The first challenge comes from the competition. Google has proven to be one of the toughest competitors Microsoft has ever faced, refusing to surrender any ground in the online search space. This is different, however. Desktop productivity applications are Microsoft's baby. Sure, Google Apps has been around longer, but the hundreds of millions of Office users prove Microsoft is still the leader. How big of a chance is Microsoft taking here? Well, it'll have to spend considerable marketing dollars to convince users the cloud is the way to go. Is it a given that once users come to that realization they will stick with Microsoft? Sure, it's likely, but Google is cheaper and starting to gain some traction. I've used both and Office 365 holds the clear edge right now, but what if it doesn't stay that way? Google has proven its ability to be agile, and it will catch up at some point. Could Microsoft really be spending its own advertising money to drive customers to the competition? It's not that far-fetched.
The second challenge actually comes from those hundreds of millions of installed Office users. In most cases (not all, but most), they own the licenses for the software they are using and have no ongoing charges. Most of them are also probably pretty happy with the product as evidence by the decreasing rate of Office users who migrate immediately to a new version over recent years. Why are they going to ditch what they have and opt for a recurring payment model on a platform that is, at best, the same as what they have, possibly even worse. This doesn't seem to make much sense. I'm sure Microsoft is planning to get these users as upgrade and refresh cycles come around, and that might work out well for them. My only concern would be that people are so used to doing things and paying for things the same way for so long that a change might be difficult. There will need to be some sort of compelling reason, and I think we are still a little ways away from that.
Another challenge or question comes from inside Microsoft. Office 365 is not an identical product to Office 2010 (the current shipped version). There is a very similar look and feel, but some of the functionality is different, and just the fact that one is a traditional client application and one is a Web application means the code base has got to be vastly different. Microsoft is trying to serve two masters. It has not commented that development of the traditional Office product will stop - that would cause some sort of a riot - but clearly it will want to keep developing the new platform as well. Which one will get the most attention? You can deny it all you want, but when you have two kids, one will get more attention than the other.
So, does Microsoft spend more time and money on Office 365 to drive customers there at the expense of Office? What if that just alienates customers and encourages them to look around at the competition? OK, so they keep focused on Office and maybe let Office 365 slow down. All that does is open the door for Google (or any other competitor) to catch and pass it in the online space.
Microsoft has a pretty big beast to feed and it takes a lot to keep the machine running. Google, on the other hand, can lock 12 developers in a room somewhere and tell them their entire focus in life is to emulate Office 365 but make it five percent better. That five percent might be all it takes to encourage a switch, so Microsoft can never let that happen.
I don't want you to misunderstand my tone. I am a big fan of the cloud, and I know full well it is the direction we are headed. I'd be very surprised if the computing platform (computer, tablet, smartphone, etc.) you use in five to seven years has any productivity software installed locally. This paradigm just makes too much sense - both financially and technically. But it's a minefield right now for the old-guard computer software giants (all of them, not just Microsoft). Right now, Microsoft is in the spotlight as it prepares to take to the battle on the enemy's home turf. I wouldn't put Microsoft as the underdog per se, but we all know home teams have the advantage every time. I'm pretty confident Microsoft will find a way to grow and flourish, but the next few years will not be without their ups and downs. For now, however, Office 365 prepares to meet the masses, and it is hands down the best cloud productivity suite you can get. Time will tell if it stays that way, or if it even matters anymore.