Google's Battle in Business Software

With Google's (GOOG) announcement that it's creating an operating system to compete with Microsoft's (MSFT) Windows, the search giant and CEO Eric E. Schmidt look increasingly determined to undermine Microsoft's core software businesses. But Google's struggles on another front suggest the company may have a hard time gaining much traction against Microsoft.

Two years ago, when Google plunged into business software, it cited General Electric (GE) as one of its marquee customers. GE had begun using Google applications for tasks typically handled by Microsoft Office, which includes word processing and spreadsheet software. Now GE is rethinking the relationship. While still using Google Apps for some employees, it's testing similar products from a company called Zoho and considering the online versions of Microsoft's Office. "We look at it as a race" for GE's business, says Greg Simpson, chief technology officer at GE.

With Google's revenue growth slowing to an expected 4% this year, from 31% in 2008, the company is trying to expand beyond search advertising. Business software is plenty promising. Even at $50 per person—roughly half what Office costs—Google Apps could bring healthy profits. But Google is struggling to attract large customers. In addition to GE, Google identifies just a handful of high-profile Apps users, including (CRM) and Genentech (DNA). On July 7, Google made several changes to enhance its software's appeal to large companies.

But a major sticking point is security. The search giant built Google Apps so word-processing documents and spreadsheets created with the software are stored on Google's servers instead of on a company's own computers, as they would be with Microsoft's software. That means businesses such as GE give up control over proprietary documents. For some companies, the arrangement violates security and accounting policies. "That's probably our biggest stumbling block to going bigger with Google," says GE's Simpson.

Business software maker SAP (SAP) also tried Google's applications but then shied away because the company didn't want to keep proprietary information on Google computers, says an SAP source. SAP's Chief Technology Officer Vishal Sikka won't comment on his company's use of Google Apps but says Google needs to do more to put customers at ease. Zoho's software lets companies keep data on their own computers.

Success in business software isn't essential to Google. It is on track to book $22.7 billion in revenue this year and $10.4 billion in pretax profit. But the effort is strategically critical. Microsoft's Word, Excel, and Exchange e-mail programs generate billions in profits that can be used to attack Google, as Microsoft did with the launch of its Bing search engine. The key for Google is to force Microsoft to defend Office, either through smaller profits or heavier investments. Microsoft is starting to lower Office's price, and on July 13 the company said it will offer free, ad-supported versions of the software suite, as well as a more sophisticated paid version, next year.

So far, sales of Google Apps have been tiny. Sanford C. Bernstein analyst Jeffrey Lindsay says business versions of the software will generate $140 million in 2009 sales, about half a percent of Google's total. Dave Girouard, president of Google's enterprise business, says the Apps operation is profitable and the company plans to be patient. "We have 10 to 20 years to grow into this market," he says.

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