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Microsoft punts the future of office into the cloud

Software giant highlights new virtual reality by moving its suite of programs off PCs and on to the net

Software doesn't come in a box any more. It doesn't come on a disk. It doesn't have to be stored on your hard disk. The pictures you take and airbrush, the word processor document containing your unfinished novel, the spreadsheet of your tattered finances – these don't have to be on your computer any more, and neither does the software that creates them.

Because Microsoft, the ultimate software-in-a-box company, made a big leap yesterday. With the launch of Microsoft Office 2010, the suite of famous products that includes Word and Excel, it has made a dramatic move into "cloud computing".

The "cloud" is only a geeky name for the internet, the vast world of data and applications that exists beyond your personal computer or smartphone and which you can get to with an internet connection and a web browser. The new version of Microsoft Office for business customers contains something called Web Apps, so that instead of keeping your documents stored on a single local computer, they are stored centrally by Microsoft and you can access them any time, from anywhere.

For the men and women in charge of corporate IT departments, that means they have to worry less about installing Office on every desktop throughout the organisation, saving time. Perhaps they need to buy fewer computers, saving money. Employees can work much more flexibly, and can collaborate on documents without having to constantly email different versions between them.

The "cloud" has been changing every aspect of computing, but the changes are coming increasingly fast. The desktop or laptop computer is withering in size and importance; in the future, it might need offer little more than a web browser, a gateway to the cloud. Microsoft is no pioneer here, but the alacrity with which it trumpeted the new features of Office 2010 means that cloud computing just came of age.

The new Office will "define the future of productivity", declared Stephen Elop, president of the company's business division. "With the 2010 set of products, organisations will save, innovate and grow as their people benefit from working across the PC, phone and browser."

It is the availability of speedy and reliable connections to the internet that have opened up this new world. Most of our social networking is done in the cloud: all the information, the pictures and the video that we share via Facebook or YouTube are uploaded and stored and accessed via the web. Whole applications that you used to have to buy in a box and install on your computer can now be reached entirely through the web browser, from personal tax calculation software to really complicated analytical tools used by business.

New software companies no longer aspire to sell their products for installation on desktop computers; the vast majority expect their business customers to want to access their wares via a web browser. The cost of starting and running software and internet companies has collapsed.

And companies that want to store large amounts of data, such as the data for a corporate website, no longer need to buy their own, expensive servers. Instead, they can rent space on servers run by the likes of Amazon and Google and access it all just as easily and quickly through an internet connection.

The market research firm, Gartner, has made the startling prediction that, by 2012, one-fifth of all businesses will own no IT assets at all. "Several interrelated trends are driving the movement toward decreased IT hardware assets, such as virtualisation, cloud-enabled services, and employees running personal desktops and notebook systems on corporate networks," it says. "And if the ownership of hardware shifts to third parties, then there will be major shifts throughout every facet of the IT hardware industry. For example, enterprise IT budgets will either be shrunk or reallocated to more strategic projects, and enterprise IT staff will either be reduced or re-skilled to meet new requirements."

And if there are savings and flexibility benefits for corporations, there are other big consequences, too. First, those who do own the servers and host the data on behalf of others have found themselves in a lucrative industry. Amazon is the most famous name that has given over its spare server capacity to others, though it does not strip out the profits it makes from the business and claims it is low margin. Gartner predicts the industry could have revenues of $150bn (£100bn) by 2015, three times the level of last year.

OpSource, a cloud and software-as-a-service hosting company, says it expects to see cloud computing grow strongly as businesses look for cheap ways to expand after the economic downturn. Its chief executive, Treb Ryan, opened the "All About The Cloud" conference in San Francisco yesterday by characterising the "cloud" in prosaic terms.

"We all understand the cloud is very cool. It is extremely fast – it allows you to get up and going very quickly – and it is very flexible. The interfaces on the cloud are allowing you to do things you couldn't do before. But that said, the cloud is completely self-service, and it is not for the faint of heart. In the end, it is just infrastructure, it is just storage and servers and network. The cloud, cool as it is, is not a solution, it is a server."

Because this is what the cloud really is, just chips, disks and wires – just somewhere else, not on your desktop. And this is the other big consequence. Greenpeace worried last month that many of the vast, power-guzzling "data warehouses" that make up the cloud had been built in parts of the US where electricity is generated mainly at coal-fired power stations.

For Microsoft, Office 2010 is not its first foray into the cloud. Far from it. Its Hotmail email service is cloud-based, with messages stored online for its customers, as are its other MSN social networking services.

But now it is "all in" in cloud computing. Google created cloud-based rivals to Word and Excel several years ago and yesterday cheekily urged business customers to switch to those instead of upgrading to Office 2010. But Microsoft has 94 per cent of the market for office software of this kind. By putting its head in the cloud, it is protecting $11bn of bottom line profit.