Google Trumpets Business-Apps Users, but It's Really Getting Beaten Up on Price

Last Updated Sep 21, 2010 5:53 PM EDT

Google (GOOG) announced that 3 million businesses have shifted from Microsoft (MSFT) Exchange or IBM's (IBM) Lotus Notes to Google Apps Premium. But that's not the good news Google wants you to think it is.
Given that the number of organizations using Google Apps was only 2 million back in April, according to the company, it seems like enormous growth. However, look at all the numbers and the story is different. Not only do the companies, schools, and organizations that use it keep getting smaller, but either Google is giving away a lot of the service or it's had to slash prices drastically to get a handful of big reference accounts.

Back in April when I last looked at the Google Apps business, CEO Eric Schmidt said that the company had "a couple of million" of enterprise customers. A statement the previous month put the number of users at 25 million. At the time, I took the split to mean that 2 million was the number of paid seats in enterprises, with a total 25 million using the product.

Now the Google press release claims that "3 million businesses have gone Google" and that "over 30 million users within businesses, schools and organizations now depend on our messaging and collaboration tools." Both numbers seem to refer to users in organizations. I probably misunderstood in April, but the implication is that large companies are kicking Google's rump over pricing.

On one hand, that seems to be a 50 percent gain in businesses over five months, but notice that the term "enterprise" has fled the scene. Why? Because the word connotes a large corporation with a significant number of users. If there are 30 million users "within businesses, schools and organizations" using Apps Premium, that's an average of only ten users per entity. Most of these customers are probably small businesses.

Now compare this statement from Google to the one back in March, in which it claimed 25 million users. The 50 percent growth in organizations using the services pairs with a 20 percent growth in individual users. Google may add more businesses, schools, and non-profits, but they are of an increasingly smaller size.

While Erick Schonfeld at TechCrunch is correct when he says that the "success of Google Apps is part of the growing consumerization of enterprise apps," we apparently have to redefine "enterprise apps" as types of software that a large corporation might use.

Given the increasingly smaller average size of organization that uses the cloud services, we also have to revisit how effective Google actually is in getting larger corporations to convert to its cloud offerings. Apparently the sense of inevitability its marketers have tried to convey with announcements of "enterprise" size customer conversions is so much blather.

That said, does it matter? If there are actually 30 million paying customers (I've got a call in to Google asking them to confirm rather than imply this), that's $1.5 billion in annual revenue given the $50 a head licensing price.

Here's the catch. That assumes everyone actually pay $50 a head. Large corporations negotiate heavily on price, and Google's own financials suggest the same. At $1.5 billion a year, Google would see on the average $375 million in revenue per quarter from Apps Premium. However, check the company's earnings from last quarter, which ended on June 30, 2010, and you see that all non-advertising revenue was $258 million. Quite a large shortcoming, even if you could attribute all that money to Apps Premium.

Google is either misrepresenting its user numbers or -- the more likely case -- it has had to virtually (and maybe literally) give the services away to court customers. In any case, it is far weaker in enterprise applications than it seems on the surface.

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Image: Flickr user Anamorphic Mike, CC 2.0.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.