Can Microsoft Convince People to Subscribe to Software?

On the verge of what Steve Ballmer says will be a momentous year for his company, Microsoft is about to conduct a massive social experiment to see whether people are willing to pay yearly fees for basic software programs.

If it works, the company will have built a stable, lucrative new way of raking in money from consumers and small businesses. And if it changes consumer expectations enough, you just might see lots of smaller companies follow along the trail Microsoft lays down.

The details were spelled out earlier this week, when Microsoft revealed the prices it would charge for the new version of its Office software package.

Office is Microsoft’s single biggest business: It accounts for more than 90 percent of the sales in the company’s most profitable division, north of $5.6 billion in revenue during the last fiscal year. Its growth is driven by big business customers, many of whom buy their software in the form of multiple-year subscriptions.

Consumers and smaller businesses, however, don’t usually buy things that way. They’re more used to the up-front payment model, tied back to the days when all software came on discs in colorful boxes on the store shelves. They might buy one version of Office, wait out one or two new versions to wring their money out of it, and then pony up another chunk of change to get better stuff.

With the new version of Office, Microsoft is bent on changing that behavior. Sure, you can still buy software the old way—but it’ll be less convenient, and more confusing than the shiny new alternative.

(For excellent, detailed deconstructions of the subscription software offers, see the coverage from ComputerWorld, ArsTechnica, and ZDNet.)

Observers have said that, with this newest pricing shift, Microsoft is using a carrot-and-stick approach or trying to “nudge” customers toward a subscription service for Office. But I’d go a bit farther—for some buyers, it might feel like signing up with a gun to their head.

That’s because Microsoft is making it much more expensive to buy Office the old way, in order to make the new subscription model look like a better, simpler, more straightforward deal.

For a lot of people, that could be true. The consumer version of Office will cost $100 a year per household, which allows all of its applications to run on up to five computers. That includes new stuff like some free Skype calling, and SkyDrive cloud storage, along with old standby programs.

But if you don’t pay the fee next year, no more Office.

Office 2010, the last version, had a similar setup where consumers could install the home version on up to three machines. That cost $150, but it was just a one-time fee—you could use the software, theoretically, forever. The new version of Office can still be purchased as a non-subscription, available-forever product. But it’s a much worse deal than in 2010: The one-time cost is $140, and it can only be installed on one machine. That version also doesn’t have the Skype and SkyDrive extras bundled with the subscription version.

If they want Office to run on more than one computer in their house, the average consumer is just going to look at the subscription service first, because it’s set up to be easier—a lower-sounding price out of your pocket now, more stuff, for more people. You actually could get a better deal … Next Page »

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