What's holding back Google apps?

When Google (GOOG) announced a foray into business software two years ago, it touted General Electric (GE) as one of its trophy accounts.

GE had begun using Google-designed applications for some of the tasks typically handled by Microsoft's (MSFT) pricier Office, which includes e-mail, word processing, and spreadsheet creation. Adding GE was a coup for a company that, despite having mastered Web search, was a neophyte in the Microsoft-dominated, multibillion-dollar world of business-productivity software.

Two years later, GE is rethinking the relationship. It's now testing Google's along with the Zoho suite of products from another upstart, AdventNet. It's also considering planned Web versions of Microsoft Office software. "We look at it as a race right now," says GE Chief Technology Officer Greg Simpson.

Google might have been a shoo-in. The $50-a-person price tag for Google Apps can cost roughly half the licensing fees charged by Microsoft. Zoho's applications aren't as robust as Google's, says GE's Simpson. But Zoho's technology lets GE store data in-house, on its own servers, making it easier to adhere to computer security and accounting policies for sensitive business information. Google Apps, on the other hand, store data on Google's servers. "That's probably our biggest stumbling block to going bigger with Google," Simpson says.

Too Much Control?

GE's quandary underscores the challenge Google faces as it tries to expand into new businesses to augment its Internet search and advertising prowess. The search engine needs to train its array of computers and data analysis acumen on new types of problems to fuel future growth. Yet companies are also wary of ceding Google too much control over their information.

At the same time, Microsoft is moving quickly to gain the same ground, preparing ways for users of its ubiquitous Word and Excel software to perform many common tasks in a Web browser as soon as next year. "Companies run pilots on Google; they run their business on Microsoft," says Alex Payne, product management director in Microsoft's Office group.

Now, Google is beginning an offensive to entice more companies to use its software. At a developer conference in San Francisco on May 27, it plans to announce a uniform way for programmers to incorporate Google's search engine, spreadsheet, maps, videos, and e-mail software into their own applications, says Vic Gundotra, vice-president of engineering. "We'll give enterprise developers a very simple entry point," he says.

Google is also developing software for mobile phones that could work with customer management software to pinpoint contacts or tally relevant expenses based on what city a sales person is visiting, Gundotra says. It released software in April that lets companies import data from business applications such as SAP (SAP) and Oracle (ORCL) into its Google Spreadsheets program.

A Network of Resellers

In the field, Google is enlisting aid from the likes of Capgemini, Hewlett-Packard's (HPQ) EDS unit, and Accenture (ACN) to build a network of technology resellers that can push Google's business products along with services like custom programming and technical support. On May 13, Google announced that Capgemini helped French auto parts supplier Valeo move 30,000 workers to Google Apps. "We recognize we're outmanned on the street," says Dave Girouard, president of Google's enterprise business. "Microsoft has a long history in these [business] accounts."

Exhibit A: Google Apps still claims just a few large customers besides GE. Two of the few widely recognizable names on a list of largest customers on Google's Web site are Genentech (DNA) and Salesforce.com (CRM).

Google won't say exactly how much revenue comes from Apps sales. But Sanford C. Bernstein analyst Jeffrey Lindsay estimates that Google Apps will generate just $273 million in sales in 2009, just 1.3% of Google's expected total sales of $21.05 billion. Unless Google makes a major acquisition, "we don't place a lot of value" on its enterprise business, says Lindsay. A March Forrester Research (FORR) survey of 152 companies found just 3% running Google's business applications.

"It's hard for us to materially move the needle on Google's revenue in fiscal '09," Girouard concedes. But he says Google's Apps business is profitable, and online productivity software could eventually yield billions of dollars in sales. "We have 10 to 20 years to grow into this market," he says.

Google can afford to take its time incubating new businesses. It commands a wide lead in the Internet search market; first-quarter revenues rose 6% to $5.5 billion, even as companies dialed back on ad spending. Still, accelerating sales of its applications is also important to Google's long-term strategy of weaving its software into more aspects of computer users' lives.

Searching for Money

Getting more large companies to buy into its business tools lets Google use its computing expertise to organize new types of information beside Web pages. "The more data people can create and analyze, the more Google can slurp into its system and index," says Christophe Bisciglia, a former senior engineer at Google who recently founded cloud computing software startup Cloudera. That makes users more likely to turn to the site for searches that Google can make money on. "Not every interaction with Google is monetizable," Bisciglia says.

Several technology trends are on Google's side. The company runs its software across many thousands of servers, providing users a level of speed and reliability few other tech suppliers that rely on smaller data centers can match. At the same time, companies are writing more of their software using industry standard Web technologies, which could loosen Microsoft's hold on the ecosystem of developers. Just as Microsoft marginalized Lotus and WordPerfect in the productivity software market in the '90s, Google may benefit from a new "platform shift" to the Web, argues Gundotra, who spent 15 years at Microsoft.

Facets of Google's structure stand in the way of fully capitalizing on this shift, however. Building a sales staff to proffer its applications is a labor-intensive endeavor that hasn't been part of the company's DNA, says Zachary Nelson, CEO of online accounting software maker NetSuite (N). "If you want to sell enterprise software, you have to have salespeople," he says.

Another challenge: focusing enough management attention for Google Apps. Although Girouard says Google's top executives are "very engaged" with the Apps business, which has a staff of 700, search operations tend to crowd out other initiatives. Creating new ways to analyze business data inside Apps has been "harder to get up on the priority list" given Google's long list of projects, according to Sam Schillace, a Google engineering director who created the software that's the basis for Google's word processor. "I'd give us a low grade," he says.

And while the company has considered a "white label" version of Gmail that customers could fold into their own applications, there's still debate over whether to release software without the Google brand, according to Gundotra.

Google needs a "second act" after search, says NetSuite's Nelson. In the business software market, where sales manpower and trust matter as much as technical chops, Google finds itself on an unfamiliar stage.

Ricadela is a writer for BusinessWeek in Silicon Valley.