Office Web: Does Microsoft really get free?

As Microsoft prepares a free Web-based version of Office 2010 it hopes to beat Google at its own game. Kudos to Microsoft for finally embracing a business model that could eventually upend its cash cow Office business. It has little choice, of course: Its Office business model stands to be steadily eroded away, starting with the low end of the market, by Google Docs, Zoho and other Web-based suites that are good enough for many users.

But does Microsoft really know how to do free?

Fat model, fat profits 

Microsoft's model has always been to sell software, and to push users to buy new versions of the same old thing every 18-36 months, by ladling on one new feature after another. By the time Microsoft heaved Office 2003 out the door the suite had become such a bulky product, with so many buried features and functions, that the company had to completely recreate the user interface to "expose the functionality" in the next version, Office 2007. This business model had served the company well until now: Office brings in $15 - $20 billion a year in revenues, second only to Microsoft's Windows franchise. But the sales curve has flattened, even as Google Docs gained traction.

Google's model is to sell contextually targeted advertising and to tie its products into its search engine. Microsoft, with its Bing search engine and the Web-based version of office, Office Web, is pursing that same "free" business model perfected by Google.

But Microsoft's corporate culture is still built around the idea of selling the user ever more features. Teasing users with a free, dumbed down Office online and then trying to upsell them with a "more is better" strategy could easily backfire.

Free = Limited

A Computerworld story on the free Office Web suite gets right to the crux of the issue. It states that, according to Microsoft, the Web version will "lack many features." That may look to users more like a dumbed down product with holes in it than a well thought out application that's built from the ground up to be fast, efficient and a complete solution for most users.

With Google Docs, less is more. With Office Web, less may just be less - something designed to get you to buy the complete product you'll need to actually do real work.

As for the risk that the free Office Web might cannibalize Office 2010 software sales, Microsoft contends that "Even the most price-sensitive consumers will still want to buy a fuller-featured, easier-to-use client version of Office." It points to Microsoft Works, a very limited product, as an example of a low end "giveaway" product that didn't cannibalize sales of Office.

Perhaps. But here's the risk: Faced with paying hundreds of dollars for the Office 2010 suite, many users may just decide that a free, Web-based suite is "good enough." And I doubt that they'll settle for a "Works" version of Office online.

The cost of free 

Microsoft needs to prepare for the inevitable: A world in which it will have to cut the margins on its Office business and transition to an advertising-supported online model for a substantial portion of the user base in order for the line of business to survive. 

But Chris Capossela, senior vice-president of the information worker product management group at Microsoft, already has a ready rationale as to why that won't happen. As paraphrased in the story: "Even if consumers and small businesses move en masse to Office Web, that won't be so bad, since the revenue per customer wasn't that high. Many were using older versions of Office or simply pirating the software."

Capossela may be right. But that business, whether Microsoft has been able to monetize it or not, is growing. Meanwhile, Google and Zoho will continue to move up the "value chain" with more sophisticated offerings.

If the Microsoft folks think free is just an extension of their traditional Office business model, a teaser for the "real" product, then they're just deluding themselves.

Copyright © 2009 IDG Communications, Inc.

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