Microsoft Office 2010: Mission critical

NEW YORK (CNNMoney.com) -- Microsoft unveiled its newest version of Office Wednesday, at a time when one of its biggest revenue drivers is feeling the heat from rivals.

The rise of free, Web-based applications like Google (GOOG, Fortune 500) Docs, and the growing popularity of other open-source office suites like Oracle's (ORCL, Fortune 500) Open Office has put pressure on Microsoft (MSFT, Fortune 500).

Gone are the days when Microsoft could simply unveil a new version and know the market would rush to adopt it.

Microsoft also didn't really help its cause with Office 2007, the most recent version. Office 2007 has been compared by many analysts with the universally panned Windows Vista for overcomplicating functions and getting rid of some of the most familiar features of earlier Office iterations.

In response, the company has come out swinging. Office 2010 is a vast improvement over its predecessor. It comes with many updated and revamped functions as well as the ability to access Office online for free.

That's welcome news for the 500 million Office users worldwide. It's also good news for Microsoft, since nearly a third of the company's revenue comes from the Word, Excel, Powerpoint and Outlook suite.

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Microsoft's biggest response to critics comes in the form of its new Web apps. Microsoft will make Word, Powerpoint, Excel, Outlook and OneNote available online for free.

The Office Web apps won't have all the functionality of the full Office suite, and only customers who purchase Office 2010 will be able to seamlessly integrate their work on the software with their work online. Both the Office Suite and Web apps are only available for businesses now but will hit retail shelves on June 15.

Still, it marks a major shift in how Microsoft operates and is a direct response to Google.

"Microsoft knows ... that they have to stop or blunt the threat of Google Docs," said DiDio. "This is its 'take that, Google' product, saying that Google's not going to knock it out of the rink so easily."

And if Microsoft wants to get Office onto smart phones and the iPad, it needs to move to the Web, say analysts. As consumers move away from traditional computers, they're also moving away from traditional software like Office. Instead, they're increasingly using Web-based applications like Google Docs.

That trend has sent warning bells flashing at Microsoft, because Windows and Office -- both of which only run on traditional computers and operating systems -- generate more than half of the company's revenue and profit.

"Google doesn't need to take much share for Microsoft to consider it a competitor," said Michael Silver, Microsoft analyst at Gartner. "Windows and Office are under attack, [and] Microsoft will need to compete in an increasingly Web-based world."

On the other hand, analysts say software is far from dead. There are still plenty of people who use Office on a daily basis and need the full functionality of the suite. Google may be good for small businesses that don't want to pay for Office, or for casual users who have embraced Web-based products for their simplicity.

For most, Office 2010 is well worth it -- if it's affordable. Microsoft raised the price on its top-of-the-line Office product for businesses, but is expected to start selling its consumer product at a discount.

Microsoft fixed a lot of the problems that were most irksome to customers using previous Office versions: Multimedia editing can now be done within Word or Powerpoint, security has been vastly improved, and much to the delight of anyone using Office 2007, the "ribbon" has come back after Microsoft unwisely confused users by getting rid of the "File" button.

Even the most common tasks like "undo" and "paste" have been improved, with Office 2010 giving users the option of pasting in simple text, just images or all content with just one click of the mouse.

Outlook has perhaps seen the most drastic improvements. Instead of hunting for replies, conversations are now grouped together. To avoid getting overloaded with irrelevant e-mails, users can click an "ignore" button to send all future e-mails in a conversation to the "Deleted" folder. And Outlook 2010 also integrates Facebook, LinkedIn, MySpace and Windows Live.

It's not clear how quickly businesses will jump on the Office 2010 bandwagon. For businesses to integrate the Web apps, they'll also need Sharepoint 2010 and Web apps aren't free for businesses. They can integrate the free consumer version, but all that data is saved on users' Windows Live SkyDrives, which most tech departments probably wouldn't like.

"Office 2010 adds a lot of polish and some significant new features," said Silver. "But organizations that are running Office 2007 can probably skip 2010."