New Microsoft President Elop Confronts The Services EraNew Microsoft President Elop Confronts The Services Era

There's also that little fact that Google and the rest of the online productivity vendors haven't really made any headway as far as big customers go. "For all of the press that these companies are given, saying Google's got that, go find me a company who's adopted Google Apps," he said. "It doesn't exist."

That might be a bit of hyperbole, but he has a point. Microsoft's business division makes 90% of more than $15 billion annually off of Office, while information has struggled in the past to find any examples of major companies or organizations embracing Google Apps whole hog at the expense of Office. Still, Elop said, Google will eventually get those first big reference customers, and it's for that reason that Microsoft can't let its guard down.

It's not that Elop sounds particularly afraid that moving to services will automatically cannibalize the client software business. He said that while Microsoft may have struggled with an innovator's dilemma a few years ago, it doesn't now. "What the company's essentially doing is testing and trying and figuring out what makes sense to our customers," he said. "As that comes into focus, we're in a position where we can make the decision that you know what, we're going to break the innovator's dilemma, we have to move forward." The implied conclusion is that by balancing software and services, cannibalization only occurs on the periphery, and Microsoft can somewhat dictate its pace.

While Microsoft bides its time and decides its direction, Elop said, he's watching the Web-based productivity market and would-be competitors like a hawk, experimenting with their products and asking Microsoft's own customers what they're looking for. "It's a new market, so you have to have a high degree of humility and say just because we've done something well before or just because they've done something well, doesn't mean either one of us is going to figure it all out," he said.

One thing Microsoft could learn from its online competitors and apply to its own services is the model of constantly adding new features to keep consumers wanting more. While software like Word and PowerPoint will stay on a multi-year release schedule for now, other services like Office Live Workspaces will add new features periodically.

With Microsoft's love of integration among its products, however, that strategy could pose challenges. "You might have the Office productivity apps on a two to three year wavelength and other things on a ninety day wavelength, and yet, for us, we still need to bring those things together," he said.

The big growth opportunities for Microsoft's business division at this point aren't just services, and are likely the technologies outside of the traditional core of Office as well as new markets: unified communications, SharePoint, and products aimed at underserved consumers and employees. "It's not just about the spreadsheet or the word processor or PowerPoint, it's also about how you can you share, how can you build an environment where all these things come together, or how that experience is extended in different directions," he said, echoing Microsoft's long commitment to integrated products.

Elop called Office a "healthy, growing franchise." However, it's unclear how much of that is due to products like SharePoint in business versus the traditional Office suite with both consumers and businesses. The business division lost $136 million in consumer revenue last quarter, excepting $500 million in deferred revenue that was recognized last year, and that's with increased revenue due to exchange rates. Considering more than 90% of Microsoft's revenue in the business division comes from the Office suite, and most of the other products products beyond the core productivity suite are business-focused, most of that drop in consumer revenue likely came from the likes of PowerPoint, Excel, and Word.

However, according to Elop, Microsoft will keep focusing on ways to execute against leading edge productivity scenarios, rather than slashing prices to near nothing, which is far beyond what the company did when it recently created the $70-a-year Equipt suite of Office, security and some free services. Google Apps costs $50 annually for a supported version, but is free for the ad-supported consumer version. "The things that are cheap and free are appropriately cheap and free," he said. "Good news, headlines, press release, we now have bolding and underlining. Great, cheap and free." The software plus services strategy, if executed well, could be one way to regain that luster.