The Office suite might be Microsoft's (NASDAQ: MSFT ) single most important product. With the recent reorganisation, it isn't as clear, but based on Microsoft's earnings last quarter, the Business division — which was composed mostly of Office — brought in one-third of the company's revenue and 60% of its profit.
Microsoft brings Office to the cloud
Over the past two years, Microsoft has been transforming Office from a local software suite into a cloud-based service. In the past, Microsoft released regular updates to Office (95, 97, 03, 07, 10) every few years and hoped that businesses and consumers would pay several hundred dollars to upgrade. Now, however, Microsoft wants its customers to buy a subscription. For an annual fee, users get access to Office 365, the cloud-based version of Microsoft Office.
Obviously, this regular, recurring revenue is beneficial to Microsoft — as of September, Microsoft said Office 365 was on pace to bring in US$1.5 billion in revenue annually. Apparently, it's also beneficial to Microsoft's customers — millions of them have made the switch. It's even popular among consumers, some 2 million of whom have signed up.
Google wants 90% of Microsoft's market
The popularity among consumers is surprising in light of the free alternatives available to them. Google, for example, makes its cloud-based Apps available to anyone with a Gmail account, and though Google Docs, Google Sheets, and Google Slides may not be as powerful as Microsoft's Word, Excel, and PowerPoint, they should be adequate for most users.
In fact, Google believes it can capture 90% of the Office market, according to its head of enterprise, Amit Singh. Last year, he told AllThingsD that while Google's alternatives may not be as powerful, they should be good enough for most users. Google Apps isn't free for businesses, but it's less expensive than Office — Google charges US$5 per user per month; Microsoft's Office 365 is US$12.50 to US$20, depending on the size of the business.
Google has seen some success in its push into enterprise. Earlier this month, it signed a deal to sell Google Apps to Whirlpool, and last week, it was awarded a contract with the Department of Defense.
Apple is giving its Office competitor away for free
Apple's Office alternative, iWork, isn't receiving the sort of enterprise push that Google Apps is getting; nevertheless, it could prove to be an attractive alternative to Apple devotees — mostly consumers, but perhaps even some business users. iWork now comes free with the purchase of any nearly any new Apple product — iPhone, iPod or Mac. Like Google Apps, Apple's alternatives to Microsoft's Office applications may not be as good, but it's hard to be beat free.
But if Apple's iWork is going to affect Microsoft's Office, it will be because of the iPad. Although Microsoft has brought Office to Apple's iPhone, it has yet to release a version for Apple's popular tablet. Microsoft's CEO, Steve Ballmer, has said an iPad version of Office is in the works, but until it's released, it gives Apple a big opportunity. Most of the members of the Fortune 500 use Apple's tablet in some capacity, and making iWork the standard productivity suite for these tablets could eventually weigh on Microsoft's market share.
Forget about Windows: Office is the story
The steady decline of Microsoft's operating system may have grabbed most of the headlines in recent months, but the real story at Microsoft is Office. Ultimately, Office is far more important to Microsoft than Windows, bringing in more revenue and profit in recent quarters.
Both Google and Apple are making a move at Microsoft's market — Google targeting enterprise users with its low-cost Apps, Apple targeting consumers and tablet users with free iWork. But, for now at least, Microsoft's Office appears to be performing quite well.