Google (NASDAQ:GOOG), which competes with Microsoft (NASDAQ:MSFT), in the productivity software market (email, docs, collaboration and calendar apps software), has now partnered with five different states in the U.S. to use Google Apps in their educational institutions for free. We believe schools and colleges play an important role in the long term adoption of productivity software, as these institutes are where many people get trained, start relying on, and form brand allegiances to these productivity applications.
Google’s strategy could reap dividends for the company in the long term and can hurt Microsoft as educational institutes present an equally important opportunity for Microsoft. Our analysis is as follows.
Google’s strategy
Google sells paid software mainly to businesses and offers free software primarily to retail users. Google’s strategy is to provide productivity software for free to educational institutes and benefit in long run as these students form the bulk of the workforce in the future and influence the type of productivity software used by businesses.
Google Apps has 8 million educational users [1] compared to around 11 million users that Microsoft has from educational institutes [2]. However, the recent addition of New York City gives Google an opportunity to provide the software to more than 3.1 million students and teachers.
Slightly positive for Google’s stock
Google Apps constitute less than 1% to the $643 Trefis price estimate for Google’s stock as only 6% of the users are paid users and the rest are free. We expect this percentage to remain steady in the long term.
However, Google can benefit if it is able to improve its paid user ratio over the long run. There could be an upside of 1% to Google’s stock if the paid percentage increases to 14% by 2016, instead of the 6% that we currently forecast.
Impact on Microsoft’s stock
The education market is equally important for Microsoft and Microsoft Office is a major source of value for the company, constituting around one-third of the $28 Trefis price estimate for Microsoft’s stock. The firm has been a dominant player in the productivity software market and had around 95% market share as of 2009. We do expect this share to go down to around 88% by 2016 due to increasing competition.
The market share loss on the other hand could be much greater given Google’s aggressive targeting of the education market. There could be a downside of around 3% to Microsoft’s stock if its market share declines to 72% by 2016, instead of the 88% we currently forecast.
You can see the complete $643 Trefis Price estimate for Google’s stock here.
You can see the complete $28 Trefis Price estimate for Microsoft’s stock here.
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