Office Web Apps Can Help Microsoft Office Retain Market Share

Microsoft (NASDAQ:MSFT), which competes with Google (NASDAQ:GOOG) and Zoho in offering web-based office productivity software, has recently released ‘Office Web Apps’, a free web-based version of its Office productivity software.  Office Web Apps is installed on servers and is also available to customers through the internet.  At the same time, Microsoft is introducing Office 2010, the latest version of its traditional desktop-based productivity software.

Although Microsoft has released Office Web Apps to better compete with Google, we believe the free version will not have a material impact on sales of desktop-based Microsoft Office software.  Overall, Office Web Apps represents an opportunity for Microsoft to retain its high share in productivity software and to create new incremental revenue streams around the free, web-based version of Office.

Microsoft Office Market Share Under Threat

We estimate that Microsoft Office constitutes 31% of $32 Trefis price estimate for Microsoft’s stock.  We currently forecast that Microsoft’s market share in productivity software will decline over our forecast period as a result of new competition to Microsoft Office.  However, the Office Web Apps can help the company retain share, especially amongst the most price sensitive segment of customers.

You can modify our forecast below to see how Microsoft’s stock could be impacted if the company were to retain share in the productivity software market.

Office Web Apps Not a Threat to Existing Microsoft Customer Base

Below we discuss three factors why we believe Office Web Apps will not meaningfully cannibalize existing Microsoft Office sales.

1.  Corporate Users Will Use Office 2010 Instead of the Free Version

We believe that the desire of corporate IT departments to deploy secure productivity tools in house along with the feature differences between the free Office Web Apps and Office 2010, which will encourage corporate users to go for the paid version.  Some of differences between the paid and the free version are:

1. Office Web Apps doesn’t allow editing of documents on iPhone or iPad
2. Re-sizing images is difficult and there is no ability to embed videos
3. Some of the features, which were available on Office 2007, are missing from the free version.  For example, Backstage feature, which is used for a unified view for printing, sharing and previewing documents, is missing from the free version

2.  Users Using Pirated or Old Versions Likely to Migrate to the Free Version

Microsoft loses a significant amount of business through piracy, especially in emerging markets.  With the launch of Office Web Apps, it plans to migrate users from pirated versions to the free version.  Similarly, users that continue to use old versions of Office rather than upgrade are likely to migrate.  Since such users were not paying Microsoft in the first place, they will not have a negative impact on Microsoft’s Office business.

3.  Opportunity for Microsoft to Create New Revenue Streams Around Office Web Apps

Microsoft can generate ad revenues aimed at retail users using the free version.  It can also use the free Office Web App as a platform to up sell the paid version which offers better security features to small businesses.  Small businesses typically need more security and control over their documents, which can be achieved through a paid version of Web Office Apps.

You can see the complete $32 Trefis Price estimate for Microsoft’s stock here.