Arik Hesseldahl

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Seven Questions for Microsoft’s Kirk Koenigsbauer About Office 365

Microsoft Office is now a cloud application that you can try out for yourself. The software giant officially launched its long-awaited new service, Office 365, at an event in Manhattan. Like Google before it, Microsoft says that the shift can help businesses save money on costs related to hardware and staffing that tend to grow from running conventional office software.

Having watched as Google nudged its way into the office productivity business with its Google Apps service, Microsoft is now bringing the strength of its enormous Microsoft Office franchise to the world of cloud applications.

The problem is, there are some risks. Where Google Apps was an incremental new business for Google that in time may or may not become big enough to figure in Google’s financials — it’s not big enough yet — sales of Office are a fundamental pillar that hold Microsoft up.

Office constitutes a huge portion of the Microsoft Business Division, and last year that segment was worth $18.6 billion in revenue, or slightly less than 30 percent of overall sales. It’s also wildly profitable, bringing in about half of Microsoft’s $24 billion in operating income last year. When you think of it that way, it’s not overstating things to say that Microsoft has chosen to mess with some of its crown jewels. There’s no small risk that Microsoft may in time cannibalize some of its own best customers.

But it’s not as though Microsoft hasn’t been talking about this for a long time. We’ve talked with other Microsoft execs about it before. And it’s also clear, judging by Google’s success so far, that Office applications need to move from their desktop-bound paradigm to something more flexible that only the cloud can accommodate by converting it to a service.

Also? This is Microsoft. It does nothing fast; it has been studying the opportunity for several years and thinks it can actually add more customers with Office 365, customers that it couldn’t reach with its traditional Office Suite products. I caught up with Kirk Koenigsbauer, corporate vice president of the Microsoft Office Division, to talk about all of these things. I also gave him the same chance I gave Google’s Shan Sinha earlier today to be catty about the competition. See if he took it below.

AllThingsD: So Kirk, we’ve known Office 365 has been coming for a while. That makes the market for these cloud-based office services more competitive. How does Microsoft see the market?

Koenigsbauer: First, it is an exciting day for us. We’ve been in the cloud business for six years. You heard Steve [Ballmer] mention Energizer, the battery company, as our first customer back then. We’re still deeply partnered with them and they are one of our best customers. Today is an important milestone for us because it is a new service. Office 365 brings the best of what we know about collaboration to the cloud. And so all of our modern capabilities are now in the service. The Office Web applications are now in the service. There are new capabilities that the service has not had historically, like conferencing and support for outside Web sites. It’s really where Office meets the cloud. We see a huge opportunity in the small and mid-sized company segment. Energizer is a huge company, and we work with lots of big companies, but with Office 365 we have the opportunity to meet the smaller companies that historically haven’t had the opportunity to have the best of what the big businesses have. Usually someone like the CEO or CFO has an additional part-time job as the IT person. And so they need things that are familiar and easy to use.

What’s a little unclear to me is the relationship between the traditional Microsoft Office boxed software and Office 365. Is this a fundamental rethinking of Office, or will this be a complement to the existing product or both?

I absolutely see this as the evolutionary step of taking Office to the cloud. One of the things that we’re really focused on with our cloud journey is providing it on the customers’ terms. And there’s a massive transformation happening in this space as you know, and small companies and large companies are going through it, and they all have a different pace and they all have different objectives. We want to make sure that our largest enterprise customers can decide for themselves if they want to use our multi-tenant service, or if they want to use the dedicated service. Do they want to run in a hybrid environment with some workloads running on-premise and some in the cloud? If they’re a government customer they often have to go through certain vendors. Sometimes they want to buy from a hosted provider or a private cloud provider, so we want to support all those options. For small businesses, sometimes all they want is to move their email to the cloud, so we have packages and services for them as well. We also have a version for big enterprise that includes the Office client, and it’s basically a subscription and it runs like a desktop client, but is deeply integrated into the service.

And it works with which versions of Microsoft Office? Please say it works with the Mac, too.

You can use Office 2007 or Office 2010 on the Windows side and then Office 2011 works with it on the Mac side.

When I talked with Google about their Google Apps service, they said that when they land a customer they’re often replacing an Exchange installation or traditional Microsoft Office. Here you’re bringing something that could conceivably do the same thing. Exchange and Office are part of Microsoft’s bread and butter. Are you worried that you’re going to be displacing yourself — and in the end hurting yourself financially in some of these situations?

I think there’s a few ways to think about it. First, we think about it as a great thing for our customers. Specifically, small and medium-sized companies are getting access to products and services that they didn’t have access to before. While we love products like Exchange and Sharepoint, those products have historically sold more into the large enterprise space. So when we can deliver through the small business offering the kind of richness that Sharepoint and Lync and Exchange have, that’s a huge upside for us. In the enterprise, it’s all about doing what’s right for the customer. This is a big transformation that’s happening and its going to take many years. And customers are going to go at different rates. So I don’t worry at all about it displacing revenue. By running a service for our customers we’ll have a longer-term relationship with them. They’ll have access to the most up-to-date version of our software. But we’re also displacing other things, too. We see a lot of customers coming from Lotus Notes and Groupwise. Seventy percent of our old BPOS (Business Productivity Online Standard Suite) came from Lotus.

Is the transition easy for customers?

We have migration and transition planning. We talk about strategies to consider based on the workflow. We’ve got a lot of experience in doing Notes migration that we can do outside of the cloud experience that we can bring to bear.

Talk about the pricing model. It seems like there’s an awful lot of options. Google Apps is either $50 per user per year or $5 per user per month. It seems Microsoft is a little more complicated.

It’s all about providing choice and flexibility for customers based on what they need. For small businesses, we know they want something super simple. And so we have a single offer, $6 per user per month. You can use the current version of Office if you want or you can add on another subscription of Office. On the enterprise side, we know our customers want more choice. We have four core plans labeled E1 through E4. You can imagine, it ranges from basic capabilities to a plan where we add the Web Apps, to a higher end plan where we add Sharepoint. The highest is E4, where we offer Lync Voice services. Then there are Kiosk versions for customers that we’ve never really reached before, who have a lightweight usage of, say, Sharepoint and Exchange. They may be mobile workers or retail shop floor workers. That’s a net new opportunity for us.

I offered Google the chance to get a little catty and they opted not to take it. I’m going to offer you the same chance. People are going to compare Office 365 to Google Apps. Size up the competition for me, if you would, and how do you like your chances?

My take on it is that of course we think about the competition. There’s a massive transformation that’s happening in the workplace. We’ve been in the collaboration and productivity space a long time. We understand it incredibly well. And we’ve been in the cloud collaboration and productivity space for five or six years. I feel like for us it’s like a transformation of our business model. We can update our software every 90 days. We can reach new segments of customers that we couldn’t reach before. Our customers will have the most modern software. That’s a big deal because they’ll be more satisfied, and happier with us. Those are the kinds of things I think about when I think about the marketplace out there.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work