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Microsoft reaps profits from revamped Office 2007 pricing

The keys: Opening the student edition to all, shifting Outlook to the pricier standard edition

By Eric Lai
July 27, 2007 12:00 PM ET

Computerworld - For Daniel Duffy, president of Valley Network Solutions Inc., a leading Fresno, Calif.-based systems integrator, the strong demand by his customers for Office 2007 instead of Microsoft Corp.'s other big release this year -- Windows Vista -- was unexpected.

"There are a lot of five-to-50-seat companies getting new installations of Office for the first time," he said. "We figured there'd be more demand for Vista. Actually, I'm a little surprised with the [slow] uptake."

So perhaps are a lot of people. Although Vista has gotten the lion's share of Microsoft's marketing dollars, its sales performance so far remains mixed. Use of the new operating system may be steadily increasing, but many users are clinging to Windows XP, forcing Microsoft to trim its fiscal 2008 projections of Vista's adoption by users.

Though on an upswing in recent years, Office, meanwhile has seemed vulnerable. Open-source rivals such as the suite, and online upstarts such as Google Docs and ThinkFree, have gained buzz -- and fans. And Office 2007's radically overhauled Ribbon interface, designed to expose more of the software's thousands of features to users, has many grumbling about the inconvenience and likely retraining.

But Office continues to prove itself as Microsoft's quiet profit machine. During the company's fourth-quarter earnings conference call last week, Microsoft officials said that revenue in its business division -- driven largely by enterprise sales of Office -- was up 19% year over year to $4.6 billion. Sales in that same division for the current quarter are expected to increase 14% to 15% from the same period a year ago.

And at its annual meeting with financial analysts yesterday, Microsoft said the renewal rate for Office is running at 90%. Jeff Raikes, president of Microsoft's business division, attributed that to "the strength of our road map and the future [that customers] see in what we are investing in for the Office system."

Moreover, data from market researcher NPD Group Inc. shows that at the retail stores and e-commerce sites where most consumers and small businesses buy software, revenue from all versions of Office was up 60% in the first six months of this year compared with the same period in 2006.

"Microsoft Office has been breaking all kinds of land speed records, but there doesn't seem to be many spectators in the racetrack stands," said Chris Swenson, an analyst at Port Washington, N.Y.-based NPD. "It's a phenomenally successful product."

Swenson credits Office's success in the retail channel -- where it has seen double-digit revenue growth year over year for the past three years -- to changes in Office's pricing and feature sets. Although the standard edition of Office may list at $399, the vast majority of consumers and small businesses either buy less expensive upgrades or, in most cases, lower-priced versions of Office once aimed solely at students.

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