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

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software as a service also means that customers are more likely to be running the latest version instead of an old and outdated version.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.