Pressure from Google Apps played a major role in Microsoft's decision to cut prices on its cloud-based Office 365 productivity suite. Price reductions have been a prominent theme in cloud computing of late, as vendors court customers, but the Office 365 price cuts have another dimension. The Google challenge to Microsoft's long-established productivity suite is a textbook instance of "disruption" at work. The shift to the cloud is jolting firms out of established habits. And this could reshape the landscape in unpredictable ways.

Flagship Under Attack

Here at IBM Midsize Insider, we recently took note of Microsoft's Office 365 price cuts in the context of growing price competition in cloud computing. But as Juan Carlos Perez reports at Computerworld, another story is also playing out. And for Microsoft, it is a deeply alarming story.

Analysts see Google Apps as posing a serious threat to Microsoft's long-entrenched dominance of the business productivity suite market. Michael Cain, an analyst with Gartner, puts it bluntly: "The price cuts reflect Microsoft's fear of Google," he says.

Google claims four million business customers for Google Apps, while Microsoft asserts that three to five million licenses for Office 365 have been sold. But these raw figures only tell part of the story. The great majority of buyers, in sheer numerical terms, are small businesses licensing a single use or a handful. But Microsoft's price cuts are targeted at enterprise customers and midsize firms.

These sales involve much larger deployments--and revenue--per sale. Even more to the point, enterprise and midsize customers are the business computing trendsetters (so are educational institutions, which also figure heavily in the productivity-apps price war).

High Stakes for Microsoft

This is a battle that Microsoft cannot afford to lose, because it strikes at the very heart of its business model. Business customers do not buy operating systems as such. First and foremost they buy productivity applications, used by large numbers of employees both inside and outside of IT departments. For many midsized firms a major task of the IT shop is keeping all these productivity-suite deployments running smoothly.

And for the last two decades and more, "productivity suite" has been largely synonymous with Microsoft Office. The current and upcoming generations of Microsoft platforms, which have been drawing many favorable reviews, are designed largely to support Office and Office 365.

Thus, the threat posed by Google; its cloud-hosted productivity suite can in effect be rented rather than bought. From a business perspective that is the very essence of cloud computing--and it has made Google Apps an appealing option to many midsize firms in a way that previous Microsoft productivity-suite rivals were not.

Microsoft, however, has no intention of going softly into the night. Expect a fierce fight and, more likely than not, some more great deals.