Why Is Alphabet's G Suite Miles Behind Microsoft's Office 365?

Four major reasons preempt any competition for Office 365

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Nov 17, 2017
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Microsoft (MSFT, Financial) has had a tremendous run in the cloud computing industry, and the company is well on course to exceeding $20 billion in annual revenues from cloud services in fiscal 2018. One of the major factors in Microsoft’s success in cloud is the company’s cloud-based software product portfolio, especially Office 365. Google (GOOG, Financial) is the only player of repute that is in a position to take on Microsoft in this space, but here is a list of four reasons why Microsoft has already won this market.

The Moat: Office 365 already has scale

Microsoft announced early this year that Office 365 crossed 100 million active users around the world. That’s a huge customer base for a product that is rented by the month or year. Despite already reaching this massive size, however, Microsoft’s revenue from the Productivity and Business Processes segment continues to grow at strong double-digit rates, largely driven by Office 365’s success. During the first quarter of 2018, Microsoft reported 42% growth in Office 365 commercial revenues.

Microsoft is still doubling its Office 365 revenues every two years as growth has been above 42% for the last eight quarters. The revenue growth clearly shows that adoption continues to be rapid for Office 365.

The key point here is this: Once customers are used to a particular product they seldom change to another that more or less offers comparable features. After all, why go through all the headaches, worry about the unknowns and jump to another product when the current product is already working really well?

As such, it will be very difficult for G-Suite to convince Microsoft Office 365 customers to make the switch.

The pricing power: Margins are high in the SaaS Segment

One way Google can hit Microsoft customers -- or at least lure a small segment of cost-conscious customers -- is by offering G-Suite at a much better price point, one that’s low enough to offer enough savings to the customer so that they are able to swallow the pain of migration.

But Microsoft is already sitting in a formidable position in that respect as well. Operating margin for its Productivity segment is well above 30%, and Microsoft has plenty of bandwidth to keep its pricing elastic.

There goes that point of attack.

The velocity of updates: Microsoft keeps adding more services to Office 365

But even if G Suite were to cut prices that low, it may still not be able to convince Office 365 customers to make the switch because Microsoft has been extremely busy adding new services and features to the service, all the while keeping the price of its core products in check.

Last month, Microsoft added a translator to Word and on-demand access to OneDrive files, launched Visio Online and added the ability for commercial Office 365 subscribers to view LinkedIn profile information. These are just a few things it added in October, and the company has made it a mission to offer some form of update or a new service or some additional feature on a monthly basis.

The velocity of updates clearly shows the importance Microsoft places on Office 365.

From a customer’s standpoint, Microsoft is not asking people to dole out more money for each new service; it’s just another benefit being added to a subscription they’re already paying for.

As the customer sees how the product keeps improving and growing, while the cost remains more or less the same per seat, the case for moving to another product is close to non-existent.

A new frontier: Microsoft’s efforts to break into the CRM/ERP segment

The last reason, but also one of the most powerful, to stay with Microsoft is that the company is already positioning itself as a single-vendor solution that can address all the cloud-based needs of a company.

Microsoft bought LinkedIn to give it a leg up in the customer relationship management software market, but the company is also pushing slowly into the enterprise resource planning segment. It is already the only company that can offer infrastructure services, a leading productivity application suite and also enterprise management software for CRM and ERP.

Why use four different vendors for four products when you have one company that offers an integrated suite of products that will work seamlessly, and all of that for just one unified and highly secure account per seat?

And that’s why Google is miles -- and years -- away from Microsoft in this area. The bigger point is, if Google with its well-rounded G Suite is so far behind, what about the rest of the pack?

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.