Google: Changing the Pricing and Provisioning Paradigm?

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1 Research Publication Date: 6 March 2007 ID Number: G Google: Changing the Pricing and Provisioning Paradigm? Matthew W. Cain This document analyzes Google s initial foray into the paid enterprise application space. While it will have little immediate impact for most organizations, the move underscores significant changes occurring in the way enterprises buy and run crucial end user productivity tools such as . Key Findings The low price point and ease of provisioning of Google services will push enterprises to consider segmenting users into premium (Exchange and Office, for example) and standard (Google, for example) application bundles as part of an effort to reduce costs. The low price point and ease of provisioning will also enable organizations to contemplate supplying (and other applications) to users lacking that capability, thereby creating business efficiencies and knowledge transfer. Google represents the most significant threat ever to Microsoft hegemony in the and personal productivity application space, which we believe is causing the Redmond giant to alter its current provisioning (on premises versus software as a service [SaaS]) and pricing models. The Google effort comes at a time when end users are increasingly aggressive in using non-it sanctioned services both hardware and software forcing organizations to reconsider the role users will play in selecting and consuming technology services. Recommendations Organizations should evaluate the costs of and personal productivity applications and determine the minimum feature set and service-level agreements needed for different classes of users. Those identified needs should then be compared to SaaS provisioned workplace technologies. Enterprises should examine opportunities for segmenting users by application needs and consider the benefits of providing software to those employees currently outside the realm of IT services. IT groups should identify savvy users with a penchant for new technology to trial and report on Google enterprise services. Likewise, pilot programs should be run for employees without software services today and/or for classes of users where the Google applications are likely to meet immediate needs. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

2 Enterprises must initiate dialogue with legal, security, risk management and human resource groups to determine and address objections to the Google-type model and establish policy around use of these services. Publication Date: 6 March 2007/ID Number: G Page 2 of 7

3 WHAT YOU NEED TO KNOW Given the brand awareness, pricing and ease of acquisition of the Google applications, the appeal to business users will be significant. Therefore, organizations must establish guidelines to determine the applicability and acceptability of Google and similar services. EVENT On 22 February 2007, Google introduced a package of collaboration tools ( , instant messaging and calendar) and personal productivity applications (spreadsheet, word processor and page creator), aimed at enterprise users. Pricing for Google Apps Premier Edition is $50/user/year, which includes 10 GB of storage (across all applications), a 99.9% uptime servicelevel agreement (not including planned downtime), an administrative API interface, and 24/7 phone support for named support staff (one hour response time on the most severe issues). Advertising is off by default. The tools can be custom branded for the organization, including the domain. Access is via an Ajax client with no downloads and data transmission is encrypted with HTTPS. A SAML 2.0 authentication API is available for single sign-on options with enterprise systems and APIs available for directory integration. Message migration from current systems can be done via a Post Office Protocol (POP) interface, which can be used as an alternative client access protocol. Enterprises will be able to rout all mail through on-premises (or other) mail relays for archive, compliance and other filtering needs. Mobile support is provided by browser access and native BlackBerry support. All data is stored in multiple places for redundancy and data centers are mirrored for high availability and disaster recovery. Google is also offering a free advertising-supported 2 GB version of the suite called Google Apps, Standard Edition, with only support and no uptime guarantees. A version is also available for the ".edu" market. Analysis The immediate allure of the fee-based Google applications is the component. At the spreadsheet and word processing level it is unlikely that organizations will replace MS Office applications in the near future for feature, familiarity and compatibility reasons. We do expect to see the lightweight spreadsheet and word processor applications which have some innovative collaboration capabilities such as simultaneous editing used by rogue groups of end users without the consent of the IT group, exploiting the free version for short-term use on ad hoc projects. These users will promote this class of applications virally to users in their department, enterprise, "ecosystem" and industry. Users of increasingly higher rank within the organization will question IT groups about cost chargebacks for Office (and ) services as the Google services grow in sophistication. Autonomous business units circa 2010 will elect to opt out of IT-provided personal productivity services in favor of Google (and other) SaaS services. However, official adoption of the Google spreadsheet, word processor and (eventually) presentation-creation applications as a replacement for Office within corporations of more than 1,000 employees will be slow. By contrast, we believe adoption of enterprise Gmail in corporations with more than 1,000 employees will be quicker, reaching 3% by YE10 and 6% by YE12 (0.7 probablility). In small and midsize companies (SMBs), and the ".edu" and ".org" sectors, those numbers are likely to be 4% and 8% respectively (0.7 probablility). Among other factors driving Google adoption will be unhappiness with Microsoft terms, conditions and complexity, and a desire to break away from what is perceived to be a Microsoft stranglehold on workgroup system software and applications. However, that said, the most likely candidates for enterprise Gmail services are users new to business and those coming from Novell and Publication Date: 6 March 2007/ID Number: G Page 3 of 7

4 IBM where the desire to migrate from current systems is strongest. We also expect organizations contemplating upgrades to the new Exchange 2007 mail server to consider Google as an alternative. The reason for the anticipated, swifter uptake of Google enterprise services compared to the other applications is that the value proposition is more immediate. Organizations often view e- mail as a commodity service and have been open at management level at least to moving to a hosted model, but the economics have never made sense. Google has proven that economies of scale do exist by running services for millions of consumers, and is likely to succeed in bringing those economies to business users. Google was a latecomer to the consumer market (April 2004), but has moved quickly to catch up. We estimate that Gmail has tens of millions of users, as opposed to MSN, Yahoo and AOL, which have hundreds of millions of mail users. Google has led the market with numerous innovations such as a feature-rich Ajax client, conversation threading, message tagging (as opposed to "foldering") and large volumes of storage. Gmail, therefore, breathed new life into a staid market, forcing MSN, Yahoo and AOL to update clients, add storage, and generally update their free mail businesses. Google is now turning its attention to the enterprise market, where, with its search appliance, it has already been extremely successful. There are many attractions to the enterprise Gmail (and SaaS in general) model. All system maintenance is done in the background an almost imponderable relief to enterprise technicians who spend enormous amounts of time testing and installing fixes, patches and service packs. Immediate feature upgrades will be appealing to users who see feature upgrades every few years via service packs or version upgrades. Version upgrades themselves present an enormous challenge for enterprises, due to the vast effort and cost associated with a large-scale upgrade. This is a scenario staring every Exchange shop in the face with the introduction of Exchange 2007, which requires new server hardware and operating system and directory upgrades. We believe that ultimately the hosted model will prove more efficient than an onpremises deployment. However, numerous barriers need to be overcome prior to that happening. The barriers to adoption for enterprise Gmail services include the following: Usability. The browser Gmail interface, thought of as innovative when first introduced, is now seen as outdated and cumbersome to use. Outlook style interfaces have clearly won the day, putting pressure on Google to respond. Application Integration. Enterprise applications increasingly use services for notification and transport purposes. Google has to respond to requests to meet enterprise integration requirements. Directory and Identity Integration. While Google offers APIs for integration, the coding process and steady-state operations are likely to be cumbersome and brittle due to the custom nature of the work. Google needs to offer a higher-level, packaged integration story. It has established some third-party partnerships to deliver integration services. Offline Use. Offline use is limited to what the POP can download to a local client; it does not include provisions for offline calendar or contacts use. Compliance and Control. Organizations are increasingly burdened with internal and external compliance requirements for message preservation, encryption and supervision. Message purging and retention for legal reasons are increasing in complexity, with the trend toward less e- mail being preserved a direct contradiction to the Gmail approach. Google will need to make significant investments to meet these needs. It has partnered with Postini to meetsome of these Publication Date: 6 March 2007/ID Number: G Page 4 of 7

5 inbound-outbound compliance needs, but the alliance does not address mail kept inside the organization. Unified Communications. Enterprises are increasingly tying voice, instant messaging and e- mail services together, which is far easier when all components are in one place. Google will have to develop services to allow, for example, Nortel or Cisco phone services to interface with the system. Avaya announced that it would pursue this path with Google on launch day. Security. Fears of unauthorized access to messages rapidly escalate as mail services move outside the perimeter, as do fears over security breaches resulting from co-location of multiple customers on the same infrastructure. Google will need to address these issues with services like in-situ encryption and dedicated infrastructure. Migration. Internet Message Access Protocol (IMAP) migration services only address standard messages and not proprietary extensions or calendar, task or contact data. Google needs to have custom migration utilities for each major system, as well as operational controls for creating migration efficiencies. Operational Support. $50/user/year is the starting place for the total cost of ownership (TCO) model for Gmail, not the end point. Companies will still have to dedicate resources for mail administration, monitoring and troubleshooting, as well as overseeing single sign-on and directory integration duties. Google needs to take steps to minimize the operational burden. Training. While Google has the advantage of slip-streaming feature upgrades on a regular basis, training users on how to use the functions will still be required. Google must establish a training regime to ensure continuous use of the service at optimal levels. Google has already taken steps to create a third-party community around enterprise Gmail to supplement its core offering. Hosted hygiene vendor Postini has been signed up to provide corporate-grade control services and Avaya has been enlisted. But clearly many things need to be done before large enterprises feel comfortable using Gmail as a replacement for the corporate mail service. Commercial Gmail services threaten the Microsoft Exchange franchise the most, as this holds 62% of the enterprise market. Over the past five years, Microsoft has been winning market share from IBM and Novell, and in the absence of Google would likely continue to aggregate market control. We estimate that organizations spend about $120/user/year for on-premises services (based on a three-year ownership model), so commercial Gmail is immediately attractive from an economic perspective. This factor alone, we believe, will spark significant interest in the service. Microsoft has not shown indifference to the events at Google. The Exchange business unit bought Frontbridge a provider of hosted hygiene and control services in 2006 and includes that service as part of the enterprise client access license (CAL) for Exchange Office Live offers hosted (Hotmail heritage) mail services to the SMB community and a similar hosted service for universities as part of Windows Live. Hosted Exchange services from third parties have been available for years, but penetration has been limited to small vendors. We estimate that less than 3% of the Exchange base uses a hosted model. Uptake is limited, due largely to the cost of hosted services, which are typically more than on-premises costs. We expect Microsoft to become aggressive with its own Exchange hosted services this year, including a mid-year offering targeted at organizations with fewer than 1000 users and a program for no-fee Exchange services for university students by the end of the year. To remain competitive with Google from an operational and cost perspective, Microsoft will have to adapt this hosted model paradigm for deployment inside organizations, where the IT group acts as an internal host. Publication Date: 6 March 2007/ID Number: G Page 5 of 7

6 We believe the February 22 announcement will kick off a long-term paradigm shift in provisioning. Besides Microsoft s own (current and anticipated) effort in the hosted space, Webex recently introduced its own SMB-focused service built on a SendMail back-end at $60/user/year. We expect Yahoo, which has intermittently played in the fee-based market, to make a concerted effort at market penetration within the next year. The next logical step is for a vendor to offer an advertising-based revenue cost-sharing model, effectively making a profit center. The benefits of a hosted model are too great to ignore the only issue is that when stability occurs, security and functionality should match and then exceed corporate-provisioned services. Given the criticality of to the health of an organization, we believe that risk abatement is the primary concern for investments. Therefore, organizations should be extremely cautious in approaching commercial Gmail services. For mainstream knowledge workers, we believe it prudent to wait two or three years to actively consider migrating to Gmail (or similar services) to determine overall maturity, stability and efficacy of the system. There is, however, more immediate applicability to boundary workers without access to and other user types where rich services are less of a priority. Done properly, is an appropriate application for the SaaS model, and that model is clearly going to be the primary destabilizing force to the current status quo. By YE10, we expect 8% of corporate users to be using hosted services, growing to 17% by YE12 (0.7 probability). Publication Date: 6 March 2007/ID Number: G Page 6 of 7

7 REGIONAL HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT U.S.A European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW UNITED KINGDOM Asia/Pacific Headquarters Gartner Australasia Pty. Ltd. Level 9, 141 Walker Street North Sydney New South Wales 2060 AUSTRALIA Japan Headquarters Gartner Japan Ltd. Aobadai Hills, 6F 7-7, Aobadai, 4-chome Meguro-ku, Tokyo JAPAN Latin America Headquarters Gartner do Brazil Av. das Nações Unidas, andar World Trade Center São Paulo SP BRAZIL Publication Date: 6 March 2007/ID Number: G Page 7 of 7