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What Free Burgers Have in Common With Google Apps

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Consumers are now conditioned to expect free stuff; what would happen to one fast-food chain if another handed out free food?

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"...when it comes to the cloud, we are all in. We are all in across every product line we have and across every dimension of the cloud."
-- Steve Ballmer on cloud computing, March 2010

Cloud computing is the best thing that has ever happened to software buyers, and the worst thing that ever happened to traditional software companies.

This morning, we learned the details of the City of Los Angeles' decision to deploy Google's (GOOG) cloud-based Apps, notably Gmail and Google Docs, over Microsoft's (MSFT) equivalent traditional software solutions.

The rationale for LA's switch was simple: Google offered far cheaper deployment and maintenance costs and built-in backup via Google's redundant servers. It's tough times for local governments, and that means saving money anywhere they can.

What Is Cloud Computing?


Cloud computing applications run through web browsers that access far-flung servers managed by companies like Google and Saleforce.com (CRM). Everything happens and is stored on their server computers -- you're just providing the input from your end. The benefits of cloud apps include low or even no -cost (at least for consumers), seamless upgrades, ease of use, and accessibility from any web browser.

And oh yeah, Google's server network is a heck of a lot more reliable than your computer's hard drive ever will be.

The single best thing I've ever done for my productivity and sanity, besides switching to Apple (AAPL), has been to dump Microsoft Office for Google Docs. I saved a couple hundred bucks, I no longer have to dig around my hard drive to find files, and I doubt I'll ever spill hot coffee on one of Google's servers.

How Do You Compete With Free and Awesome?

The cloud revolution is among the biggest to ever hit the software business. Now consumers get great stuff for free and it's cheap and easy for businesses to deploy enterprise-quality applications. That makes it a lot harder for companies like Microsoft to demonstrate bang-for-the-buck in their own solutions.

Microsoft wants in on cloud computing now (see Google, Microsoft Head for Cloud Cover), but only because it has no choice. Otherwise, it wouldn't be so late to a party that so obviously started years ago.

In its ideal world, the cloud doesn't exist. The emergence of the cloud is forcing Microsoft to compete with software products that are free and awesome. That is the very definition of a bad market because consumers are now conditioned to expect free stuff. Digital music download sales are lousy (I'm just not impressed with 9% growth) because people got so used to getting music for free. Why would they pay up now? For jpegs with album artwork? Come on.

What would happen to McDonald's (MCD) if Burger King (BKC) started handing out free burgers?

And on the enterprise side, Microsoft now has to deal with competitors offering solutions that are a fraction of the cost, easier to deploy, and yes, awesome. Just look at some of the big companies that have switched to Google Apps: Genentech (DNA), Motorola (MOT), Capgemini, and the original enterprise cloud company, Salesforce.com itself. The city of Los Angeles was not the first, and they won't be the last to switch.

This growing list is a great example of social proof -- now it becomes okay for a large corporation to go with Google because other big companies went ahead first.

I don't care how cloudy Microsoft gets -- Google is taking market share while forcing prices DOWN.

What's Different This Time

This isn't the first time Microsoft's Office cash cow has been under attack from a far less expensive competitor. OpenOffice, a free (or low-cost, depending on the version) Oracle (ORCL)-sponsored Office clone, gained some buzz a few years back after being deployed by some government agencies and companies.

It never caught fire, because it didn't have a single Internet-focused brand like Google behind it, and because you couldn't point to both cost and productivity benefits from day one.

The Conclusion?

The cloud is bad for Microsoft. Sell the stock.
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No positions in stocks mentioned.
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