Microsoft Office 365 Finally Breaks Free From Its On-Premises Legacy

26 April 2013 ID:G00249718
Analyst(s): Matthew W. Cain, Michael A. Silver, Jeffrey Mann, Frances O'Brien

VIEW SUMMARY

In February 2013, Microsoft moved its Office 365 cloud platform from the 2010 wave of Office products to the 2013 wave, initiating a different release cycle for cloud and on-premises versions. We examine the implications for IT leaders and the future of Office 365.

Overview

Key Findings

While issues remain, Microsoft is starting to hit its stride with Office 365 and the impact will be profound. Office 365 will:

  • Force most IT leaders to reconsider how they license and deploy the MS Office personal productivity suite.
  • Push most IT leaders to rethink how they approach change management of all Office-branded products including SharePoint, Exchange, Lync and Office.
  • Lead IT leaders to reconsider their approach to Microsoft licensing to accommodate bring your own device (BYOD) and consumerization trends.
  • Expose IT leaders to new Microsoft enterprise services such as the Yammer social network and the SkyDrive Pro file sharing service.

Recommendations

  • Determine the role Microsoft will play within your organization over the next five years before committing to Office 365 and its rental payment model. Do not rush decisions based on short-term promotional campaigns: We believe that Microsoft will continue to offer significant one-time incentives to move.
  • Prepare to overhaul change management approaches to Office products. Continuous changes to Office 365 may require substantial changes to on-premises system software to maintain compatibility.
  • Consider Office 365 ProPlus for users that need access to Office from multiple devices, but factor in the impact of being on a continuous payment subscription model.
  • Evaluate the need for new Microsoft online services such as Yammer and Skydrive Pro to meet business needs and reduce the risk of users turning to consumer equivalents.

Table of Contents

Analysis

Introduction

The importance of Office 365 to the long-term future of Microsoft cannot be overestimated. To prosper in the enterprise market, Microsoft must accelerate its ability to respond to changing business needs driven by the consumerization, cloud, mobile and social trends that are reshaping global work practices.

The importance of Office 365 — the cloud versions of Exchange, Lync, SharePoint, Office, Yammer and SkyDrive Pro — to enterprises is also hard to overestimate. Almost every organization in the world runs some Microsoft software, which makes Office 365 relevant to just about every enterprise. Organizations are also facing the challenge of responding quickly to changing user work habits, and are under pressure to cut costs and move away from activities that don't add value. Before committing to Office 365, however, IT leaders should evaluate other hosting options for Microsoft services, as well as non-Microsoft options such as Google Apps for Business.

Microsoft must beat back aggressive competition from arch rival Google, which has found that the appeal of Google Apps for Business — its simplicity, economy and continuous development — is finding strong resonance in the enterprise market. For the first time in two decades, a rival has emerged that threatens Microsoft's near total control of many segments of the enterprise market.

Office 365, however, also represents a significant opportunity for Microsoft. It can push customers into continuous annual payments for its collaboration and personal productivity software, thereby increasing long-term revenue opportunities and consistency. Most organizations today have perpetual rights to Microsoft software, enabling them to run it long after it was paid off. But in most cases with Office 365, if the customer stops paying, access to the service is cut off.

Given these circumstances, it is no mystery that Microsoft is aggressively pushing its customers toward Office 365 with a variety of incentive programs including:

  • An offer to pay up to $40 per user toward the migration costs to Office 365, capped at $250,000 and depending on the number of users.
  • Pricing the inclusive E3 enterprise package as low as $3 per user per month (it lists for $20) when added to an existing on-premises Enterprise Agreement that contains Office Professional Plus and the Enterprise CAL Suite.

An enormous incentive for customers to sign up for Office 365 is per user licensing. Most organizations have only been allowed to license MS Office on a per device basis. But given the BYOD trend, most organizations need licenses to support employees that want to run the software on a work PC, a home PC, a smartphone and/or a tablet and Microsoft is using Office 365's per-user licensing model to entice organizations to sign up for the service.

Microsoft updated the language in its standard Enterprise Agreements to give the customer the ability to subscribe to Office 365 easily. The company said in an April 2013 earnings call:

"One in four of our enterprise customers now has Office 365."

Microsoft uses an inclusive criteria for defining an Office 365 customer. A large organization with just a handful of users on Office 365 is counted, as well as customers trialing or piloting the service. We believe actual deployment — where an enterprise has the majority of users on at least one Office 365 workload — is fewer than 10% of enterprise customers. We expect this number will grow to about 60% by YE20.

Office 365 is the single most important bet Microsoft has made to preserve and promote its enterprise strategy, and the consequences for organizations are profound. Most enterprises have already been supplied with astoundingly low offers to move to Office 365, which may dramatically change how they license and provision Office products. Regardless of Office 365 participation, most organizations will face dramatic alterations in Office product change management.

This report explores four Office 365 issues:

  1. Change management
  2. Office ProPlus
  3. Licensing
  4. New services

First, however, we will take a look at how Microsoft Office 365 has evolved over the past four years.

Overall Progress of Office 365

The February 2013 migration to the 2013 wave of Office products is the final of three big-bang updates Microsoft has undertaken with its cloud service. The company has underplayed these large-scale migrations because they seem incompatible with the overall spirit of cloud deployments, but the reality is that its flagship Office 365 collaboration suite has gone through three distinct stages:

  • Office 365 was originally known as BPOS (Business Productivity Online Suite), which was based on the 2007 wave of Office products, and was released to market in April 2009. We refer to this version as Office 365 v.1.
  • BPOS gave way to Office 365, which was based on the 2010 wave of Office products, and that service was available to new customers starting in June 2011. We refer to this version as Office 365 v.2. Existing Office 365 v.1 customers had one year to move v.2.
  • The latest incarnation, also known as Office 365, is (as of February 2013) based on the 2013 wave of Office products. We refer to this version as Office 365 v.3. Customers can defer the migration, but the move to v.3 must be completed by 1 March 2014.

With each ensuing release of Office 365, Microsoft has made progress in numerous areas in its journey to becoming a top-tier cloud application vendor.

Highlights include:

  • Upgrade timing: It shortened the time between the availability of new Office product versions for on-premises customers and the availability of the new versions in the cloud. The wave 2010 Exchange bits, for example, were available for Office 365 v.2 in the cloud 18 months after they were available on-premises. Wave 2013 Exchange code in the cloud followed the release of on-premises wave 2013 Exchange code by just three months. From now on, new features will be available in the cloud first, and it may take up to three years for those features to be made available to on-premises customers.
  • Cloud engineering: Each successive wave of Office products is engineered to be more cloud friendly through investments such as more effective site resiliency, separation of protocol handling from applications, multi-browser compatibility and support for low-cost storage options.
  • Upgrade effort: The upgrade from Office 365 v.1 to v.2 was labor-intensive, but it appears that the upgrade from v.2 to v.3 will be easier.
  • Entitlements: Microsoft has continuously increased entitlements without raising prices — bumping Exchange Online storage allocations to 25GB and including SkyDrive and Yammer in the enterprise bundles at no additional cost, for example. It has also lowered the price of some of its more popular packages.
  • Product expansion: Microsoft has consistently added new capabilities to Office 365 —such as data loss prevention, e-discovery and voice — mostly via feature upgrades also available to its on-premises customers.
  • Vertical market expansion: Microsoft now has industry-specific versions of Office 365 for the education (K-12 and higher education) and U.S. government entities. It also continues to sell a dedicated version of Office 365 to organizations with over 30,000 seats.
  • Geographic market expansion: Microsoft has continuously released Office 365 to new geographies and in new languages. It currently offers support in 88 countries and 33 languages and has four data centers in the USA, as well as those in Hong Kong, Singapore, Amsterdam, Dublin and San Paulo.
  • Support and customer-facing operations: Microsoft has added fee-based support options and is producing a continuous stream of tools and documentation to assist customer operations and troubleshooting.

Microsoft has said that uptake has been strongest with companies under 500 seats, and we believe there are about 100 organizations with over 30,000 seats that use the dedicated version. There is, however, still room for improvement.

Some barriers to migration or adoption include:

  • Migrations from older versions of Exchange and non-Microsoft email systems can be long, complex and more resource-intensive than expected (see "Users Share Problems with Office 365 Email Migration.")
  • Organizations have expressed some dissatisfaction with the support service that comes bundled with Office 365. Like Google, Microsoft outsources some support duties to an offshore vendor. We continue to recommend the purchase of extra support for the first year or two of operations.
  • Customers still need to employ talented Level 2 and Level 3 support engineers to manage the Office 365 service.
  • Office 365 has delivered the contracted 99.9% uptime in 11 of the past 12 months (as of April 2013). In the cases when outages do occur, there is dissatisfaction with Microsoft's communication and transparency around the outage.
  • Poorly executed changes to the Office 365 service can create problems — including downtime — for customers.
  • Customers want more information about short- and long-term road maps for Office 365.
  • Regulatory compliance, data sovereignty and contracting issues can stall or prevent deployment.
  • On-premises application integration can be challenging.
  • Some Office 365 prerequisites — such as the need to use Windows 7— can be difficult to comply with for some customers. Compared to the vast network of resellers for Microsoft on-premises software, the number of partners globally that have the skills to migrate, manage and customize Office 365 is minimal.

There is a learning curve at work for both parties here: Microsoft and customers are both adapting to the cloud but, for most customers as they enter their second or third year of subscription to Office 365, overall satisfaction is strong (see Table 1 for a sample list of Office 365 customers).

There is no doubt that Microsoft has made remarkable progress over the four years it has been running Office 365. Gartner, however, recommends that larger enterprises with stable on-premises operations and modern, well-managed infrastructures should consider staying on-premises for most collaborative workloads through to YE15 (see "The Gartner Position on Cloud Email.")

Office 365 Release Cycles Go From Three years to Three months

2013 is a critical year for Microsoft as it transforms into a cloud-centric application vendor. As part of that transition, the company will abandon its 20-year reliance on a three-year release cycle for Office products. It will move to a steady cadence of smaller upgrades every three months for the cloud versions of Office, Exchange, SharePoint, Yammer and Lync.

This new three-month release frequency represents a significant change that will have a profound impact on how organizations deploy, upgrade and license Office products. The reasons for this move to a much shorter release cycle are not hard to identify:

  • Consumerization, mobile and BYOD trends are forcing Microsoft to rapidly respond to demands to support new devices and non-Windows hardware and operating environments.
  • The need to rapidly innovate social and collaboration services to keep pace with changing ways of working.
  • The need to consistently improve cloud availability, operational fitness, security and support services.
  • The need to combat Google, which is encroaching on Microsoft's long-dominant position in the enterprise with Google Apps for Business. Google has never employed the concept of "versions."

Simply put, Microsoft cannot afford to wait another three years to release major new cloud functionality. It has to embrace a rapid-release mentality or lag behind Google. Web-savvy users have grown comfortable with rapid change driven by A/B and multivariate testing to determine which changes produce positive results.

This change will have a profound impact on Microsoft customers — their ability to consume the steady stream of change will require greater attention to change management and continual upgrades of Microsoft infrastructure to keep pace with that change.

Change Management Challenges for Microsoft

Microsoft will have to rethink its development processes for new features. In the old style, Microsoft would generally begin to identify new features in the next wave between 48 and 36 months prior to shipment; build the features 36 to 12 months prior to shipment; and test the features anything from 12 months to immediately prior to shipment.

Microsoft will need long gestation periods for some complex, large-scale features — such as e-discovery or data loss prevention — but will struggle with when to reveal the development to customers and how much detail to provide, both to customers and to third parties.

Microsoft will also have to rethink how it prioritizes development work as certain features — such as mobility — may be pushed to a fast track, diverting resources from other initiatives. Quality assurance and dependency testing will be more complex due to shorter time frames and a much broader test bed. These circumstances — the need for faster iteration across a broad set of interlocking services where failure can potentially result in downtime for 10 million or more users — require substantial investments in operational fitness.

The new faster release cadence does, however, have some significant upsides for Microsoft. In the old development process, engineering teams had to adhere to one schedule, with all code dropping on the same release-to-market day. With the new cadence, development teams can work on different features and functionality on independent work streams without being tied to a common release date. The Office Web Apps team, for example, can ship new features or performance enhancements when the feature is complete — they are no longer forced to wait for a SharePoint upgrade to release the code.

Office 365 v.3 rolls out changes in three ways, with varying degrees of IT control:

  • Ongoing services updates happen every two weeks. These are behind-the-scenes service improvements and bug fixes that are transparent to the customer and are deployed without any customer control.
  • Additive feature and capability releases come every 90 days. These add new value for customers but do not trigger the need for significant new training or disrupt the user experience. In most cases, service administrators can decide whether or not to make the feature available to end users but acceptance will become mandatory within one year.
  • Major feature and capability releases come every 12 to 24 months and will typically require customers to retrain IT staff and/or users to some degree. These features also become mandatory after a year.

Communicating this complex cadence of change to the Office 365 customer (and internal Microsoft) community will be challenging. Microsoft will also struggle with how to monetize new features. If it adds, for example, data loss prevention across SharePoint, Exchange, Yammer and Lync workloads, does it charge extra for the service or does it bundle it into existing services at no additional cost?

Microsoft is struggling to get the right mix of product suites. With the introduction of Office 365 v.3, for example, the company dropped its longstanding E2 option and added two new bundles. It added Yammer to all E suites at no extra charge when licensed under an Enterprise Agreement, but has not yet offered Yammer via the Microsoft Online Subscription Program. We expect this rapid change in packaging to continue for several years, with the end result being higher prices for feature-rich bundles, which may result in overprovisioning.

The Plan for On-premises Deployment

In light of Office 365, Microsoft is still formulating its strategy for releasing Office products for on-premises deployment. In the late 2012, the company indicated that it would step away from the traditional three-year release cycle in favor of a steady stream of upgrades, much like the cloud model.

The company has since evolved that line of thinking and is now considering an 18- to 24-month release cycle instead of three years. That approach, of course, means that the Office 365 feature set will be ahead of on-premises deployments. This dynamic will lead organizations to debate which is more important: preservation of existing infrastructure or access to new features? Given the uptake rate for new releases in prior generations, most enterprises do not appear to be "feature seekers" — those who upgrade as soon as new capabilities are available. Many enterprises skip generations before launching a major upgrade. Feature seekers are more willing to change and will be more likely to migrate to Office 365, but Microsoft must deliver some type of compromise between these two approaches — balancing customer need for change against customer desire to minimize disruption in a stable environment.

Change Management Challenges for Customers

Microsoft's new strategies for Office 365 also create challenges for customers. While there should be fewer disruptive upgrades to deal with after the transition to Office 365 v.3, the steady-state period of calm experienced between releases is also gone. Administrators must now deal with a constant stream of small and medium changes. These changes need to be tested, accepted and explained to end users. Customization — of SharePoint sites, for example — will likely only add to the quality-assurance burden. As administrators grow more confident that light customizations made with SharePoint Designer survive Microsoft's small code changes, testing is likely to diminish. Initially, however, we expect many administrators to diligently test everything before releasing new code to users. The new app model introduced in 2013 will isolate customizations from underlying platform changes more thoroughly.

This rate of change is much faster compared to on-premises deployments. Some users will embrace the accelerated rate of change while others may object to any disruption to their familiar environment. Constant change will put the IT group in continuous contact with end users, a role that will be new to some IT groups.

It is likely that Microsoft will limit backward compatibility for older versions of Microsoft products that work with Office 365. It is hard for Microsoft to push ahead with new functionality if support for older versions of Windows, Internet Explorer and Active Directory, for example, is required. Microsoft has historically supported older versions for 10 years, but we suspect it will take a new approach with Office 365 by making the use of the newest technologies such as browsers, operating systems and directories mandatory. This dynamic could open the door to Microsoft reducing its ten-year life cycle for all of its products.

The irony should not be lost here. One of the primary reasons organizations move to the cloud is to avoid the burden of regularly deploying service packs and versions — Microsoft takes care of that work in the cloud. But subscription to the cloud may mandate faster upgrades of premises-based application and system software to accommodate changes on the cloud side. Organizations will have to pay strict attention to on-premises software requirements as the pace of change ramps up with Office 365. If an organization fails to keep pace with mandatory on-premises changes, then the Office 365 service may stop working.

Office 365 ProPlus

The Microsoft Office suite of personal productivity tools is one of the most broadly used pieces of software in the enterprise, and it is a substantial part of Office 365. ProPlus refers to the version of Office Professional Plus included in the Office 365 offering, which was added when v.2 launched.

Office 365 v.3 introduces several much-needed changes including:

  • Single sign-on
  • Streaming installation (as opposed to download/install)
  • Runs using application virtualization technology
  • Updates in the background
  • Roaming settings
  • Installation of Office for Mac from the portal
  • Licensing allows delivery via Remote Desktop Services and Hosted Virtual Desktop

Microsoft continues to confuse matters by calling Office 365 ProPlus "Office in the Cloud," even though it runs on local desktops. Like the rest of Office 365 — and unlike the traditional version of Office Professional Plus — Office 365 ProPlus is licensed as a subscription with non-perpetual rights to the software. If the customer lets the subscription lapse, it no longer has rights to use the software. Existing documents can be viewed and printed, but new ones cannot be created and those already generated cannot be edited. This will help Microsoft reduce the number of organizations that buy a copy of Office and run it for years, skipping releases and avoiding Software Assurance fees.

Another difference is that Office 365 ProPlus is licensed on a per-user basis instead of per device. In a world of consumerization and virtualization, Microsoft's licensing has been slow to catch up with technology and new use cases where users have multiple devices from which they want to run their software. The idea of paying for a separate Office license for every device a user may have does not sit well with most organizations, and it would make sense for licenses to be associated with users in these scenarios instead of with the device.

The problem with Office 365 v.2 was that the most common scenario for users with multiple devices was that they wanted to run a copy of Office on their PC as well as from their iPad. Initially, Microsoft's licensing prohibited running Office 365 ProPlus remotely from a server or virtual desktop. With the license restricting the Windows or Mac software to local execution and without native tablet apps for iOS or Android, the offering was not compelling for most organizations. Microsoft eventually began allowing this kind of platform shifting in January 2013.

Microsoft has still not revealed plans for Office running on operating systems other than Windows and Mac OS X. While its Office 365 collateral indicated that an Office 365 ProPlus or E3 or above subscription will include access to "Office Mobile Apps…on select mobile phones and tablets" (Microsoft subsequently removed this line), Microsoft has not discussed any future mobile products or dates. There are regular rumors in the press, however, that Microsoft will be releasing Office for iOS and Android this year. Running Office on a variety of devices with a single subscription should make Office 365 ProPlus significantly more compelling for many users at most organizations.

Organizations that are planning to do BYOD for PCs or that plan on allowing non-x86 devices to run the Office Professional Plus suite need to consider licensing via Office 365. Office Professional Plus is licensed by endpoint device, and organizations that allow BYOD may not be able to control what endpoint devices are being used and ensure they are licensed properly.

It is unclear if or how Microsoft can audit this compliance. The organization could do its best to create policies and communicate to the users what devices can access or run Office and when, but if the organization needs to prove compliance, licensing users for Office 365 ProPlus, which puts more onus for license tracking on Microsoft, would certainly be the safest (and may eventually be the only) way to go (see "How to Decide Between Microsoft Office Professional Plus and Office 365 ProPlus").

Broader Office 365 Licensing Issues

Office 365 contracting continues to challenge customers. Microsoft Office 365 is not a product. It is a brand. Therefore, to understand licensing requirements, entitlements, contractual commitments and SLAs, Microsoft customers need to know what functionality is included in each service offering (Exchange Online, SharePoint Online, Lync Online and Office 365 ProPlus) and refer to the Product Use Rights, Product List and Service Plan Description documents for each (see Microsoft's Volume Licensing Agreement).

The March 2013 Microsoft Product List introduced two new SKUs for Office 365 and made changes to several others as well. However, these new SKUs and changes are not yet reflected in the Service Plan Description that makes it difficult for customers to determine what is included in the Office 365 plan they subscribe to. For example, starting in March 2013, Yammer was to be included in the stand-alone SharePoint online plans and Office 365 plans 1 through 4, yet there is nothing in the Product List or the Service Plan Description to reflect that. If Microsoft fulfills its suggested three-month deployment schedule, it will need to accelerate the pace at which it syncs marketing collateral with contracting detail.

Perhaps the most troubling aspect about Office 365 contracting is, however, the way in which its benefits are reported by some Microsoft sales reps. Specifically, some Enterprise Agreement customers are told that, for Office Professional Plus purposes, they will not be required to count all qualified devices and can use the Office 365 ProPlus subscription license right for use on up to five devices even if they do not deploy Office 365 ProPlus.

Customers with Office Professional Plus and Windows OS included in their Enterprise Agreements are required to count all qualified devices. If, however they decide to transition users to Office 365 ProPlus, either as a stand-alone service or as part of Plan E3 or E4, devices that are used exclusively by users with Office 365 ProPlus subscriptions do not need to be covered by a device-based Office license. Devices not used exclusively by those licensed for Office 365 ProPlus must be licensed for Office Professional Plus.

In contrast, when subscribing to Office 365 Plan E3 or E4 as part of the promotional offering, since it is offered as an Additional Product (not an Enterprise Product), even devices exclusively used by those covered by an Office 365 ProPlus subscription must be covered by a device-based license to satisfy the Enterprise Agreement requirement.

Given Microsoft's increased license verification activity, this is a compliance issue just waiting to happen. All customers given this assurance must get a contractual amendment that specifies they no longer have to count all qualified devices in the Enterprise Agreement when buying the Office 365 ProPlus right for on-premises deployment.

In summary, our main points of guidance are:

  • Offering one-time only incentives is common practice when vendors want to get a product deployed. The decision to contract for Office 365 carries risks and opportunities that need to be assessed before making any commitment. Customers should not make hasty decisions based on incentive offers with short shelf lives.
  • Assurances that Microsoft will ignore Office license shortfalls if the organization subscribes to Office 365 should only be accepted if they are included in a formal amendment to the contract.
  • Office 365 customers should negotiate for renewal pricing at the time they first subscribe to Office 365. If renewal pricing is not in the contract, then the expectation should be that renewal pricing will be close to the "then current" list price.
  • Prior to contracting for Office 365, organizations should understand how licensing for iOS and Android devices will be handled if Microsoft does introduce Office for these platforms. Customers should secure a contract amendment that says that the Office 365 ProPlus Subscription will give a subscribed user full access to any mobile device versions of Office ProPlus.

New Services With Office 365/Office 2013

Most of the changes in Office 365 v.3 have been discussed in other research reports, which describe updates to the underlying products:

"Exchange 2013: A Bridge to the Microsoft Cloud"

"Office 2013 Advances Office, but Should Not Divert Attention From Migrations Off Windows XP"

"SharePoint 2013: Good Progress but Missed Opportunities"

"Microsoft Lync 2013: Don't Base Upgrades on New Features Alone"

Arguably the two biggest new elements of Office 365 v.3 are Skydrive Pro and the Yammer social network.

Yammer: Microsoft acquired the cloud-based social network site Yammer just months before launching SharePoint 2013. While concrete integration plans are scarce beyond those described in a recent blog post, Microsoft has said that SharePoint and Yammer will grow closer together while remaining separate products. Yammer will be the preferred social technology, but remain a cloud-only service.

In addition to the current points of integration (search, content federation and a SharePoint Web Part for Yammer) Microsoft will integrate Yammer with Office's new identity management capabilities and SharePoint will adopt Yammer's activity stream experience.

Microsoft has been clear that Yammer is its strategic direction for social technologies, and not SharePoint any more. SharePoint remains the primary platform for document management, portal, integration and workflow functionality. However, as Yammer rises in prominence for social functionality, the relationship with SharePoint is far from clear. When it comes to facilitating online group interaction, Yammer and SharePoint significantly overlap in functionality. Over time, we expect that SharePoint's social functionality will wither away while its role as a content repository, enterprise portal and workflow platform will remain. During this transition, enterprises risk using capabilities that will be deprecated as Microsoft unifies the overall experience.

SharePoint administrators who are also using Yammer should plan to move social functionality away from SharePoint and into Yammer. Those who currently use SharePoint for social purposes and do not plan to deploy Yammer, or cannot use cloud-based products, need to closely monitor Microsoft's developments, re-evaluating whether continued use of SharePoint is warranted as Microsoft shifts emphasis to Yammer.

Skydrive Pro: Microsoft has had a file sync and share service aimed at consumer users since 2007 when it was introduced as Windows Live Folders. SharePoint 2013 and Office 365 v.3 introduces Skydrive Pro, aimed at professional users who wish to synchronize files between different devices and share them with other people. Skydrive Pro is a feature of SharePoint and is available in both the online and on-premises deployments. We expect that the online version of SkyDrive Pro in Office 365 will be far more important, however. Accessing on-premises servers from user-controlled mobile devices (the primary use case) is far more complicated.

Most Office 365 users get 7GB of Skydrive Pro to store their documents. Client software is available for Windows as well as most mobile devices. Skydrive Pro is aimed squarely at the enterprise file sync and share market (see "MarketScope for Enterprise File Synchronization and Sharing"). Office 365 users will have less reason to need products like Dropbox, Box or YouSendIt.

Office 365: The Consumer Push

With Office 365 v.3, Microsoft is making a big push into the consumer market with the cloud service.

This is critical for Microsoft because:

  • It wants to shift consumer (along with enterprise) buying patterns to a subscription model.
  • It needs to combat Google Apps' presence in the consumer market.
  • It must create support for Office 365 in the enterprise via consumer channels.

The latter reason is especially important because Google is clearly making headway in the enterprise in part because of the popularity of Gmail, Google Docs and the Chrome browser in the consumer space. This dynamic explains the creation of the Outlook.com consumer email service (officially launched in February 2013), to which Microsoft is migrating the vast Hotmail user community.

The Office 365 Home Premium edition includes the Office suite, which can be installed on up to five devices, plus 20GB of Skydrive storage and 60 minutes of Skype calling every month for $100 per year. Microsoft is also pursuing the education market with Office 365 University, a four-year subscription plan for university students, faculty and staff which includes use of Office 2013 on two PCs and Macs, as well as Office Mobile Apps on two Windows Phones, for $80 per year.

Conclusion

Office 365 is not just about Microsoft. It is about a profound industrywide shift to the cloud provisioning platform. The progress Microsoft has made with Office 365 over four years is impressive and is indicative of the "bet the company" mentality in Redmond. Yet we are really at the starting point in this decade-long journey. There is a steep learning curve on the Microsoft side — transitioning from a traditional software supplier with a three-year release cycle to a cloud vendor with continuous updates — which is fraught with peril.

Customers must also learn to live with the cloud. Giving up control of the physical infrastructure and losing direct line of sight into operations requires a significant change in mindset. Both vendor and customers (see Table 1) have commenced a long journey that will be a transformative experience.

Appendix: Companies Signing Up for Office 365

Table 1. Sample of Companies Signing Up for Office 365

Vertical Market

Company

Expected Number of Users

Accounting

Grant Thornton

5,800

Advertising

Wunderman

2,000

Automotive

Toyota

200,000

Aviation

JetBlue

15,000

Construction

Marubeni

7,500

Construction

The Hilti Group

22,000

Construction

UrbaCon

8,000

Construction

Vinci

183,000

Design

Tata Elxsi

4,000

Electronics

Bang & Olufsen

2,000

Electronics

Ricoh

11,000

Energy

Caltex

3,500

Energy

Origin Energy

24,000

Facilities management

ISS Facility Services

25,000

Food and drink

Campbell Soup Company

8,000

Government

City of Chicago

30,000

Government

County of Santa Clara

15,000

Government

Federal Aviation Administration

80,000

Government

Fredericia Kommune

4,000

Government

State of Minnesota

35,000

Government

State of Texas

100,000

Government

U.S. Department of Veterans Affairs

600,000

Government

U.S. Environmental Protection Agency

25,000

Healthcare

Advocate Healthcare

30,000

Healthcare

Baycrest Hospital

5,000

Healthcare

Florence Zorg

4,000

Healthcare

Gwinnett Hospital System Inc

2,000

Healthcare

Kindred Healthcare Inc.

76,000

Healthcare

WellPoint

37,000

Hospitality

Burger King

30,000

Hospitality

Emperor Group

7,000

Hospitality

Hyatt

106,000

Hospitality

The Hongkong and Shanghai Hotels

7,000

Manufacturing

Air Products

18,300

Manufacturing

Lantmannen

10,000

Manufacturing

Sumitomo Rubber

6,000

Media

A&N Media

7,000

Mining

Fortescue Metals

5,000

Not-for-profit organization

American Heart Association

3,000

Not-for-profit organization

American Red Cross

40,000

Not-for-profit organization

FHI 360

4,400

Not-for-profit organization

International Federation of Red Cross and Red Crescent Societies

500,000

Packaged Goods

Barilla

13,000

Pharmaceutical

Lundbeck Denmark

6,000

Real estate

Hersing

5,000

Real estate

Midroc Europe

2,600

Retail

AP Eagers

2,900

Retail

BCBG

10,000

Retail

Hallmark Cards

9,500

Retail

jcpenney

177,000

Retail

L'occitane

6,000

Retail

Renner

19,000

Retail

Sephora

21,000

Retail

Tesco

475,000

Telecommunications

Cablemas

5,300

Telecommunications

Rakuten

9,900

Test Services

Underwriter Laboratories Inc.

6,000

Transportation

Aviapartner

6,000

Transportation

Japan Airlines

20,000

Data from Microsoft Office 365 Customer Blog and Microsoft Case Study website.
Companies are in various stages of deployment — some are just starting, others are completed.

Source: Gartner (April 2013)