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 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.

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