Microsoft is cutting the price of its Cloud-based service, Office 365, by up to 20 per cent, to improve its chances of success in the enterprise market and to stave off competition from Google Apps, analysts say.
Microsoft itself says the cost of running the Cloud suite, which typically includes hosted versions of Exchange, Office, SharePoint and Lync, has fallen and thus the price cut announced earlier this month is simply "passing on" savings to customers.
Nonetheless, Gartner analyst Matthew Cain says it's clear that Microsoft is responding to Google's success in selling its cloud-based services to businesses.
"The price cuts reflect Microsoft's fear of Google," Cain said. "Google Apps for Business has increasing momentum in the enterprise sector, and Microsoft is doing everything they can to prevent further incursions."
Google claims that 4 million-plus businesses are using its hosted application suite, while Microsoft has reportedly claimed that 3 million to 5 million Office 365 user licenses have been sold.
Google Apps has gained some highly publicized large customers for its hosted software suite, including the city of Los Angeles (minus its police department), the city of Pittsburgh and the National Oceanic and Atmospheric Administration. The LAPD pulled out of the Los Angeles move to the cloud because of security concerns.
Cain said Microsoft's plan to begin offering a free version of Office 365 for Education this summer, and to aggressively cut the prices of other versions, is strong evidence that it's girding for battle with Google.
"Microsoft dropped fees simply because Google does not charge [education] customers," said Cain, noting that Microsoft was "increasingly losing share" in that crucial market.
In a blog post, Michael Osterman, president of Osterman Research, contended that the price cuts are likely an attempt by Microsoft to spur sales of Office 365 among enterprise customers. It isn't clear whether Microsoft's pricing strategy will succeed, because there's "substantial variation" in how demand increases after price cuts, Osterman said.
Osterman's research shows that when cloud-based email services are priced at $20 per seat per month, the market of "likely or definite adopters" is equal to 16 per cent of midsize and large companies. At $US15, the share of likely or definite adopters jumps to 27 per cent, and at $10, it jumps to 49 per cent.
"I suspect that Microsoft has done its own research and come to a similar conclusion -- that the price cuts may be significant enough to create sufficient demand among its potential enterprise customers," Osterman wrote.
The decision to cut Office 365 prices came just a couple of weeks after Microsoft disclosed that it had started constructing a new $130 million data center in Dublin that will be used to run cloud services for its growing European customer base. A spokeswoman wouldn't say when the new facility will open.
Because the price cut came early in Office 365's life, it could convince wavering customers to stick with Microsoft, said Rebecca Wettemann, an analyst at Nucleus Research.
She noted that it's "better for Microsoft to capture those customers at a lower price point than have Google or someone else compete for them."
Perez is a reporter for the IDG News Service. Mikael Ricknas of the IDG News Service contributed to this story.
This version of this story was originally published in Computerworld's print edition. It was adapted from an article that appeared earlier on Computerworld.com.
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