Microsoft Office Faces Challenge From Free Google Tools

Microsoft Corp. has vanquished most competitors to its Office suite of software. But a new version of the popular program will be challenged by free or low-cost Web-based alternatives from Google Inc., which some businesses are adopting.

Microsoft has added Web-friendly features to Office 2010, which will become available to businesses starting in May, that allow people to run over the Internet Word, Excel and other applications through Web browsers and to edit documents simultaneously with other users. The company will also offer a free, online version of Office 2010 that has advertising.

The moves are Microsoft's most serious effort yet to refashion one of its mightiest cash cows for the era of 'cloud computing,' a Google-backed trend in which applications are run in remote data centers and often rented to customers rather than purchased and installed on customers' personal computers.

Google's online Apps, which perform similar tasks to Office, have gathered steam in recent years by reducing costs and administrative hassles. Google also competes with behind-the-scenes software in the Office family for running email systems and company Web sites, called Exchange and SharePoint.

With the free version of Office 2010, Microsoft is making a risky bet that customers will pay for a version that omits advertising and gives businesses greater control over how documents are managed, often a key factor for compliance with securities and privacy regulations.

The Redmond, Wash., giant can ill afford to let Office sales slip as it seeks to recover from a tech-spending slowdown. Its business division, which gets more than 90% of its sales from Office products, accounted for nearly 60% of the company's operating income in its last fiscal year, which ended June 30.

For now, Microsoft seems to be staring down the Google threat, especially with large business customers. Riding on the tailwind from sales of Windows 7, a new version of its flagship operating system, Microsoft recently beat Google with Office-related business deals at General Motors Corp. and Starbucks Coffee Co.

'When we're there competing, we win,' said Stephen Elop, president of the Microsoft division that includes Office.

Mr. Elop recently helped woo GM to use SharePoint software to run GM's internal Web site, a deal for which Google was also being considered.

Kirk Gutmann, chief technology and strategy officer for GM's information-technology group, said the auto maker also plans to deploy Office 2010. 'The Microsoft products are very, very rich,' Mr. Gutmann said, adding that he likes Office 2010 because of its new Web and collaboration features. He declined to say how much GM paid.

A person familiar with Google's position said the Internet company wasn't in serious contention for GM's business. In some cases, this person added, businesses appear to use the specter of Google to negotiate discounts with Microsoft. 'The majority of companies that give serious consideration to Google end up choosing us,' a Google spokesman said.

Google said there are about 25 million total users of Google Apps. Research firm Gartner Inc. estimates there are only about one million paying customers for Google Apps; the rest download a free version that has advertising. Google declined to comment on Gartner's estimate.

Google has had the most success getting businesses to use its Gmail service to host their corporate email systems, with that toehold potentially leading to further deals.

Part of Google Apps' appeal is its cheap and simple-to-understand price: $50 per user a year. Customers also don't have to install or administer Google Apps, which Google runs in its data centers.

Business versions of Office typically sell for several hundreds of dollars, while a popular consumer version runs around $119. Microsoft hasn't disclosed what it will charge businesses that choose the Web version of Office 2010 rather than purchase a copy to install on PCs.

'Of all the other threats [Microsoft has] faced over the years, this is the one to worry about, not just because it's from Google but because it espouses a whole new way of doing things,' said David Smith, an analyst at Gartner.