Can Office 365 convince you that renting software is a good deal?

Can Office 365 convince you that renting software is a good deal?

Summary: With its just-announced Office 365 subscription plans, Microsoft is asking customers to rent its flagship productivity software instead of buying outright. It might be a good deal for everyone, but is Microsoft willing to be aggressive with pricing?


Rent or buy?

That’s a question that businesses and consumers face all the time. Should you lease a new car or buy it outright? Should you open your new business in someone else’s office space or purchase your own building? Should you own your house or rent?

And now, with its just-announced Office 365 subscription plans, Microsoft is adding its flagship productivity software to your list of rent-or-buy decisions.

Calculating whether the new plans make sense economically isn’t possible yet, because Microsoft isn’t discussing how much they’ll charge for each subscription offering. Nor have they confirmed the prices of the traditional packages—the ones with perpetual licenses. (Check this page for an overview of all the plans, and read my Office 365 FAQ for more details.)

But it’s possible to do back-of-the-envelope calculations to see what those prices are likely to be and to assess the pros and cons of this approach.

I know from reading comments on previous posts that some people have a knee-jerk reaction to this issue. But suspend that reaction for a minute and ask yourself two questions: Why is Microsoft pushing subscription plans? And why should you consider them?

For Microsoft, the answer is simple: it means a more predictable revenue stream, and an opportunity to sell more upgrades.

For customers, it means a predictable cost, with fewer large outlays. It also has some significant other advantages, including ease of management.

Selling software as a service also means that customers are more likely to be running the latest version instead of an old and outdated version. That’s good for the customer, who doesn’t have to think about laying out $100 or more per PC when a new version is released—the upgrade is a benefit of the subscription. And those upgrades to shiny new software—presumably faster, more secure, more reliable, and more full-featured than the previous version—drive customer satisfaction scores higher.

Priced right, the subscription plan puts more revenue in Microsoft’s pockets by convincing cheapskates to spend a little more and rewarding enthusiastic users, who actually save money in the long run.

Let me explain.

Let’s say, for the sake of argument, that the Office 2010 Home and Student edition costs $120, and that the Home and Business edition costs $180. Let’s also say that, on average, customers hang on to either version of Outlook for an average of 4 years. We can also assume that the cost of money is zero (which is depressingly true right now).

That makes the effective monthly “rent” for the Office software about $2.50 for consumers and $3.75 for businesses, a fee which has to be paid in advance.

So what if Microsoft can convince some percentage of those customers to pay $5 a month for the Home Premium edition and $10 a month for the Small Business edition? They’ve more than doubled their revenue from those customers and added potentially hundreds of millions of dollars to the top line of their most successful division.

That’s a good deal for Microsoft, but what’s in it for the customers?

To sweeten the deal, the two subscription editions come with extras that aren’t included with the shrink-wrapped software packages:

  • 60 Skype minutes a month; at 2.3 cents per minute, that’s worth as much as $1.38.
  • 20 GB of extra online storage (in SkyDrive for consumers, in SharePoint for business customers); Microsoft offers 20 GB as a SkyDrive add-on for $10 per year, or $0.83 per month (competitors like Dropbox and Google Drive charge much more than that).
  • Business customers get hosted Exchange through Office 365, with e-mail, calendar, contacts, and tasks; the basic P1 plan from Office 365 currently costs $6 per month.
  • No activation hassles, no product keys, and the ability to use the desktop apps on up to five devices; this is a huge benefit compared to Office 2010, which allows use on only one, two, or three devices and adds the headaches of activation.
  • Additional software: the new Office 2013 packages include more apps than are in their Office 2010 counterparts; home users get Outlook, Access, and Publisher as extras, while small business users get Access, Publisher, InfoPath, and the Lync client. Essentially, it’s an upgrade to the much more expensive Office Professional, which currently costs about $300, or $6.25 per month when amortized over 48 months. That’s an extra “value” of $3.75 per month for Home customers and $2.50 a month for Small Business customers.

And, most importantly, you get the most current edition of the desktop software (and the Office Web Apps) without having to pay a big chunk of change for it.

So Microsoft can argue that the “actual value” of an Office 365 Home Premium subscription is over $8 per month, and that an Office 365 Small Business subscription is worth about $15.

That’s fine as a point of comparison, but if the actual price tags are anything close to that than the subscription offering will be a flop.

The real point of comparison for Microsoft, like it or not, is Google Apps for Business, which charges $5 a month or $50 a year. That has to be the price point for the Office 365 Home Premium subscription, at which point Microsoft can make the devastating argument that they offer exactly the same features as Google and you get the desktop apps for free.

For the Small Business offering, I think a $10-per-month price point with a $99 per year option would hit the magic number. (Office 365 Enterprise plans, which include access to Office 2010 Enterprise edition, is already priced at $20 per seat, and I think that price will remain in place.

Those are aggressive prices, and the part of me that has been watching Microsoft for decades says they’ll try to keep the price high. If they do, they’re making a mistake.

The software landscape has changed dramatically in the past few years. Switching to a subscription model will work, but only if the price is right.

Topics: Cloud, Microsoft, Software

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  • Works for me!

    At that price ($5 per month), I'd definitely sign up for Office. I'm currently trying to decide if I should purchase Office right now or wait for the new version. This really makes me want to wait.
    • Price

      My uninformed guess is that the price will be between 6.95 and 7.95 per month. The added value from getting 5 legal installs cannot be understated. Further, if they open these install up to Tablet versions, then a user will be completely covered on the PC, Mac, and mobile platforms.
      • The 5 PC

        thing is a joke to be honest. Most people dont have two PC's let alone 5.

        It is tied to your skydrive account, so if you are trying to use it for a family you will have to create a generic skydrive account just for this. That tag the document as that account and try to sync with that account to skydrive.
        • It's 5 devices...

          ...not 5 PCs. That will include the option to install on tablets and Windows Phone smartphones. Running the preview right now I've got 2 installs (one on my PC and one on my laptop) and may install 2 more on the wife's PC and laptop. Theoretically I could add a 5th install to a smartphone or tablet at some point in the future if I wanted to use all 5.

          Each install can also be signed in to with a different Microsoft account, so you wouldn't necessarily have to share a single SkyDrive account across every member of your family. It even remembers the different users and their recent documents so you can switch accounts with just a click or two.
      • A lot of the buzz says $6.

        The price point that I've seen floated by a lot of analysts is $6 or under. That sounds about right, I guess; I've seen it suggested that it might be as low as $3 or $4, but $5 to $6 would put it close to Google and still hold them in the "value" range where it would make sense compared to a retail version. I have no use for the Skype minutes but wouldn't mind the added SkyDrive space (I've already got 25 GB as an early adopter, even though I never really started using the thing until the Windows 8 previews hit) and the extra installs would let me put Office on my PC, my laptop, and the wife's PC and laptop without having to buy a random extra license (or stick with an older version.) I like Office 2013 and can see the potential value of Office 365, but if the price is too high then it won't be worth it to me to subscribe.
    • I agree

      I'd much rather rent than buy, provided (a) the price is low and (b) I can terminate the agreement at any time. If they offer discounts for bundles, that would make it even better.

      Software, like a lot of products, is really more of a 'capital good' than a 'consumer good'. Firms even treat software purchases as investment, which provides a stream of 'software services'.

      For products with this 'capital good' aspect, renting without fixed contract lengths is good, because it reduces the chances of mistakenly over- or under-investing. Aggregated over all such products in the economy, moves towards renting might even help to reduce cyclical fluctuations (boom and bust).
    • Absolutely!

      Me too! Office is just so super! I can hardly wait to begin using its advanced features! I'll definitely sign up. And I'll go door-to-door in my neighborhood signing up other people!

      OK, I said it. When do I get my twenty bucks?
      Robert Hahn
      • Twenty bucks?

        You misunderstood... you're getting twenty dollars in Microsoft Points.
        Hallowed are the Ori
      • Keep lowering your gunsights, money dudes

        Robert Hahn, I thought you were serious at first! I was worried for you. Thank goodness I realized you are a master of irony.

        As for that $10 a month mentioned by others... Yeah I don't think so. OF COURSE Office is central to my daily life. But I've switched to OpenOffice and LibreOffice at home, voluntarily. OpenOffice is on my work PC now, alongside MS Office.

        Maybe $1 a month, MS Office? MAYBE $3 a month? I might pay those.

        And might I just say: thank GOD for the Free Software Foundation, GNU, Richard Stallman, Linus Torvalds, and the many many thousands who have given us the opportunity to say "no". Without those guys I shudder to think what corner we might be stuck in right now.
        • Cheapskate...

          I'm sure you aren't Microsoft's target market... As for those of us paying thousands for Microsoft's Office and other products, we find this to be quite the beneficial way of getting Office applications cheaper and with greater services.

          Truly, those of us who purchase Office with Software Assurance win in this deal.

          For guys like you, go use their free Web Apps and you're fine. You're probably not all that productive anyway. ( ;
          • LOL! Cheapskate indeed!

            So someone has convinced you that renting is actually better than owning? Maybe for you but that doesn't make us cheap if are needs are met by free solutions.
          • Someone convinced you...

            that owning something that isn't 'real' is better than renting?? Please don't call out my delusions when you suffer from the same yourself... Software isn't 'real' in the sense that your house, car, and other items are... You can always failback to free solutions if necessary, but converting your capital expenditures to operating expenses is a good idea in almost every case... Especially when measured over time.

            Now, I want to own my car and my house - without financing whenever possible -, but 'owning' something that isn't tangible is like claiming you own the radio waves... You have rights to use it... Albeit perpetual can come in handy on rare occasions, but you're in a crisis at that point and I'm hoping that your software is down on your priority list of concerns in that case.
          • So you admit to having delusions

            That's good to know.

            And if Micro$oft told you to bend over, you would do that too. Right?

            If you want to split hairs, software IS tangible. It's actual code written on a HD. You do know what a HD is, don't you?

            Just because you can't see it with the naked eye doesn't mean it's not there. Or did that need to be pointed out as well?
          • You dont get

            how many people are just not tied to office anymore.

            I dont pay for it or any real price for it. If I could not get Office through my job for $15 I would NOT buy it all. Open/Libre office could easily be used for what I need.
          • 80% 0r more use is simple needs

            I've gotten tired of MS's new version of Office being a scramble the menus and add a feature that I don't need type change, to unsaturated the market. We have had shared resources for years in LAN, WAN shared drives and folders and internet sharing options. There have been sharing resources for cloud like resources for years. More then 80% of the use is still word processing, presentation and spread sheet, propitiatory ERP type uses. I know the the names have changed and marketing types have sold upper management on the most current fad, but we could still do business with the word processors, presentation programs and spread sheets of years past with a little better sharing options. ERP by it's nature is already a shared almost like a cloud type application. I don't mean to support the cloud either, that is FUD marketing double speak to unsaturated the market to make the next round of big corporate bucks and lock in users to keep put, and keep paying homage to corp big brothers.
          • All good points. Not renting ANY software here.

            I don't need all that stuff at home.

            "For customers, it means a predictable cost, with fewer large outlays." (Ed Bott)

            True, but NOT the whole picture, as it carefully ignores the fact that the TOTAL outlay over time will be MORE. If it weren't, then MS wouldn't be pushing it.
  • Working Offline

    As long as my users can work offline (disconnected from any network whatsoever) then the value argument is good. But if anything requires Internet access (installation, features, licensing, etc.) then it doesn't matter. I know that you can rent locally-installed apps, but there can't be a requirement for even occasional Internet connectivity, even at the beginning for the initial install.

    Also, there cannot be a requirement to have a Microsoft Account (LiveID). Users must be able to use AD domain accounts only.
    • Working Offline

      @YukioCowboy If you cannot be online for the install then I think you will have a problem signing up for the subscription service. You will be able to use the installs no problem after install though.
    • Amen.

      Web dependence, not to mention dependence on servers we do not control, leaves us no plan b in case of an outage. If a business really gets in a bind and needs to cut expenses it can be problematic. I'd rather have a version I own, so if the economy tanks, a fundamental part of my operations is not at risk.
      • Are you a worry wart??

        Did the economy tank so much that you couldn't afford Office and other critical business applications? If you went from 300 employees down to 100, your costs drop at that point as well... And you didn't pay for 200 copies you now do not need. You're paying a very high premium for something that is not all that likely to happen....

        And seriously, when was the last time you lost internet for an extended period of time? Don't pigeon-hole your thinking like that. Keeping your costs down and being smarter with your finances will pay off in much bigger dividends than worrying about the elusive What-Ifs so much. Concentrate on the ones that are likely to happen rather than think just because you paid for it outright that it's a better deal.