customer base. Microsoft had little to lose but much to gain, and the upstart took chances IBM dared not. IBM couldn't risk losing customers or jeopardizing existing revenue streams. Today, Microsoft assumes IBM's role of the 1980s, while Google is the scrappy upstart.

During its youth and teen- age years, Microsoft used low pricing as an effective competitive tactic. Bundling, such as putting Excel, Word and PowerPoint together to form Office, worked especially well. The approach succeeded best when a Microsoft product reached a "good enough" threshold of usability. The software didn't have to be better; it simply had to offer features most people wanted for a better price.

Microsoft could price low as its business grew because the real revenue came from platform software sales. The strategy: Undercut competitors and make money elsewhere (e.g., Windows). Google's strategy isn't much different. The company offers productivity applications for free (to consumers and small businesses) or low cost (to enterprises). Microsoft can't nimbly respond, because the revenue streams from Office and Windows are just too big today.

Google is bundling, too, but through partnerships rather than deep integration. For Salesforce.com users, Google productivity application availability is akin to Microsoft bundling its software with Windows. If the applications are good enough, people will use them because they're easily available. Google and Salesforce.com offer business users easy access to hosted services that cost a fraction of CRM, Exchange, Office, SharePoint Server and Windows Server—the Microsoft software required to meet comparable Google-Salesforce.com capabilities and to extend beyond them. Office Live Workspace doesn't come close.

Google-Salesforce.com competition is no great enterprise risk to Microsoft today. Microsoft won't immediately lose many existing customers. But smaller businesses, particularly those already using Salesforce.com, are going to be a problem. Sure, the Google productivity applications were already available. But easily available will make a difference for many Salesforce.com users. My contention: Productivity application commoditization and Google software/service features intersect at the "good enough" threshold. Google-Salesforce.com exposes Microsoft's soft, small business underbelly.

Microsoft is readying its response by way of hosted applications and server software. But, like IBM in the early 1980s, Microsoft will move slowly as it seeks to protect existing revenue streams. Meanwhile, Google will engage other bundling deals that will further the commoditization of collaboration, CRM, messaging and productivity software. Microsoft's position would be less tenuous if the PC and Web 2.0 weren't competing platforms.

Microsoft already is responding with more subscription offers and better volume-licensing pricing. Enterprises will continue using Office for many years yet. But commoditization is inevitable.