Can Microsoft Convince People to Subscribe to Software?

9/21/12Follow @curtwoodward

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 buying separate licenses in some circumstances, but a lot of people are not going to do that much math.

A lot of people, however, will realize that this is a worse deal than they were getting before. If you upgraded to Office 2010 when it was new, you’d have paid just $150 to have it available to your family for the three years until the next update. That same setup—albeit with more stuff—will cost you twice as much under the new scheme.

Subscribing to a software service the same way you pay for cable or phone or Internet is actually a fine way to think about paying for your digital services. But it’s hard to say if there’s a broad swath of consumers who are interested in making that leap, especially if they feel like some humongous company is essentially forcing them to do it. And especially with just one option at the consumer level—$100 a year, take it or leave it.

The calculation for small businesses is somewhat different—they’re charged $150 per employee per year, but those employees can use the software on up to five computers each. I’m not sure exactly what kind of small business has five different devices assigned to each worker, but there ain’t too many of them.

Small businesses can still buy the one-time fee software for $220, but like the consumer version, its got fewer features and can only be used on one computer.

This kind of thing is unquestionably better for Microsoft because it smoothes out the spikes in revenue that come with an old-school product-release cycle. And an monthly subscription is the dream revenue stream for almost any business.

But the change could make consumers feel like Microsoft is exploiting the lack of time and energy they have for deconstructing software price schemes. For one thing, we’re still climbing out of the worst economic hole in generations, and a lot of people still do not feel very secure about their jobs, their homes, and their retirement savings.

Those people might not like the idea of getting locked into a new monthly bill that has no end in sight. And that means it’s possible that a lot of people will just buy Office 2010’s old family deal and hang on as long as possible, waiting until subscription software pricing is the only game in town. There’s some evidence of that kind of reaction already, including the entertaining comment thread on Microsoft’s own website detailing the pricing changes.

But despite the inevitable griping, it could work. And that could be really interesting.

People’s computing behaviors are rapidly changing, and with a proliferation of mobile devices and powerful laptops tapping into online services (especially Google’s Gmail and documents services), this could be a ripe opportunity for Microsoft to lead the way toward broad new adoption of the subscription business model for consumer digital services.

That would be quite a feat, especially for Microsoft, whose sense of the American consumer has been legendarily iffy over the years. It would be nice to see Microsoft leading the way on a bit of consumer technology strategy, especially if it seeds a new market opportunity for smaller companies to provide people with services for a good price.

We’ll have to wait and see—the new Office doesn’t hit the market until some time next year.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • Mr. Jorbs

    What benefits will the new office packages have over 2010? Or which features are actually useful enough to make people jump ship? I have been using office 2003 until 2010 came out, and even that upgrade wasn’t necessary for me. I think the only way this would become mainstream is if they work with retailers to bundle service with new machines. Either pay the next year or office will stop working.

  • http://pulse.yahoo.com/_GYMH7Z4NIONI33HHYBW4U4XJS4 Simple Facts

    As Joe Biden would put it, “one word:” Open Office. Or Libre Office.
    For that matter, pretty much any Linux flavor would save the average home consumer or small/home business more than enough to afford a new tablet to work with!

  • Marco van de Voort

    The subscription deal entered the software scene because in companies would be easier to book software annually by accountants. Those might actually pay for the privilege.

    However Harry Homeowner is not stupid, and does the math. Unless the subscription is significantly cheaper, he will avoid it.

  • http://newstechnica.com David Gerard

    This would work if MS Office did not have competition. However, LibreOffice is (a) free (b) updated regularly. There are all sorts of features in MS Office that aren’t in LibreOffice, but it does the basic stuff just fine, and that’s how disruptive innovation from below works. While Microsoft may be able to keep businesses paying them, consumers would jump ship immediately.

    • curtwoodward

      I’d agree the opportunity for competition is there, and being widened by MSFT as it makes this move. But so far, most free alternatives have been pretty janky. Google Docs is ehh, and I use it a lot. OpenOffice was always a pain in the ass. I will say I’ve never used LibreOffice, so I will try it.
      But someone’s got to make an open/free version that seems more “safe” and less buggy to Joe Sixpack if it wants to really make a move against the MSFT behemoth. Regular consumers want something that seems stable and real in comparison to paid Office, which sets the standard for most.

      • Douglas Goodall

        I don’t understand your post. Microsoft software is notoriously buggy, vulnerable and expensive. Show me some software that is “safe”.

        • curtwoodward

          I just mean “safe” from the Joe Blow consumer perspective, that’s why it’s in quotations – not in the sense of security, but in the sense of legitimate, with a known brand behind it.
          It’s definitely buggy, but I always found regular Office more stable and easier to use than Open Office, although it’s been years since I tried that particular alternative.
          I do use G Docs a lot, but again, people are trained that the MS Office experience is the standard and G Docs seems like a lesser product in that sense. It should be lesser in some way, since it’s free, of course. I just mean that a lot of mainstream consumers are going to have trouble figuring out new things – they might be likely to just pay thru the nose and complain, for now.

        • Timpster

          buggy YES
          in office 2003 i had to make a calender about every month for school in computer class
          and i go to put in a picture in one spot but it would go in another like WTF man i had to move it all over the place to get it right

  • cpt_roxas

    This will cause a massive move to Google Documents and other free or low cost alternatives by the average user and small business. Microsoft’s greed is going to be their downfall.

  • Ray Charbonneau

    Hmm.. $100/year for Office or Google Apps for free.

  • Karin

    A yearly fee for a Microsoft product? Surely, that is enough to persuade me to walk in the other direction.

  • CrossWired

    There’s been no real innovation with office since 2003. It gets sold in the millions because it’s a standard business tool, and MS decided they want to squeeze more money out of it. So they bump up the prices for the “buy outright” version and rip people off with the rented version.

    Guess what’s going to happen now. Most of us will reuse our old versions. The proliferation of cracks will spike. MS loses in the end.

    • curtwoodward

      I also just noticed on Friday: Office 2010 Home (licensed for three machines) is on sale for $99 at Best Buy. Same price as 365 Home for one year, whenever it’s released.

  • Robusto

    ….OR YOU COUD JUST SWITCH TO LIBREOFFICE AND BE DONE WITH THAT…

    • Timpster

      OH YEAH that’s what I’M talkin bout!!!

  • curtwoodward

    I also completely missed this tidbit – not something MSFT invented, but being deployed nonetheless. Free Office 365 for education, to get the next generation hooked on the new version (and ready to shell out $100 a years!)
    They rolled this out under a big youth philanthropy initiative.
    http://www.microsoft.com/en-us/office365/education/school-services.aspx

  • Douglas Goodall

    I for one would not be interested in any subscription based licensing with Microsoft. I go for various periods of time between my usage of Office. Should I pay $100 per year if I only use it three times? I am a Mac switcher, and only occasionally do I need to use Office for some business purpose or another. I keep a Windows desktop with office around for the occasional use, and it doesn’t matter to me if the latest and greatest version has some new bell or whistle. I am also not comfortable with the idea that they will be constantly upgrading the software. It is hard enough to construct a stable machine and load a well integrated set of applications. Like many IT people, I am uncomfortable about accepting updates on an automatic basis. Usually enterprise IT people test updates before rolling them out. I don’t like my documents living in the cloud because I don’t know who has access to my data from one month to the next.

    So lets summarize…

    1. They want me to pay on a time basis, regardless of my actual usage.

    2. They want to slipstream the software behind my back whenever they like.

    3. They want to store my data on whichever cloud provider they can cut a deal with, possibly changing from moment to moment.

    4. They want me to pay upfront for the entire year.

    All this like they are doing me a favor.

    In your dreams Microsoft.