Microsoft poised to fight back as iPad generation shuns Office

It may be one of Microsoft Corp's biggest squandered opportunities.

Tired of waiting for Office to be optimized for their mobile gadgets, a growing contingent of younger companies is turning to cheaper, simpler and touch-friendly apps that can perform word processing and other tasks in the cloud.

Take Artivest Holdings Inc, a New York-based financial services startup that sells alternative investment products. The New York-based company uses an app called Quip, which combines word processing and messaging, to handle all but the most sensitive legal and financial files.

"There are no more Microsoft Word documents being circulated. If someone emails me a Word document, I'll tell them to put it in Quip," said Artivest Chief Investment Officer David Levine.

"If I'm walking to and from home, or going to an appointment, I can review or edit on my iPad. Not being tied to my desk, that's a big pro," he said.

(Also see: Microsoft announces cheaper Office 365 Personal for individuals)

The speed with which apps like Quip have been adopted is forcing Microsoft to intensify its efforts to bring the powerful but ageing Office software suite to tablets and smartphones, according to people close to the company.

Microsoft already has a full iPhone and iPad version of Office ready for release, the sources said. The only question is when Chief Executive Satya Nadella, who took over in February, will pull the trigger.

Nadella wants to widen Office's customer base but has to balance that with the flagship Windows franchise, which benefits greatly from tight integration with Office, especially on desktop computers.

"We have some pretty exciting plans," said John Case, the top Office marketing executive, without giving any details. "Certainly, interest in Office on the iPad is extreme. When they (customers) want to do real work, they are going to want to use Office."

Investors for years have urged Microsoft to adapt Office, its most profitable product, for mobile devices from Apple Inc and Google Inc - rather than shackling it to Windows as PC sales decline.

Activist investment firm ValueAct Capital, whose president Mason Morfit sits on Microsoft's board, has more recently voiced misgivings about Office's continued mobile absence, sources familiar with the firm said.

According to one analyst estimate, Microsoft is giving up $2.5 billion a year in revenue by keeping Office off the iPad, which has now sold almost 200 million units.

"Office is being disenfranchised on the hottest growth platforms," Nomura analyst Rick Sherlund wrote in a note to clients. "Maybe it is time to focus on Office independent of Windows."

Some analysts say it may be too late for Microsoft to win back the iPad generation, even if it introduces a mobile-optimized Office suite in the next few months, as expected.

"Look at the applications that are on the rise to support mobile. It is not Microsoft OneNote or Word. It's Dropbox, or Evernote," said Ted Schadler, an analyst at tech research firm Forrester. "It's really about being everywhere. That's an important, immediate decision that Satya's going to have to drive."

New apps on the block

Microsoft's productivity tools remain the industry standard, with more than a billion users spending almost $25 billion on them last fiscal year. But Office revenues are driven primarily by corporate officers who buy for large workforces - and more than half of America's employees use a mobile device daily to supplement their work.

The rapid rise of apps such as Quip, Haiku Deck, Prezi, Paper, Smartsheet, Good and Evernote, not to mention Google Apps, is nibbling away at the Office franchise. That is particularly true among mid-sized and smaller companies, which tend to be more frugal and less dependent on legacy Office documents or spreadsheets.

Ian Ray, a network administrator at Cypress Grove Chevre Inc, a cheese maker based in Arcata, California, has most of his 35-member workforce using web-friendly apps on iPads and Google Chromebooks.

"We use Google for email, Google Docs tied to that, Expensify for expense reports, Lucidchart for doing flow charts, and Smartsheet for organizing projects," Ray said.

After more than two decades, Microsoft has in recent years eased some Office functions into the mobile arena, mostly accessibly via web browser. The company has yet to release a touchscreen-optimized version of the full Office suite including Word, PowerPoint and Excel - not even for the Windows 8 operating system.

One reason for the delay appears to be internal politics. The powerful Windows group and the younger but more profitable Office group have a patchy history of collaboration.

When then-Windows boss Steven Sinofsky unveiled the touch-friendly Windows 8 and the Surface tablet in late 2012, many industry insiders remarked on the absence of a tailor-made Office suite, which was shepherded by Kurt DelBene at the time.

Both Sinofsky and DelBene left their jobs within months. Former Microsoft CEO Steve Ballmer has vowed to override divisions with his 'One Microsoft' overhaul launched last summer, now in Nadella's hands.

But divisions remain. Some in the Windows camp want to make sure Office remains primarily a Windows experience, which should help sales of the Surface. Others in the Office camp, however, want to reach customers on as many platforms as possible.

"We will bring these apps to Windows devices and also other devices like the iPad in ways that meet our customers' needs and in ways that make sense economically for Microsoft," the company said in a recent statement.

Clock ticking
According to research firm Ovum, 57 percent of all employees use a personal smartphone or tablet to access corporate data, while 70 percent of tablet owners use their personal tablets at work at some point.

Companies are increasingly allowing employees to work on their personal devices - a trend the IT industry has dubbed "bring your own device" or BYOD.

That is the true danger for Microsoft, said Adam Tratt, a former Office executive who is now chief executive of Seattle-based Haiku Deck, an iPad-based presentation app.

"Microsoft rose to dominance in an age when the CIO (chief information officer) really held the keys to IT decision making," said Tratt. "Over the past five years, BYOD has really eroded the level of control that many CIOs have."

Although they are not as fully fleshed out as Office, younger challengers have been built from the ground up in an era defined by mobile devices and cloud computing.

Text files in Quip, for instance, are not formatted in virtual 8.5- by 11-inch pieces of paper - instead, they automatically zoom to fit any tablet screen. Revisions in a file can be made and viewed, in real time, by collaborators without sending email attachments back and forth.

"We don't have Word's 30 years of features built into it," said Bret Taylor, Quip's co-founder. "But we're much better at collaboration and much better at mobile."

© Thomson Reuters 2014