Microsoft fail: Motorola tosses Outlook for Google Apps, City of LA next

News broke yesterday, via Business Insider, that telecom equipment and handset maker Motorola (MOT) would adopt Google (GOOG) Apps in its mobile devices division and ditch a key piece of Microsoft's (MSFT) Offiice suite. That's thousands of corporate users who will no longer be using Microsoft's Outlook backed by the company's highly profitable Exchange email server. And that's a really big IT department no longer paying for what is likely one of Microsoft's most lucrative software products.

It also looks like the City of Los Angeles rolled to Google Apps.

Perhaps this is why Microsoft shares have lagged their technology peers by so much over the past five years -- the creeping erosion of mindshare for Office.

There is a sea change underway and the rationale is very clear: Running apps over the web means no more software upgrades, more flexibility, less support time as well as less need for fast hardware and big backup systems. Plus, it costs a whole lot less, if Google App's case study acolytes are to be believed.

There are very obvious reasons why Office is now so vulnerable. For starters, the pace of adoption and acceptance of software delivered over the Internet has sped up. At first it was primarily large enterprise software companies like Oracle (ORCL) and (CRM) delivering software functions via broadband connections.

Another reason is that people have grown accustomed to nearly unlimited storage capacity in their consumer Web-based mail accounts. So naturally they expect the same from their corporate email. Google's attitudinal injection of "never delete another email" has infected virtually everyone who checks email on Hotmail, Gmail, or Yahoo! (YHOO). Then there is frustration IT departments feel with having to update software on their users computers, something that seems positively archaic to anyone accustomed to Web-based apps.

Finally, there's the price. Google estimates that companies running its messaging apps pay one-tenth as much in software licenses, hardware, and labor than a company running Microsoft Exchange. Redmond would surely dispute this, but they seem to be voting with their feet by offering many of the same online messaging capabilities as Google in their OfficeLive product.

Now, there are a half-dozen strong pretenders to the Office crown, ranging from scrappy to Adobe's (ADBE) own productivity suite, to Google Apps. In fact, it really is starting to look like core productivity suites will be something of a commodity in the near future -- a business so competitive that the premium high-double-digit operating margins squeezed out by Mister Softee will become a thing of the past. Mister Market has known this for quite some time and has watched nervously as Microsoft has managed to continue pulling in cash even as the tech cred shifted away from desktop apps and towards the computing cloud.

Microsoft's stock has even managed a mini-rally of late, raising itself up from the $16 range earlier this year to $23 as of this week. Of course, anyone who has held Microsoft over the past seven years has not done nearly as well as a holder of Apple (AAPL), Research in Motion (RIMM), or Google, among others.

And Microsoft will not go gently. Under the fierce leadership of software chief Ray Ozzie, Microsoft is rapidly rolling out Internet delivery of all of its productivity apps.

But making a wholesale transition will be very difficult for the same reason that newspapers have struggled to transition from richly-paid print ads to less lucrative Internet ads. Replacing a fat margin business with a thin margin business is nearly impossible without completely replacing the company salesforce and reorienting the compensation structure and business hierarchy.

Does Microsoft have some good technology? Indeed it does. Case in point: .Net is a rock solid framework for building Web applications. Windows 7 is getting good reviews and will likely remain a central player in the PC operating systems space. XP for servers is more than holding its own.

But without the fat cash cow that is Office, it's hard to see Microsoft retaining its dreadnought status among tech companies.

Update: Original post stated that Motorola had stopped using all Microsoft Office products. Motorola continues to use Microsoft Office products and is a "valued partner", according to Motorola. The Mobile Devices division is one portion of the company. The original post implied the entire company was switching to Google Apps for communications. It should be noted that Motorola is a strong supporter of Android, Google's mobile operating system and so the switch by the Mobile Devices Division to Google Apps aligns with the unit's interests to support Google as a communications platform.

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