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Why Microsoft Corporation (MSFT) Cannot Compete With Google Inc (GOOG) on Price

Yes, it is not considered sexy technology. But anyone who invests knows that enterprise technology brings in revenue and thus, profits. Microsoft Corporation (NASDAQ:MSFT) has been the king of enterprise computing for a long period of time. In 1986, the company released Microsoft Works, the precursor to Microsoft Office that originally was for Apple Inc. (NASDAQ:AAPL)‘s Macintosh.

It didn’t take long for Microsoft Corporation (NASDAQ:MSFT) to realize that the enterprise through productivity suites on up to complex server environments would make the company a ton of cash. But, as Microsoft built this empire, the industry inevitably changed. Now, Google Inc (NASDAQ:GOOG) is making big bets, and enterprise is one area it has entrenched itself. The problem is that Microsoft is going to struggle to compete.

Understanding Google Enterprise

Google Inc (NASDAQ:GOOG)’s Enterprise division consists of a number of offerings that help businesses operate. The flagship that is most commonly known is Google Apps, which is an enterprise-grade version of Gmail, Calendar, and Google Drive. It is sold to businesses for $50 per user per year.

Microsoft Corporation (MSFT)For educational institutions and nonprofits, there is no fee. This is an important distinction. Organizations that are not profit-driven can switch from Microsoft Corporation (NASDAQ:MSFT)’s pricey Exchange email solution to Gmail and pay no per user fees. The value proposition is simple for these organizations, and at $50 per user per year for enterprise customers, it’s much cheaper than Microsoft charging customers tens of thousands for their server-based email solution.

Google Inc (NASDAQ:GOOG) also has a growing maps and search business that is complementary to the Google Apps suite. And although the company does not break out specific revenue numbers, the company did report in 2012 that it made $2.3 billion in “other revenues.” That is revenue outside of advertising and hardware, which is being counted under the company’s Motorola Mobility unit. That $2.3 billion in 2012 is a 71% increase in “other revenues” from 2011’s $1.3 billion.

Apple has cache, but no enterprise cloud

Apple Inc. (NASDAQ:AAPL) has beefed up the amount of enterprise sales that it does, offering really great bulk deals to businesses on computer hardware and mobile devices. The problem with Apple’s computers, however, is that they don’t fit well in the enterprise; IT departments continuously struggle to deal with them.

Selling to the enterprise has its caveats. While it gets Apple Inc. (NASDAQ:AAPL) gear into workers’ hands, it affects overall margin. Apple does pretty well on this front, as it reported a stellar 43.9% gross margin for 2012. That’s better than the 40.5% that it reported for 2011. But, the company expects margins to go down in 2013, with expectations of a sub-40% figure.

Even though Apple Inc. (NASDAQ:AAPL) reported selling between 3 million and 4 million iPhones to the enterprise in the fourth quarter of last year, its margins were still up. That’s good, but just selling iPhones to businesses will have diminishing returns. The company’s software, service, and other sales figures were a paltry $3.4 billion. If Apple wanted to make money from enterprises, this is where that number would be. And it’s not much bigger than that of Google Inc (NASDAQ:GOOG)’s figures.

Microsoft’s conundrum

Microsoft Corporation (NASDAQ:MSFT) is not doing well selling cloud services, which is the business model Google Inc (NASDAQ:GOOG) is attacking it with. In fact, only 22,000 of Microsoft’s 650,000 worldwide enterprise partners are selling the company’s competing enterprise product called Office 365.

Microsoft Corporation (NASDAQ:MSFT) recently admitted to some partners at the company’s Worldwide Partner Conference that it would not be able to compete with Google Inc (NASDAQ:GOOG) on price. The company is reorganizing itself in order to more holistically sell products and services. That makes sense, because in the past, the enterprise business was done through two different divisions: Servers and Tools and the Microsoft Business Division.

Server and Tools has seen some good growth numbers. From 2010 to 2011, the division saw 17% growth, and from 2011 to 2012, an 18% increase. But, one has to question whether that could continue as companies focus more on the cloud, where the concept of servers is completely foreign. And while Microsoft Corporation (NASDAQ:MSFT)’s Business Division, which sells software licensing to companies, saw a great 24% increase in revenue two years ago, the growth slowed to 7% last year to a total of $15 billion in profit on $23 billion in revenue.

Conclusion

Google Inc (NASDAQ:GOOG) is not going to back away from the enterprise soon. In fact, on its most recent earnings call, it specified that investment in the company’s enterprise products was going to increase. Analysts believe that Google is now making $200 million in revenue per quarter on Google Apps and the Google Cloud Platform, which allows companies to build custom solutions on Google’s Platform. This is a 195% jump year over year.

While Apple Inc. (NASDAQ:AAPL) sells hardware to companies, those devices in turn help Google Inc (NASDAQ:GOOG) because as a replacement for BlackBerry Ltd (NASDAQ:BBRY), an iPhone can connect right into Google Apps’ email and other productivity apps in a snap.

Over 50% of the Fortune 500 is now using some sort of Google Inc (NASDAQ:GOOG) enterprise product. Microsoft Corporation (NASDAQ:MSFT) needs to make a move in this space to stay relevant and to maintain its $42 billion in revenue from the Servers and Tools and Business Division revenue. That makes up 57% of its total annual take. The question is: how is it going to do that?

Daniel Cawrey has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.

The article Why Microsoft Cannot Compete With Google on Price originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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