Battle for office space

Software giant Microsoft is bullish about the prospects for its latest version of Office. But a host of rivals are aiming to take a bite out of its market share

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By  Caroline Denslow Published  November 20, 2005

|~|office1body.jpg|~|Over 90% of enterprise workplaces use versions of Microsoft’s Windows and Office applications, bu there is a drift towards an alternative platform using open source.|~|Steve Ballmer, Microsoft’s charismatic chi-ef executive, is pretty upbeat about the company’s future. At its annual global sales meeting last July, which was held at the Georgia Dome in Atlanta, Ballmer took to the stage to rally Microsoft’s faithful troops, even trading high fives with some of the company’s salespeople. There is every reason for Ballmer’s enthusiasm and Microsoft’s overall optimism. For its fiscal 2005, which ended last July, the company clocked up US$39.79 billion in revenue. And for fiscal 2006, it is projecting revenue of between US$43.7 billion and US$44.5 billion. So far, Microsoft is right on track in achieving its sales targets as it reported first quarter earnings of US$9.74 billion, up 6% from the US$9.19 billion first quarter results last year. Most of its revenue is sourced from its client, server and information worker groups — the business units making up Windows and Office. Combined, the three groups have, so far, brought in about US$8.365 billion in gross profits for the first quarter of fiscal 2006. It comes as no surprise, then, for Microsoft to consider Windows and Office as its cash cows since these are the world’s predominant desktop operating system and office productivity suite, respectively. With over 90% of enterprise workplaces using them, according to an IDC report, Microsoft’s stranglehold in the desktop space is as tight as ever. And although there are a few firms that are trying to challenge its position, it has managed to cling on to that dominant position. But lately, the appeal of Windows and Office seem to be slowly fading. The company, though it remains as the world’s largest software maker, has become less profitable than it was five years ago. In fiscal 2005, overall sales rose only 8% — the first time the company has ever reported less than double-digit growth. While its desktop market share is still increasing, the adoption of new versions of Office is slowing down — and it is hurting Microsoft’s revenues quite badly. One of the major reasons why Microsoft is finding it hard to attract users to migrate to the latest versions of Office is because there are less compelling reasons for users to move, according to Mark Rotter, an analyst with IDC. “The differences between various desktop office suites become less and less, so naturally there is a lower inclination to turn to a newer version or a different product,” Rotter elaborates. “It’s a bit of a trap for Microsoft because the value proposition of newer Office versions are already proven and being delivered by existing software. What new features can Microsoft show customers with its upcoming software? That’s increasingly becoming a challenge for the company in the desktop space,” adds Rotter ||**||The lure of Linux|~|rotterbody.jpg|~|If you introduce something you need to support it so there are service costs involved, says Rotter.|~|While Microsoft confronts the weakening appeal of Office among its installed base of customers, various Linux proponents are attacking it from the side. At present, the threats from open-source desktop suites may not pose a serious threat to Microsoft, but recently several high-profile Linux desktop migration projects have been announced that could possibly turn the tables on the company. One well-publicised win was in Munich, Germany when, in 2003, the city council announced that it was moving 14,000 PCs and 16,000 users from Windows to Linux. The German city, at that time, was looking at upgrading its desktop PCs to the latest versions of Windows and Office, but decided to pursue Linux after Microsoft presented it with a US$36.6 million proposal for the upgrade. Not even Ballmer’s special visit to Germany’s third largest city, or massive cost reductions to the project — the company lowered its pricing to US$31.9 million and then to US$23.7 million, an overall 35% price cut — were able to salvage Munich’s contract with Microsoft. In the end, Munich opted for a Linux and OpenOffice.org solution for US$35 million, despite the fact that its final choice was pricier than Microsoft’s. The decision, according to the council, was primarily influenced by concerns about Microsoft’s unpredictable long-term upgrade costs. While Europe may be seen as one of the strongest proponents of Linux, with countries like Spain, the UK, France and Norway also propagating their own open source initiatives, other regions have also decided to move to a Linux-based desktop platform. In India, the Department of Information Technology has developed a strategy to introduce Linux and open source software as de facto standards in academic institutions. The Chinese government in a multi-year contract with Sun announced two years ago, is installing Sun’s Java Desktop System on more than 200 million computers. For many, the key selling point for Linux-based desktop is cost. While the retail version of Office 2003 Standard Edition, as posted on Microsoft’s web site, sells at around US$399 and the upgrade pack costs US$239, StarOffice 8, Sun Microsystem’s latest desktop suite, retails in Amazon’s online shopping portal for US$99.95. The downloadable version of the software, which is available from Sun’s web site, is even priced much lower at US$69.95. In terms of volume licensing, Microsoft offers several volume licensing options to suit companies of all sizes. One of the cheaper options is a licensing package designed for students and educators, where it charges US$149 for an Office Standard Edition 2003. But Sun’s volume licensing package is even cheaper, with StarOffice 8 costing around US$35 to US$50 per user. The cost already includes upgrade, support and maintenance, Porter says. Novell’s SUSE Linux 10 and Linux Desktop 9, which are also Linux desktop office versions available commercially, are relatively low-priced as well. SUSE Linux 10, which is aimed at consumers retails at about US$80 while the enterprise version, Linux Desktop 9, sells for approximately US$90. Other alternatives to Office, such as Corel’s WordPerfect Office Version 12 and IBM’s Lotus SmartSuite and Workplace, also offer a cheaper option to Microsoft’s pricey packages. There is also the OpenOffice. org suite, which anyone can do-wnload for free. Graham Porter, Sun Microsystems’ marketing manager for the Middle East and North Africa, believes that open source’s lower-cost alternatives will lure users away from Microsoft. “We’ve heard a lot of discontent, even from large organisations like governments, that are saying that [Office] is a lot of money. A lot of people are spending millions of dollars every year with Microsoft, and they feel like it’s a one-way traffic,” he claims. Sun, for one, is keen to take some of the market share in the office desktop suite away from Microsoft through StarOffice 8, Porter says. Star Office 8 is the commercial version of the Open Office 2.0 open source code. It promises big improvements over the last version when it comes to compatibility with Microsoft’s Office software. For one, the company claims that it can convert a majority of Office macros. It also has an improved user interface for the applications contained in the suite, which include a word processor and a spreadsheet, plus presentation, drawing and database capabilities. It boasts of Arabic capabilities and what Porter describes as a “recognisable user interface”. Analyst firm Gartner says StarOffice 8 will draw greater interest from companies with employees who are relatively light users of Office and don’t require its advanced features. Potential sweet spot would include Office 97 end users — and possibly Office XP and Office 2003 users — who face migration and cost issues if they move up to newer versions of Office. The recent government projects are undoubtedly big wins for open source desktop advocates, but Gartner analyst Mike Silver believes that it is still too early for the community to highlight its victory. “Some of the migrations we have seen announced so far are still in their very early stages, and the success is not proven yet,” Silver says. “I think some of the announcements have been so big that they represent really risky projects, and I think the risk is that if the project doesn’t go well, it could actually be a big setback for the open source community,” he warns. Silver admits that many of Gartner’s clients are interested in deploying open source in the desktop, but migration costs are holding back the companies from adopting Linux. “If they have a license for Office XP or Office 2003, Microsoft will support them until 2011 or 2013, depending on the product, which is a long time. What this means is that open source may be right for the company but maybe there is not a reason for it to consider it right now. Maybe it wants to consider it closer to when Microsoft drops support for the version of Office that it has,” explains Silver. Silver says claims of desktop Linux being free are false, and that open-source desktops make sense only for some users in some organisations, but rarely for all users in any organisation. In a Gartner study, Silver reports that the open source software experience is more similar to the Windows experience when it comes to complexity, support costs and reliance on vendors. In fact, he goes on to claim that because of high migration costs, Linux and open-source office products are a non-starter for many users at most companies. “The oversized catalogue of applications with no suitable Linux alternative in the typical company reduces the number of users for whom Linux is viable,” Silver states in his report. “If you count the number of studies done, most of the studies say that Windows is cheaper than Linux,” adds IDC’s Rotter. “But, of course, some of the studies were subsidised by Microsoft so you have to question whether those are objective.” Nevertheless, biased or not, Rotter says that comparable ROI studies that pit Microsoft against Linux provide inconclusive results. Savings and improvements are marginal, he adds. “It’s not like a company pays 100% for Microsoft and it doesn’t pay anything for open source because open source software is free. That’s simply not true in a business environment where one has a three- to five-year spending timeline. If you introduce something you need to support it so there are service costs involved,” elaborates Rotter. “The question is: which service costs are cheaper?” he asks. Microsoft may be more expensive to deploy, but then again its platform is supported by a wider array of desktop applications. That is something that hampers companies from moving to Linux as porting their existing Windows-based business applications to an open source platform would mean additional costs for them. ||**||Office rivals|~|Grahambody.jpg|~|Graham Porter of Sun.|~|Fortunately, a growing number of third-party software developers are recognising the importance of providing versions of their solutions that are based on Linux . One such company is business applications developer Tally Solutions. The Indian-based company considers the open source desktop market significant enough for it to consider Linux as part of its product rollouts. “Earlier this year, Tally Solutions has announced our partnership with Red Hat, where the two companies worked together and made Tally’s accounting software available on Red Hat Enterprise Linux,” says Deepak Prakash, general manager, Tally Solutions Middle East. “We see this as one of our first steps in our initiative to provide a PC with low cost of ownership,” Prakash adds. Other vendors that have dipped their toes on Linux waters include Corel, which ships a Linux version of WordPerfect 12, and Adobe Systems, which pledged to embrace Linux in version 7 of its PDF-reading software last April. “It’s very clear that over the last seven or eight years many of the very well-known brand names made a concerted effort to either run on or be ported to deliver open-source functionality,” says Rotter. “SAP, Oracle, and even Adobe have a reader for Linux already. And I’m not even talking about some sort of semi-equivalent functionality available already that one can run on Linux. These are fully functional software based on open source,” Rotter adds. Still, some vendors face some of Microsoft’s software ‘lock-in’ hurdles, especially through the use of macros within the Office software, according to Hazem Bayado, operations director, Novell Middle East. “There are certain users who have already developed macros under Microsoft Office. Macros for Microsoft Office are not compatible with OpenOffice.org,” says Bayado. “If there is a very complex macro structure that people use or there are a lot of enterprise applications that are actually tightly integrated with Excel or Word using the APIs (application programming interfaces) specifically from Microsoft then in that case the Novell desktop, or even any other Linux desktop, will not be able to function properly,” he points out. However, if the user is willing to learn OpenOffice, which is not that different from Microsoft Office according to Bayado, compatibility issues between Microsoft Office and open source desktop software can be easily remedied. “If a user spends just a week learning OpenOffice.org, he will be able to transfer most of the knowledge about Microsoft Office to the OpenOffice environment easily,” Bayado says. Porter shares Bayado’s sentiments, having personally experienced some compatibility issues between Office and StarOffice. “There are still some odd things that are frustrating,” explains Porter. “As an example, which is based from my own experience, I have an Excel spreadsheet where I keep my personal finances in and it’s password protected. But we cannot, as Sun today, read the Microsoft passwords because Microsoft won’t let us,” he claims. Arguments about the real ROI benefits of Linux on the desktop are what make Microsoft bullish about its future in the desktop. Brynjar Skauvik, marketing director, Information Worker, Microsoft MEA, claims that while he sees a lot of companies testing open source, eventually they still go back to Microsoft. “There have been a lot of people trying it out, especially in schools but they very shortly came back to Microsoft,” Skauvik says. This, he adds, is because the features and functionality of Office are far better than existing alternatives. “I don’t think the Linux alternatives can compete with Office in terms of functionality and features, I really don’t,” he insists. “Maybe, if you use your Office package today like a typewriter or a calculator, then you would probably be able to do a lot of what we can do in Office in StarOffice or OpenOffice.org,” Skauvik acknowledges. However, he touts Office as far more than just a set of desktop tools. Each new version of Office, he says, offers much better integration features with enterprise server systems, an area in which Microsoft is also a major player. “The connection with the server side is really, really strong in Office 2003. For instance, with our new collaboration features, users can create a Word document where several people can work together by clicking a button,” Skauvik elaborates. “Stuff like that makes people more effective in teams. You don’t have those features at all in OpenOffice.org and StarOffice today,” he states. If displacing Microsoft in the desktop space is going to require a market strategy that rests on significant innovation, perhaps IBM Workplace holds this potential. Unlike Lotus Notes suite, which is only primarily concerned with e-mail and collaboration — and which Big Blue continues to sell — Workplace bundles together e-mail, collaboration software, a web portal, a small database, software for working on web applications online, and desktop productivity applications, such as a word processor, spreadsheet and presentation manager programs. On top of it all, it can be deployed either as a small Java application or can be accessed by end users via browser. Its thin client design, according to Bashar Kilani, manager, Software Group, IBM Middle East, Egypt and Pakistan, allows it to provide a strong value proposition to large organisations. “The way it’s deployed offers huge savings and a lot of benefits and functions. I think, for any enterprise, this is the right way to deploy communication within their organisation,” says Kilani. The market sweet spot lies in operations such as data entry, call centres, factories, warehouses and sales forces. It is also successful in the education sector, Kilani adds. The company is also initiating pilots in the airline industry. Globally, there are approximately 1.4 million employees using Workplace and over 100 independent software makers adapting their products to work with it. Although Workplace is seeing adoption picking up, it is still far from matching Microsoft’s market share — primarily since it is only focused on the enterprise space. Nevertheless, Gartner’s Silver says it pays for Microsoft to worry about its competitors, because it “keeps them on their feet” and inspires the company to bring out new innovations in Office — which sustains Microsoft’s popularity in the desktop space. “Microsoft always needs to worry about things, and I think it does a good job worrying about things,” Silver says. “I think Microsoft does realise the threat. It acknowledges that it does need to be proactive in terms of deciding how to counter [threats] because eventually, if it is not vigilant, then someone will come out with something that is different, that is better and Microsoft will lose its market share,” he concludes. ||**||

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