Does Microsoft's Plan To Sell Software As A Service Make Sense?

from the keep-an-eye-on-this dept

Fri, Apr 18th 2008 1:37pm — Mike Masnick

While Microsoft remains dominant in the office productivity suite space, it knows that it's facing renewed competition from online offerings and open source offerings. While none of those other products really match the breadth and depth of Microsoft's, in some cases they're reaching "good enough" quality, and Microsoft recognizes the threat of a Clayton Christensen's "Innovator's Dilemma" situation, where the good enough product ends up beating out the much more expensive, but more complete product. So, as part of a strategy to deal with that, Microsoft is testing offering Office as a subscription service. It's targeted at consumers, not businesses, who would pay a smaller monthly fee to get Microsoft Office and a variety of other components. If they stop paying, they lose the software (but keep their data and documents, of course).

While I have no idea if this particular offering will catch on, it is a step in the right direction. Selling software as software is increasingly an unsustainable business model for all the usual reasons (infinite goods, and the like). Different companies have taken different approaches to dealing with this. IBM has shifted its business significantly over to services, and even has become a big proponent of free and open source software. Similarly, Red Hat focuses mainly on services. Google (and many other "web" software providers) focus mainly on ad-supported models for software. Microsoft, due to its tremendous legacy user base lock-in and inertia has been able keep selling software directly, and will continue to be able to so for a while. But, eventually, that business model is unsustainable -- and this new "Albany" subscription offering is a step towards moving away from it.

While it may seem like a subscription service is really just the same thing as straight software sales, it isn't necessarily. It really depends on how Microsoft treats this. If it treats it as just a way to break up the sales price of software, then it will fail. But if it rethinks it's overall approach, and realizes that the subscription fee should be for an ongoing service that provides additional benefits, then it could work quite well. From an economics standpoint, the subscription should be paying for additional ongoing services and benefits, rather than the cost of the software, which has no marginal cost to reproduce. Those ongoing benefits can be scarce goods, whereas the software itself is an infinite good. Effectively, you should be paying for future and ongoing benefits rather than the completed software. That is, there needs to be additional ongoing value to paying for the service. That means not just access to the software, but additional convenience, perhaps online storage, remote access, collaboration features, continual upgrades, service and support and the like. Make it more into a real service, rather than just a piece of software with monthly payments.

That's not to say that Microsoft will get this right. It's business model is so tied up in direct software sales, it likely will be very difficult for the company to really embrace a full software-as-a-service model. However, as things go, even experimenting with such a model is definitely a move in the right direction, and a recognition that Microsoft (even with its continued dominance in direct software sales) needs to adapt to the changing market.

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Filed Under: business models, economics, office suite, software as a service, subscription
Companies: microsoft

21 Comments

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garrett, 18 Apr 2008 @ 2:16pm

I remember hearing a rumor that they wanted to make office 2007 online and charge like .03 cents per page
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Hellsvilla, 18 Apr 2008 @ 2:43pm

It does make sense
It makes sense to Microsoft, who sees it as a way to sell something for twice the cost of the thing it replaces, while they get to further engrain their monopoly over your data, AND they get ABSOLUTE control over piracy. No login? no software.

Anything else (conveience, sanity, value to the consumer) is secondary.
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Joel Coehoorn, 18 Apr 2008 @ 2:46pm

Pricing
It comes down to pricing as well. If Microsoft uses this as a way to fleece users, it won't work. But if they price it right this could be seen by many as a real value. So what is the right price?

To start, let's look at what people are paying now as a baseline. Honestly, most people get Microsoft's software at OEM pricing when they buy a new computer, which happens optimistically (for Microsoft) about once every three years. Last time I saw a price sheet, OEM Office ran about $120. They're bundling OneCare which adds another $30 per year (or $90 per three years) as well as the live services (currently free). So that's $210 per 36 months, or $5.84 per month. So $5.99 per month or $65 per year (small discount for paying for the full year up front) isn't unreasonable, by current pricing standards.

I doubt Microsoft will undercut their software as software business by charging much less, and I just don't think this offering will sell if they charge much more, so I think I'm pretty close here. If you're a user looking at retail prices this may actually look like a pretty good deal, especially if you're already paying $30 per year for OneCare, or if you've been frustrated with conversion issues from a competitor like Open Office but don't want to spend over $100 for the retail copy.
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Joel Coehoorn, 18 Apr 2008 @ 2:48pm

Re: Pricing
Now that I think of it, that $120 was for office profession. OEM Basic was closer to $90, which drops things about $1 month.
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Anonymous Coward, 18 Apr 2008 @ 2:49pm

As long as it's not totally net based so you can work off-line and there are continuous updates as part of the service I would definitely subscribe to something like this.

I just paid over $300 for Office 07 on my Vista based machine, but I'm the guy that will use it until it's completely obsolete, which could be 5-7 years like office 2000 was for me. If they charged me $10 a month and updated the software on a regular basis, making my files compatible for the long haul, I would be much happier and they would end up getting more money out of me. It's a win-win situation. Any extra features they provided, like remote access, would just be icing on the cake for me.

One major benefit I could see from this would be subscribing to each program individually instead of a suite. I don't need all the programs that came with the version I purchased, but I needed PowerPoint, so I had to buy the second level up in packages.
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Eric the Grey, 18 Apr 2008 @ 3:07pm

Unless it's cost prohibitive.
I can see this working well, so long as the cost does not end up being prohibitive. Currently, One Care costs ~$50 a year, which is about the same price for one of the retail anti-virus or all-in-one security products. How much more will it cost the end user to add in Office?

If you take how long between each upgrade of office you do, and how much you spend for each, the overall cost has to be lower, or people won't stick with it.

I doubt I'll ever do it. More because I refuse to pay Microsoft for One Care to help protect my machine from security flaws in their own operating system. Personally, this service should be provided free for those who paid for the OS.

One of these days, I won't be forced by my desire for cool games to keep windows on my PC.

EtG
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Eric the Grey, 18 Apr 2008 @ 3:15pm

Re: Re: Pricing
I doubt that most people get their software under OEM pricing though. When you purchase a new PC, you get a time-limited version that only works for so long, and then you have to go out and buy a new copy.

I purchased my current copy of office for $20 or $25 through the partner program we have at work, and students can also get cheaper versions, which run slightly less than OEM, but the rest of the regular consumers are stuck buying the software at full-value.

EtG
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Bobbknight, 18 Apr 2008 @ 3:18pm

It's all In The Cost
MS will need to come up with a cost per household.
Twenty dollars a month for all MS has to offer the home user.
Else I will be more on my way to GNU/Linux.
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interval, 18 Apr 2008 @ 3:53pm

Re:
I'm not the guy who uses Microsoft products, so I'm insulated from the pain of NOT using MS Office. Really, what am I missing by using openoffice (other than my $300)?
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Kevin, 18 Apr 2008 @ 3:54pm

Re: Re: Re: Pricing
I doubt that most people get their software under OEM pricing though. When you purchase a new PC, you get a time-limited version that only works for so long, and then you have to go out and buy a new copy.

Unless you pay for them to pre-install the OEM version, in which case you don't pay the OEM price, you pay the OEM price plus markup. But Microsoft only gets the OEM price. So what he's saying is that there's potential there to keep the price fairly low by cutting out the middle man. Of course, MS wouldn't do that. For starters, they'd be turning down a bigger profit margin. Secondly, they'd be alienating their hardware resellers. And while 99% of all new PCs are still going to ship with Windows, a pissed off hardware reseller could make a lot of trouble for MS by bundling/pre-installing a free "good enough" office suite like OpenOffice.org with every PC sold.
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MLS, 18 Apr 2008 @ 4:03pm

There are just far too many privacy issues involved here that lead me to believe this is not likely to be a successful endeavor.

I suspect this proposed business model will run smack dab into the brick wall of open-source and/or freeware that is deemed good enough.

The are some upsides from the standpoint of hardware (perhaps less memory, drive size, etc.), but on the whole I am certainly not one who would use such a service.

If MS really wants to make a killing, it might just try cutting its prices from stratospheric levels.
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Joel Coehoorn, 18 Apr 2008 @ 4:13pm

Re: Re: Re: Pricing
That's only true if you actually got a trial edition. If you get a real OEM edition the software is good forever, but it's tied to the computer on which you purchased it.
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Walter Dnes, 18 Apr 2008 @ 7:36pm

Business will pay for stability
When Y2K came along, a lot of legacy applications were found that had benn running for over 20 years. Business is willing to pay for stability. A lot of businesses complain about new versions of Windows not because of cost of the new OS, but rather, because of the cost of re-writing their in-house apps that break under the new OS (Operating System or Office Suite). And let's not forget the 5-year-old printer or scanner that manufacturers refuse to write Vista drivers for. That's why people (including businesspeople) are urging MS to keep XP alive.

XP has been a long-lived exception to the rule. Let's say you bought operating systems for several years...

1994 DOS 6 plus Windows for Workgroups
1995 Windows 95
1996 Windows 95 OSR2
1998 Windows 98
1999 Windows 98 SE
2000 Windows 2000
2001 Windows XP

Some macros and batchfiles and stupidly-coded programs broke with each new OS. That's when Redhat made their entry into the business market by promising several years of support for each release of their business OS. If Microsoft promised extended support for XP for $50/seat/year, they'd get a big uptake from business.
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José Luis, 18 Apr 2008 @ 10:08pm

If i remember correctly, this "wise plan" of software in the net is not new to MS. Circa 1997 (i think), when Java was starting to grow in the heart of everybody, MS started talking about office and the like in the net (but technology was immature and they figured out they loose money in the short term). The pricing they talked about seemed to be like this "model".

Yet here we are!

The problem with this is that huge software development is starting to be a very risky business for companies. There is an estimated development cost for Vista and it's supposed to be in the order of many billions (i think these numbers are likely wrong, but a 5 years dev cicle is a very expensive proposition). Yet, Vista sales are not closing! And they won't because it's heavy, slow and obnoxious (i "try" to use it every day).
Free and Open Source Software, on the other hand, does not have this "risk" component (as time and effort is rewarded differently).

The problem MS is facing now is that to go into this model, a huge amount of money will have to be spent over a number of years (as this will not be ready tomorrow) and, at the end, alternatives will keep getting better. Alternatives that very well might be free at the end. It's worst if you consider that a merge with Yahoo! could divert MS attention in the next year or two.

I remember reading a piece from a well know developer (maybe Joel Spolsky) that said something on the line: don't worry about speed, don't worry about technology limitations, worry about function and ease of use. Speed and limitations always disappear. When that happens, you might have a killer app.

I really don't know if MS has some valid option now. They have been pushing against software on the net for so long (claiming that users wan't the desktop), while others started to migrate. Now could be too late for this. And limitations are certainly disappearing.
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Anonymous Coward, 19 Apr 2008 @ 9:14am

Your Work is Belong to US
If they stop paying, they lose the software (but keep their data and documents, of course).

Mike, that may true true in some cases, but not all. The grade school that the daughter of a friend of mine goes to recently got into a deal with Microsoft that lets all of the students with internet access at home use Microsoft Office 2007 at home but only online as a service. At first, this looks appealing to the students. Until, that is, they try to save a local copy of their work and find out that it can't be done. Nor can they e-mail a copy. Even the function to print it has been locked out. They are only allowed to save their work online. It seems that Microsoft wants to charge the school extra to let students keep their own documents. And when the school year is over, so is the student's access to Office and their work. This is the same old "lock-in" business model Microsoft has based their entire company on so I don't really know why anyone would expect it to suddenly change now. In conclusion, while Microsoft may in some cases let people "keep their data and documents" as you say, that certainly isn't true in all cases and in others it may come with an extra charge.
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Matt, 19 Apr 2008 @ 8:38pm

This Will Fail
If Microsoft goes ahead with this subscription based model, you will find A LOT more Open Office users.
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Bluebearr, 20 Apr 2008 @ 2:37pm

Companies need to own the means to access their data
Mike, some of your comments make sense. But not for an office suite. Spreadsheets, word processing documents and personal databases are some of the most enduring documents in a business environment. Businesses need to own the means to get at that data. Of course, no one owns their copy of Office, but they do have the ability to get an old CD, load up a copy of the software, and get to their data. As recently as last year I was dealing with someone needing to run Access 97 to be able to use an old database, and I myself was opening documents I created in 2000. Imagine this scenario:

a) Company creates data using subscription-based software.
b) Company archives data.
c) Ten years pass. Now Company needs to access their old data. However, they can no longer get a copy of the old software that created the documents, and the currently available software doesn't recognize the old file format. What do they do?

Yes, Microsoft has been good about maintaining compatibility with old Office versions. But does a company want to trust its archived data to what Microsoft might do in the future?
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jhunter, 21 Apr 2008 @ 7:30am

Great...
what I really needed was another monthly bill to go in with water, electricity, gas, cable, cellphone, tivo, etc.
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Computer Consulting Kit Home Study Course, 21 Apr 2008 @ 7:50am

features or benefits?
I think no matter what, software really can’t be seen as a “service.” Implicit in the idea off a “service” in terms of technology is a slew of both tangible and also “soft” benefits that help those receiving the services either do better business or get something real long term. Software is really more of a commodity – no matter how you present it – than it is a service, and anyone that stresses this as an offering is going to become a commodity to “buyers.” They are going to think, “Where can I get Office cheaper?” and all the other price-related thoughts that buying a product brings. However, it sounds like Microsoft is actually thinking of adding extra “benefits” to its offering – storage services, etc. I think in order to do well with this, even as a large company, Microsoft is going to have to really provide some personal service to its customers. I think as we’ve seen recently, Microsoft is trying to put a more personal face on its partner programs and include more different types of users into its “favorites” (small businesses, etc.), but I think the company still has a long way to convince people it’s really getting better at providing real solutions and not just products and features.
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rety, 12 Aug 2008 @ 11:23pm

Serviced office
Your inspection of these offices will confirm that our comfortably appointed Centre offers the most convenient office environment and best value for money in the city.
-http://www.mces.com.au/
by: Serviced office
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ted, 18 Nov 2009 @ 12:28pm

open office
@ interval
Open Office is cheap- in every sense of the word. Coming from using Word and now being forced into Open Office at work, I find myself feeling like a kid playing softball with one arm tied behind my back. Same goes for Excel and the Open Spreadsheet version. Neither are very compatible with Google Docs either, which poses a problem for sharing.
Many programs, like remote access software, presentation software, and antivirus software, come in free versions. I have found that a job worth doing, or in this case buying, is worth doing right.
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