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

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

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.

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