Is Microsoft’s productivity empire vulnerable?

Courtesy of CloudOn

Even in Silicon Valley, where entrepreneurs set out to hack the world and disrupt everything, it’s hard to be more brazen than Milind Gadekar, the chief executive of CloudOn. He’s trying to beat Microsoft (MSFT), which sits at a lofty No. 34 on the Fortune 500 list, at its own game and using Microsoft’s own tools. When Silicon Valley investor Chamath Palihapitiya first heard about CloudOn, he told Gadekar he was crazy. Then he invested.

The crazy plan that underpins the company—license Microsoft Office, then build a mobile version of it—was so simple that it actually worked. At the time, Microsoft hadn’t made much of an effort to bring its productivity tools to mobile devices. Gadekar believed the demand was there. “Enterprises saw the iPad as a device for consumption, not productivity,” Gadekar says. “But people clearly wanted Microsoft Office on their devices.” (Microsoft introduced the Surface, a tablet computer intended to replace the conventional laptop, in 2012.)

On the first day CloudOn was available, the mobile application shot to the top of Apple’s App Store, attracting 100,000 downloads. (It has since reached eight million.) CloudOn’s Microsoft app was perfectly legal, but Microsoft executives were still shocked at its success. Executives called Gadekar on the first day. CloudOn fielded a handful of acquisition offers,Gadekar says, even though the first version of the app was “fairly crappy.”

He turned them down. Having spent his career at companies with big ambitions, like @HomeNetwork and Epinions, he wanted to go big. Gadekar saw how strong the demand was from people who wanted to do work on their tablets and cell phones.

He decided he use CloudOn as a Trojan horse in the battle against the incumbent player. His investor agreed. “I cannot wait for the shit to come out of the ass of the Trojan horse,” Gadekar says Palihapitiya told him.

Palihapitiya’s fund, Social + Capital Fund, alongside others, invested a total of $26.1 million in the company. CloudOn set to work building its own open, freemium version of Microsoft Office for mobile. The company began with Word, the word processing application. After two years of work, CloudOn unveils the software today.

The new version uses gestures to edit. Rather than replicate desktop functionality (such as pull-down menus ) in the mobile environment, the new version embraces how people use mobile devices that typically come with touch-screens. CloudOn’s word processor is compatible with desktop versions of Microsoft Word and integrates cloud storage services from Google (Drive), Dropbox, Box, and Microsoft (OneDrive). CloudOn will eventually integrate with content management systems and publishing software, Gadekar says.

The obvious question lingers: Couldn’t Microsoft, a company the market values at $383 billion, squash tiny CloudOn? The obvious answer, of course, is “yes.” But Gadekar doesn’t believe Microsoft has the right culture to win at mobile because it has enjoyed a multibillion-dollar grip on productivity software for the last two decades.

The biggest innovation in the productivity category has come from Google (GOOG) and its Apps suite. But like Microsoft, Google’s tools also operate on a closed platform, which means they don’t always play nice with software from other companies. If the success of open software companies like Dropbox is any indication, Microsoft will have to eventually adapt to a world where it does not control everything. (For posterity, Microsoft Word on the iPad has a three-star review in the App Store. CloudOn has four and a half stars.)

“Microsoft is vulnerable because we’re no longer living in a Windows-only world,” Gadekar says. “The future of mobile is iOS and Android, and it’s not controlled by IT [departments], but by consumers.”

The larger tech companies, including Dell, Lenovo (LNVGY) and Hewlett-Packard (HPQ), are realizing the importance of mobile productivity. They can’t be Windows-only—they need to be compatible with Google’s Android and Apple’s iOS, too. Likewise, storage companies are moving in. Box, Dropbox, and Amazon Web Services (AMZN) have demonstrated interest in taking a bite out of Microsoft’s productivity empire.

“The expectation that Office is an impenetrable castle is not as improbable as it used to be,” Gadekar says. The sentiment is supported by the notion that file storage companies, facing a race-to-the-bottom in pricing, are moving into software, which enjoys larger profit margins.

Thirty percent of CloudOn’s users are students and the other 70% are small and medium-sized businesses. The hope, of course, is to get those small businesses to pay for premium features, and eventually, develop software robust enough that large companies can use CloudOn. Large companies, including General Electric (GE) and Virgin are already asking for enterprise-grade versions of the software, Gadekar says. If all goes as planned, CloudOn will raise more money next year to build out that capability.

Still, CloudOn has taken on a major challenge. Microsoft’s iPad apps for Word, Excel, Powerpoint and OneNote have been downloaded more than 35 million times. Adding in desktop users, more than one billion people use Office 365.

Gadekar says a Microsoft executive once told him: “You picked the deepest part of the ocean to swim in.” Gadekar’s response? “You only live once.”

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