Having just postponed a subscription offering of Office XP in the US, Microsoft confirmed on Tuesday that it will offer Office XP by subscription in Australia and New Zealand when the product launches on May 31.
Australian customers will have the option of paying a one-year subscription of 48 per cent of the cost of a regular upgrade from Office 2000. But they would have to keep paying that charge every year for continued use of the software.
Microsoft is introducing the subscription versions as part of its eventual move toward selling software as an online service rather than in boxed packages. That shift would mean a dramatic change in the way Microsoft earns revenue. Even before the technology is ready to deliver subscriptions online, the Redmond, Washington-based software giant wants to experiment with the new revenue model. So it will begin to sell subscriptions to packaged products.
The subscription version of Office contains extra code that is sometimes called a "time bomb" to remind the user when the subscription needs renewal. Users will be able to renew the subscription by getting a packaged product from a retailer, or by renewing over the internet or via the phone. If a user chooses not to renew, after a grace period of five uses, the software will not create any new documents or edit or save existing documents. A user will be able only to load, view and print files previously created with that copy of Office.
Microsoft is citing nonsubscription prices in Australia for Office XP Professional of A$749 for customers upgrading from Office 2000 - that's most customers - and $1,288 for first-time buyers. Those who want to buy on a subscription basis would pay $359 per year for Office XP Professional Subscription. As a special offer for the launch, Microsoft is also offering a rebate of $60 on the subscription version until the end of August. New Zealand pricing was not available at press time.
"We have listened to what our customers want here in Australia and are pleased to be the world leader in offering a software subscription," Mark Linton, Microsoft Australia's office product manager, said in a statement.
For Microsoft, a software-by-subscription model has great appeal. It means a constant revenue stream and an end to the constant need to persuade consumers to upgrade their software - something that has become increasingly difficult as Microsoft's product line has matured. Users see few reasons to upgrade if what they have works just fine. An estimated 60 per cent of Office users have a version older than the most current Office 2000 product.
"The subscription model for Office has long-term strategic benefits for Microsoft," says analyst Chris Le Tocq of Guernsey Research. "It creates a cadre of users immune to the peaks and valleys of the upgrade business. It makes those users a more attractive base for selling (additional) .Net services later."
The announced pricing sets the cost to current Office users at a level equivalent to an upgrade every two years. That might not be a very competitive package, given that many users take much longer to buy upgrades. Many current users are still happy to use Office 97. For first-time buyers, it's certainly a more attractive deal.
Microsoft confirmed that it postponed its plan to offer Office XP by subscription in the US. The indefinite delay in the US market is probably a result of concern that a move to subscriptions could lower revenues for the fourth quarter of this year. Although the subscription model looks like a winner for Microsoft in the long term, the company will take a revenue hit in the short term as subscribers pay smaller amounts on a continued basis. This year, while the US economy slows, Microsoft is straining to post sustained revenues. Desktop applications account for 37 per cent of Microsoft revenue, and Office accounts for the bulk of that.
"Microsoft can't afford any weakness in Q4 revenues no matter how strategically desirable," says Le Tocq. "There's a lot of short-term thinking going on."
Lisa Gurry, a product manager for Office, says Microsoft is taking "a conservative approach to delivery" in the US market in order to ensure that its sales channels are ready for the shift.
In the US, Microsoft is citing an estimated retail price of US$579 for first-time buyers of Office XP Professional and $329 for upgrades. This is roughly in line with current pricing for Office 2000.
Some years down the road, web versions of both the Windows operating system and the Office desktop application suite will be standard; consumers will be able to download new editions of the software from the internet and will pay a monthly subscription for continued use. But Microsoft must fully implement its web strategy, called .Net, to deliver online subscriptions. Web versions of both Office and Windows require major technology changes to the current code that will take years to deliver.
In the meantime, Microsoft wants to forge ahead with adjusting the revenue model and work out the implications of the changes. Australia and New Zealand are the test markets.