When Microsoft bought Yammer for $1.2 billion last July, plenty of people in Silicon Valley’s chattering class scoffed that the deal was a costly disaster in the making. Microsoft (MSFT), that old-style box-software company, planned to join forces with a hip “social” business software maker that delivers its product as an ever-evolving Web service. The ensuing culture clash was expected to result in Yammer’s employees—overburdened with bureaucracy—fleeing in droves. “We were quite concerned about this coming together of two worlds,” says Adam Pisoni, Yammer’s co-founder and chief technology officer.
As the companies worked to close the deal, Pisoni flew up to Microsoft’s headquarters in Redmond, Wash., to seek reassurance from Chief Executive Officer Steve Ballmer and Kurt DelBene, the head of the Office business. Pisoni was taken aback by what he found: Microsoft had spent the last couple of years revamping its engineering teams’ processes to be more like fleet Web startups. “We have to remember our roots and go back to building what’s good for the consumer,” Ballmer told Pisoni.
On Tuesday, Jan. 29, Microsoft began trying to sell this turned-on image of the company to the public with the release of Office 2013. The new version, the first major overhaul of the franchise in three years, is Office for the cloud. The applications—Word, Excel, PowerPoint, Outlook, and others—have a much cleaner design and can save files directly to SkyDrive, Microsoft’s online storage service. Users can run Office as an app and share these files across PCs, Macs, Windows tablets, and Windows phones, and can tap into an online-only version of Office on just about any device. The company will add new features to Office 2013 as it develops them, instead of waiting years for the next iteration of the software.
While Microsoft was working to get Office right, its nimbler rivals have been charging forward. Dropbox recently passed the 100-million-user mark, making it one of the leading services for storing and sharing files across computing devices. Box has become a power among corporations trying to store and edit internal files and to share documents with other companies. And Google (GOOG) continues to push its low-cost rivals to Office products, including Quickoffice, an application it acquired last year that runs on iPads.
“The whole business is changing from packaged software,” says Wes Miller, an analyst with Directions on Microsoft. “Office is definitely not a business they can afford to lose.” Last year, Microsoft’s business software division generated $24 billion, or about one-third of Microsoft’s $73.7 billion in revenue. It’s the company’s biggest, most profitable division and accounts for a handful of Microsoft’s fastest-growing products.
Microsoft says its goal is to get consumers to “subscribe” to versions of the software such as Office 365 Home Premium. It’s a $100-per-year package that lets a family run Office 2013 on up to five computing devices, including Macs. The bundle also includes 20 gigabytes of extra storage space on SkyDrive and 60 minutes of free calls on Skype, which Microsoft acquired in 2011.
The company’s plan is to update Office every three months with new features meant to keep the the product’s 1 billion users happy. Microsoft’s software engineers have moved from upgrading their test version of Office every month to working on a new copy of the software every day that reflects immediate changes. The company has invested a lot of money in automated systems that can spot errors in code and help engineers keep programming at pace. “It’s turned all our engineering systems on their head,” says Jeff Teper, a company vice president.
Microsoft has also borrowed some data-analytics techniques from Yammer, using algorithms to see which features the testers of early versions of Office 2013 seem to like. Yammer has been sending teams of engineers to Microsoft to give one-week crash courses on how they show users a new design look or tool and then measure precisely how it changes their behavior. “It forces you to build software that is good for the user,” says Yammer’s Pisoni.
In the coming months, Yammer plans to tie Office into its service, a private social network for a company’s employees, so users can open documents, presentations, and the like and work on projects together. Pisoni says Yammer has tapped into Microsoft’s expertise at running huge, secure data centers as the company tries to build out its service to handle many millions of additional users.
In Microsoft’s ideal world, every Office 2013 user would be like Mike Kaminsky, a 32-year-old band manager from Los Angeles. He’s been testing the software for months and even has a Windows smartphone. On a recent trip to Asia, he kept a complex itinerary saved as a Word document in SkyDrive and gave his assistants access to the file so they could update it. “I was in strange countries with a client but knew I always had the most up-to-date information of where we were supposed to be,” he says. “It usually takes Microsoft two or three versions to get something right, and I feel like they are starting to nail this.”
Aaron Levie, CEO of Box, counts Microsoft as both a competitor and a partner, with Box’s app running on the new Windows 8 operating system. He gives Microsoft credit for updating something as massive and critical to businesses as Office, even if it took the company a long time to do so. “They simply have a longer list of stuff they have to build and more dimensions to the problem,” he says.
Levie says that in the future, Microsoft will have to compete much harder to hold onto its business. The company can longer use Windows as the leverage point it used to rely on because of Apple (AAPL) and Google’s strength with mobile devices. Microsoft is facing off against clever, low-cost rivals in many areas of business software. “Customers are just going to use a more diverse set of products,” he says.
Microsoft still lacks an Office application for iPad and Android devices, although there are rumors that one is in the works. And SkyDrive, an important cloud feature, is not a well-recognized brand. Analysts expect that the company will be able to use its might to overcome these deficiencies a while longer. “Office does a really good job, and it’s kind of like the U.S. dollar,” says analyst Miller. “I don’t think anybody is successfully poking at it.” That said, Microsoft will have to live up to the culture change it’s been touting if Office, Yammer, and other properties are to keep its coffers full in the years to come.
