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17 MS Office Killers

Upstarts are taking on the A-Team of the desktop software world: Microsoft Office. Do they have a chance?
August 14, 2006 Print Issue

This is as close to a soap opera as the tech world gets.

An unknown company sets out to take on the largest software maker in the world. It raises millions in funding and creates a product—only to see its potential market vanish in the tech crash. Forced to sell itself to survive, it perseveres long enough to make a comeback six years later to rapturous users.

Silicon Valley dot-com survivor ThinkFree is living this story. ThinkFree started in 1999 with $24 million and the idea of offering a web-based word processor, spreadsheet, and presentation product.

Together they would act as an online alternative to market leader Microsoft’s Office suite of products that rolls together Word, Excel, and PowerPoint, a bundle only available in boxes to be physically installed by users.

But after the dot-com bust, with revenues evaporating, ThinkFree sold itself to Haansoft, a publicly held South Korean company. It moved most of its engineering staff to South Korea and continued to work on the online Office look-alikes.

Last April, the company finally relaunched its products and on one busy day, more than 10,000 users signed up. “Our engineers stayed up all night trying to keep the machines going,” recalls ThinkFree CEO T.J. Kang. “I guess this means we can keep doing this in the future.”

Not Alone

Today, of course, ThinkFree isn’t alone in taking on Microsoft. Companies like JotSpot, AdventNet, Silveroffice, and 37 Signals are joining the bid to present users with an alternative to Microsoft Office, one of the most successful consumer software products in history.

In March, Microsoft’s online nemesis Google acquired an online word processing startup, Writely. Soon after that, it introduced its own version of an online spreadsheet. “Earlier we were a lone voice in the wilderness, but Google’s acquisition of Writely had validated the business,” said Mr. Kang.

Since then, a host of products has emerged from the woodwork. To compete against Word, there are now online word processors like ThinkFree, JotSpot’s Wiki, Zoho Writer, Rallypoint, and WriteBoard that require no downloads and charge no fees for individual users.

Excel has online competitors in the form of JotSpot Tracker and NumSum, among others, while the Office suite is being attacked by gOFFICE and Zoho Virtual Office.

These challengers could be on to something, said Joe Wilcox, an analyst with JupiterResearch.

“Look at the way people work today,” he said. “There’s a need to access stuff from anytime, anyplace, and anywhere, but Microsoft has kept the Office software as is. They are thinking, ‘when you’ve got a good thing going, why mess with it?’”

But feasting off Office can’t go on forever. Software is moving online and on-demand. Companies like Salesforce.com and Google have accelerated the shift from physical media to software as a service.

Aware of the Trend

Microsoft isn’t oblivious to the trend. Last October, Microsoft Chairman Bill Gates circulated a long memo from Ray Ozzie, the company’s chief software architect and the man widely seen as a possible successor to Mr. Gates, acknowledging the shift toward services.

Microsoft, said Mr. Ozzie, plans to address the market through its Windows Live services that will offer software as a service to users.

Still, there was no mention of an online strategy for Microsoft Office, one of the company’s most profitable products. Also known as the “productivity suite,” Office contributed $11 billion in revenue in 2005. It accounts for 30 percent of Microsoft revenues—and about 60 percent of profits.

It is also the Redmond giant’s soft underbelly.

“The cash that Office generates for Microsoft is both a blessing and curse,” said Roger Lee, general partner at venture capital firm Battery Ventures. “Office has incredible market share but that also means Microsoft does not have as much flexibility in changing the business model or pricing structure for the product.”

Having a clean software slate that takes advantage of new web technologies could be the way to go, he added.

Customers may be ready for the shift. Six percent of businesses with 100 or more employees are ready to use a web productivity suite, said a 2006 JupiterResearch survey of 207 businesses.

“It may seem small, but considering how big this market is, it is a number with a potentially huge impact,” said Mr. Wilcox. Nine percent of respondents said they would add new users to their existing web-based productivity suite over the next 12 months.

Changing the Rules of the Game

Microsoft’s dominance of the productivity suite market exists because it defined it. Toward the end of 1989, when it was transitioning from MS-DOS to Windows, Microsoft introduced Office, bundling word processing, spreadsheet, and other applications it thought essential to a business or home user.

Office turned out to be the killer weapon in the company’s arsenal and it would soon trounce market leaders like WordPerfect and Lotus 1-2-3.

But over the years stuff happened. Companies changed the way they worked. The Internet, intranets, and email transformed workflows. Globalization and outsourcing dispersed people to satellite offices and partner companies. Collaboration tools became critical.

Office wasn’t made for this. Documents and spreadsheets had to be mailed back and forth, and group editing was impossible.

“A lot of businesses are facing this fundamental problem,” observed Joe Kraus, founder and chief executive of JotSpot. “Collaboration over email is untenable, and the sheer volume of information that the average person receives on email every day doesn’t make it a viable tool as a shared repository of information.”

Beating dominant Microsoft, though, would be impossible unless the rules of the game changed—which is exactly what startups like JotSpot and 37 Signals are trying to do. The traditional Office suite is an old idea, said Jason Fried, chief executive of Chicago-based 37 Signals.

“That’s 15-year-old thinking,” he said. “The modern office is more about real-time collaboration and group chat, and not just a spreadsheet and processor.”

To that end, 37 Signals created an online word processor called WriteBoard to offer—along with project management software called Basecamp—a group chat product called Campfire, as well as shareable to-do lists called Ta-da Lists. WriteBoard, said Mr. Fried, is a simple online word processor.

‘Complete Overkill’

“Microsoft Word seems like complete overkill for sharing text here and there,” he said. “You don’t need tables or formatting all the time. You need a place to write text, make changes, and pass around.” So far, 350,000 WriteBoards or web-based documents have been created.

Mr. Kraus is following the same strategy over at JotSpot. Wikis, so far, have been thought of as web pages that allow for both reading and writing. Mr. Kraus wants to extend that idea into Microsoft territory.

“Why can’t you have a wiki page that is a spreadsheet or a calendar, or a document?” he asked. JotSpot has signed up 2,000 companies to date, which translates into 30,000 paying subscribers of its products—and 10 times that number of free customers.

Another online Office look-alike, Zoho, which offers both the individual applications and a suite, has 50,000 signed users. Zoho has been on the market for barely six months. Its parent company, AdventNet, has been around since 1996, supplying optical networking equipment.

When the telecom crash came four years ago, AdventNet engineers found themselves with a lot more time on their hands, and they started to work on the online Office product that eventually became Zoho. The name is a twist on Soho, the acronym for the Small Office Home Office.

For the last few months, AdventNet CEO and founder Sridhar Vembu said he has been fielding calls from three or four VCs a week.

“They have suggested that Zoho be spun off into a separate company,” he explained. “But we don’t need the money and, though the domains seem different, there’s a lot of cross-pollination between our different company divisions.”

Currently profitable, AdventNet has never taken a dollar from venture firms, Mr. Vembu said.

VCs say it is an irresistible segment. “There’s a big market, and there has been real demonstrated traction in other areas of the technology stack where Linux and MySQL have been able to dislodge the incumbent and get market share,” said Mr. Lee.

Battery Ventures, in fact, has yet to sink any cash into the market itself but said it is open to the idea. But Mayfield and RedPoint Ventures have poured $5.2 million into JotSpot. Mr. Fried of 37 Signals said 30 VC funds have tried to woo him so far.

He held out until July 20, finally giving in to Bezos Expeditions, a personal investment company of Amazon.com founder Jeff Bezos, which took a minority stake in the startup. What 37 Signals was really looking for, Mr. Fried says, was a mentor, and Mr. Bezos fit the bill.

Dancing Around Microsoft

Even with influential mentors, these startups have to tread with caution. The Office suite has a strong user base of more than 400 million and Microsoft can be dangerous when provoked. After all, its position in the productivity suite business has been hard-earned.

Microsoft Word trounced WordStar, then the market leader, to reach its current position. Later this year, the company will debut a new version of Office, Office 12, which will offer increased collaborative functions.

“Microsoft Office is the clear leader in what has always been a very competitive space,” said Microsoft spokesperson Alison Dwiggins. “The fact is, Microsoft Office 2003 continues to be several versions ahead of competitor functionality, and the 2007 Microsoft Office System will extend the lead even further.”

Startups say they understand that, but they also have a lot of extras to wean users off Microsoft products. JotSpot’s Tracker, for instance, is as easy and as familiar as Excel but also offers collaboration at the cell level.

Every individual cell in the Tracker can be changed by a group. Even attachments can be added. “You can’t just offer what Excel offers and put it online and expect a large audience to migrate to it,” said Mr. Kraus.

JotSpot now offers a consolidated view of all of its products, much as Office does, bringing together spreadsheets, calendars, wikis, and photo galleries. Still, Mr. Kraus falls short of calling it an alternative to Microsoft.

“We haven’t said we are trying to build an Office competitor online,” he said. “A direct frontal assault makes you very vulnerable.”

In a similar vein, 37 Signals positions its product as complementary to Microsoft’s. WriteBoard has its shortcomings, Mr. Fried is not above admitting.

“It is not for writing your 300-page functional specification document or long manuscript,” he said.

WriteBoard also lacks familiar formatting functions like font, paragraphs, or text point size. Users can take the text and then move it into a Word document or a PDF file, or publish it as HTML.

‘Bloating Their Products’

WriteBoard can seem almost bare-bones in its features, but Mr. Fried is betting on simplicity. “The problem with the traditional software industry is that they have to bloat their products,” he said. “They have to add more and more so they can get more money out of their users next year, but we don’t want to follow that model.”

Meanwhile, Kevin Warnock, founder of three-year-old bootstrapped startup Silveroffice, which makes the gOFFICE suite, said he’s looking at the international market. Already more than half of gOFFICE’s 47,000 users come from outside the United States. gOFFICE also positions itself as complementary to Microsoft Office.

“There’s a definite place for both,” said Mr. Warnock. “People use Outlook for their email, but they also have a web-based email service. We see the same thing happening in this segment.”

The new entrants may not agree on the depth of features that their products should offer, but they all agree that Microsoft will be around for a long time.

It’s hardly going to be an all-or-nothing proposition, anyway. Before instant messaging, people used to use email for the same purpose. Yet when people embraced IM, it hardly killed email, as Mr. Kraus points out. “People won’t stop using Word because they get a wiki,” he said.

Not until wiki becomes the next Word.

Contact the writer: PGanapati@RedHerring.com