Office 365 ‘momentum’ announcement met with some skepticism

Microsoft Corp.‘s (NASDAQ: MSFT) declaration last week that Office 365 is enjoying unprecedented levels of sales success didn’t fully convince some industry experts who were expecting the company to back up its claims with more concrete figures and who feel it’s too early for a victory lap.

Office 365, a cloud collaboration and communication suite for organizations launched in June, is selling eight times faster than its predecessor, the Business Productivity Online Suite (BPOS), and is on track to become one of the company’s fastest-growing products ever, Microsoft said on Tuesday.

Still, IDC analyst Melissa Webster was left wanting more specific data about Office 365’s performance on the market.

“What Microsoft hasn’t shared is user or revenue statistics, so it’s hard to judge how much traction Office 365 is getting,” she said via email.

Webster doesn’t put much weight on the fact that Office 365 is proving much more popular than BPOS did. “When BPOS launched, interest in cloud collaboration solutions was only nascent, and Microsoft’s offerings weren’t easy to buy/consume SaaS [software-as-a-service] plays,” she said.

Gartner analyst Matthew Cain views this week’s announcement less as an organic consequence of early sales success and more as a competitive response to Google’s Atmosphere conference, held two weeks ago and attended by about 350 CIOs from around the world.

At that event, Google announced product improvements and customer wins for Apps, its cloud communication and collaboration suite, which competes directly with BPOS and Office 365.

“Microsoft’s Office 365 momentum announcements, which are clearly in reaction to Google’s Apps momentum announcement, demonstrate the high-stakes game being played out for ownership of the enterprise collaboration cloud,” Cain said via email.

Prior to the launch of Office 365, Microsoft was criticized for years for not having a strong rival to Google Apps and for being slow to catch on to the shift to the cloud model in business software, aimed at organizations that don’t want to install and maintain applications on their own servers and end-user computers, preferring instead to access them via the Internet from vendors’ data centres.

It’s still not clear who will end up dominating this nascent market for cloud collaboration and communication suites, but Google Apps has been an option since 2007, and Google has been aggressively boosting its enterprise features in the past two years or so to attract the attention of CIOs and CTOs at large companies.

Of course, Microsoft has been a leader in the older and much larger market for communication and collaboration software that is installed on customer premises.

Both Office 365 and Google Apps offer a suite of email, calendar, office productivity software, IM and other tools hosted on their respective data centres, but they also differ in several ways, including most significantly that Google Apps is designed to be mostly cloud-based while Office 365 has been designed with a hybrid cloud/on-premise model in mind.

In other words, Office 365, which includes hosted versions of Office, Lync, SharePoint and Exchange, is designed so that it can leverage and interact with existing on-premise Microsoft software, especially the on-premise versions of those four main components.

As with most cloud software, Office 365 and Google Apps customers license the software on a subscription, per-user basis, paying either on a monthly or annual schedule. In addition, cloud suites like Office 365 and Google Apps claim to simplify and improve collaboration because files are stored on shared cloud servers where documents can be accessed by multiple users from anywhere and jointly edited.

This SaaS model, which reduces companies’ upfront investment in software and hardware, as well as the time and effort involved in setting up and maintaining the applications, has been gaining popularity, especially among small companies with few or no dedicated IT staffers.

In fact, a big part of Microsoft’s “momentum” announcement was devoted to trumpeting the fact that so far more than 90 percent of Office 365 customers are companies with 50 or fewer employees.

This factoid did resonate more with Webster. “The uptake so far from this new group of users — who undoubtedly already had the Office desktop authoring tools, but hadn’t stepped up to server products — is promising,” she said.

Nucleus Research, which has been contacting and surveying Office 365 customers, isn’t surprised that smaller organizations find the suite appealing. “It gives them greater flexibility, access from anywhere and in many cases greater reliability than they’d have either running the applications on their own or with a separate hosting provider,” said analyst Rebecca Wettemann.

“We’re seeing a lot organizations be able to significantly cut the ongoing costs of support as well as the ongoing costs of upgrading licenses,” Wettemann added. “Productivity is also a big area here too, so for organizations that have a lot of distributed workers, or who are working from different sites or traveling, it’s a great way to provide full collaboration capabilities to them at a relatively low price point for SMBs.”

Gartner’s Cain points out that while Microsoft is happy with Office 365 adoption among small companies — a segment of the market where Google Apps has historically been strong — the emphasis is bound to shift upmarket.

“For now, the battle focuses on small companies, but we expect it to escalate rapidly into warfare over medium-size companies,” Cain said.

Whether Microsoft provides more concrete details about Office 365 sales later on remains a question, but at, a Quebec reseller and systems integrator, Office 365 has so far proven a good addition to its menu of products.

“We have been pretty happy overall,” said Steve Noel, the company’s sales and marketing manager, in a phone interview, confirming Microsoft’s assertion about particularly high interest among small companies.

It has been particularly encouraging to see many potential customers proactively call to ask about Office 365, in addition to the sales leads the company’s sales staff generates, he said.

“Customers are hungry to change the way they do business, so we’re happy to be at the right place and the right time,” Noel said, referring to the broad interest in cloud-hosted software for communications and collaboration.

Noel does acknowledge that Office 365 is a low-margin business for resellers like, which get an 18 per cent cut of the customer fees in the first year, a commission that drops to six per cent per year thereafter.

The key for resellers, he said, is to beef up those margins by selling complementary services to customers, such as data migration and technical support not only of Office 365 but also of related products, like mobile devices and other software tools.

At this point, some areas where Office 365 could be better, from’s perspective, include a beefing up of the telephony features in the suite’s Lync Online IM, a voice and video communications application. would also like to see Microsoft provide more tools and processes to automate migrations from BPOS implementations to Office 365, a process that has found to be mostly manual, lengthy and error prone.

In addition to touting the small-business adoption of Office 365, Microsoft on Tuesday also made the suite available for 30-day free trials in 22 new markets, including Argentina, Taiwan and South Africa. Office 365 is fully available in 41 markets. Microsoft also rolled out more than 30 product enhancements to the suite.

Office 365 comes in several different packages that include an email-only plan that costs US$4 per user per month, a fully loaded suite with Lync Server on premises and Office 2010 Professional Plus for $27 per user per month, and a version for small businesses with 25 or fewer users that costs $6 per user per month.

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