Shifting subscriptions: Microsoft's bet-the-company strategy for the future of software

Shifting subscriptions: Microsoft's bet-the-company strategy for the future of software

Summary: Microsoft's been making a lot of big bets recently. But do they all add up to one really big bet — the biggest the company has ever made?

SHARE:

Microsoft CEO Steve Ballmer has been talking a lot about "big bets". Windows 8 is a big bet. Azure is a big bet. Surface is a big bet. Windows Phone another, along with the new Office and Office 365.

But as big as they are, it's becoming clear that they're not the really big bet that the Redmond giant is making — though they're all part of it.

Office Launch July 2012 620x412
Microsoft CEO Steve Ballmer presenting at the Office 2013 launch event in San Francisco.

So what is that big bet, and why is it so important for Microsoft?

Two recent events have shed light on just what's happening behind the scenes. The first was at Microsoft's Worldwide Partner Conference in Toronto, the event where it shares its marketing plans with partners and resellers from all over the world.

There, the company announced a new way of selling its Office 365 cloud service, Office 365 Open, which lets resellers bill their customers directly — rather than waiting for a revenue share cheque from Microsoft. The second came at the Office 2013 launch, where Microsoft announced that it would be selling Office subscriptions with Office 365 alongside boxed copies.

That second announcement made more sense of Office 365 Open. Selling boxed copies of Office gave resellers a well-understood revenue stream — one that a subscription service would disrupt.

But by allowing resellers to convert that one-off cost into a continuing revenue stream by Office 365 open, Microsoft neatly prevented a possible revolt from its main channel to end users — and also avoided having to increase the size of its direct sales business.

Putting two and two together, it's clear that Microsoft is making a huge bet on a fundamental change in the software industry, one that changes the way people buy software. Instead of boxed copies that connect to cloud services, it's working towards a future where users and IT departments buy subscriptions to cloud services, and get desktop software as part of the package.

It's a future that's less software plus services and more services plus software. It really is a bet-the-company strategy, one that changes revenue models and customer and partner relationships.

It's also a shift that changes the traditional cadence of Microsoft's software delivery, something I've suggested we're likely to see with Windows. Instead of a big-bang release of a new Office every three years or so, a subscription version of Office becomes something that's continually improved and continually updated.

It's no longer Office 2013, it's Office 365, with quarterly updates to the cloud servers and monthly, even weekly, seamless updates to the desktop tooling.

That changing cadence makes for a much more nimble Microsoft, too. Instead of waiting three years to remove a dead social network from Outlook's address book tools, Microsoft will be able to replace it quickly and quietly, as soon as the numbers show people have stopped using it.

So what could shifting to a subscription model do to Microsoft's financial numbers?

Let's look at Office, for example, which the company says has a billion licensed users. It's part of Microsoft's Business division, which last quarter reported revenues of around $6.3bn. If all those users switch to an Office 365 E3 subscription, which at $20 per month is the cheapest to come with a full Office licence, Office subscription revenues alone would account for $60bn a quarter — more than triple the company's total revenue in that same quarter. That's also slightly less than twice Apple's entire quarterly revenue.

Office alone bigger than Apple? That's a really big bet.

Of course not all users will be subscribers, and not all subscribers will pay that amount — especially as we don't know what the Office/SkyDrive home subscription will cost.

But shifting to a subscription rate that's not much more than the cost of a large Starbucks coffee a week would rapidly change the shape of the software business.

There's a lot of risk to a change this big, and Microsoft has made the sensible decision to start pioneering it with Office. Still think it doesn't add up?

Well, it's not just Microsoft making that bet: Adobe's shift to a subscription model with CS6 and the Creative Cloud is indicative of wider industry changes under way.

Topics: Microsoft, Apple, Cloud, Software, Tech Industry

Simon Bisson

About Simon Bisson

Simon Bisson is a freelance technology journalist. He specialises in architecture and enterprise IT. He ran one of the UK's first national ISPs and moved to writing around the time of the collapse of the first dotcom boom. He still writes code.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

29 comments
Log in or register to join the discussion
  • This is a good move by Microsoft.

    From the latest direction in HW/mobile/cloud it would appear that the desk top revenue stream has a limited life span. Add to that the open source/virtual pressure and the pinch becomes more accute.
    droidfromsd
    • But why should we care?

      What is in it for the users? I don't want to trust my data to "their cloud" and frankly my copies of Office 2K3 and 2K7 work perfectly fine, heck even my ancient Office 2K with the converter pack opens all the new formats just fine on my netbook without the bloat.

      You have to give the customer something they want and with this? it just seems like a way to please wall street and NOT the customers.
      PC builder
      • How Old Are You?

        Will you be using a computing device in 2025? How will those versions of Office work then? This cloud modus operandi is not about the next couple of years and short term profits. I don't like it either, but the pipes are fat and just about everybody thinks this is the future. Next you'll be whining about not being able to go to a local store and buy programs on CDs, like you did in the past.
        Yacko
  • I hate this new direction...

    Already I'm paying $20+ a month for satellite radio. I'm paying $60.00 a month for internet/TV. I'm paying $9.00 a month for Hulu+. I'm paying $1400 a month for my mortgage. (Just paid off my car, but that was $200 a month). Every month I also pay nearly $200 to my electric company. And it feels like the subscriptions just continue to multiply and proliferate. And while $20.00 a month for Office 365 may be just the price of a large Starbucks coffee every week, it adds up to $240.00 a year. And that's like buying the full Microsoft office suite every two years! Who can afford that?
    dsf3g
    • It "could" make sense for business users

      That pay software maintenance every year. But for a regular end user it will be much more expensive to keep paying for a software that you can own basically with one payment tha covers a year of subscription. And use it for maybe 3 for or 4 years.
      jsapaj
    • There is madness to the method.

      If people can be pushed into Cloud computing to the point that they are no longer aware of the "Cloud", the strong-arm companies like MS can give you a junk X-box with a keyboard attached, and exsanguinate you with subscription costs (on top of your IAP costs) just so that you can type a simple post like this on your HDTV.
      Treknology
  • no way am I paying a monthly fee for office products

    I made the switch to OpenOffice a while ago because
    1) Microsoft Office utilities are vastly over priced
    2) I hate the interface they introduced with 2007 & 2010... I haven't even bothered looking at 2013 information

    I'm glad I did because there's no way in hell i'm going to sink a monthly fee for Office. I don't doubt that it's great for Microsoft, and maybe even some businesses.

    I'm also not a fan of cloud based computing. The thing I like to remind my friends of when they ask me about it is: "Who owns the cloud? You? Or some faceless company that really doesn't care about anything but profit? What happens to your private data that you have up there if that corporation has a sudden ethical breakdown?"

    The inherent problem with cloud based computing is simple: Once your stuff is in the cloud you no longer *really* own it. Sure, the folks who own the cloud tell you it's yours. It's secure... it's safe... it'll always be there.

    Until their servers get hacked or they go out of business, or they have an ethical breakdown and decide to sell your data... or the Government asks them for it... etc.. etc... the list goes on.


    And then... there's the cost. I dunno about most people but even when I DID use office I generally skipped 1 or 2 generations before buying an upgrade. Because, frankly, Office is over priced. I used office 2003 until nearly 2010, just as an example... and at that point I only bought Office 2007 (2010 hadn't released just yet). And, after I saw 2007 I promptly switched to Open Office because I detest the new interface of Office.

    dsf3g is absolutely correct... this 'new' direction is far more expensive for end users... Subscription based software doesn't work very well... just look at the video game (MMORPG) industry... most MMO's have had to dump their subscription based services in favor of free-2-play models because people just don't want to eat a monthly fee. We're not stupid.
    elnator
    • licences

      I think the only reason most companies go with the latest version of Office is because of Software Assurance licences they bought (that mandates it). If companies had to buy the actual software each year, they just wouldn't.

      As it is, with the introduction of per-month costs, companies are much more likely to see the cost in their balance sheets every month, they're likely to start thinking of alternatives. Google is well placed here to offer Docs for a lot less.
      gbjbaanb
      • Google is a cloud service. look at my point on that

        Google may be well placed but, since it's a cloud service, there's no way I'd use it. Don't get me wrong, I like Google's stuff... but it's a cloud...

        Putting it mildly putting things in the 'cloud' means you are trusting that whomever owns the cloud you are using will not ever have an ethical breakdown, get hacked, have an IT employee go postal... have a server farm failure... go out of business... just decide... hey... this cloud stuff isn't profitable... etc :)

        How many 'privacy' or 'hacking' issues do people need to read about regarding internet cloud services like:
        Facebook
        Apple
        Google
        Yahoo
        LinkedIn
        etc.

        Before they wake up and realize that once your stuff is out on the web it's no longer 'safe' from hackers? Sure, someone could technically hack your own PC as well but it's a lot less likely than someone deciding to hack a major cloud provider so that they can access EVERYONE's information and not just yours.
        elnator
        • Bankruptcy by a thousand cuts

          Agreed.
          The whole point of the subscription model is to suck more money out of the consumer.

          Q - Who'd pay $1000 for Office, when you can get it for $400?
          A - Someone who is subscribing to it.
          lehnerus2000
        • So...

          You don't use banks, because they get robbed/broken into...

          If you want to live a paranoid life then go for it. I am almost positive that if the internet was around when the concept of banks was formed you would be saying the same thing about them.

          To each his own, but think about it this way... If someone wants to get into Fort Knox, they will. If your house is as well secured as Fort Knox and they want to get in... they will. So instead of living looking over your shoulder every step of the way, why don't you enjoy this era we live in.

          Oh and FYI doesn't matter WHAT mail system you use, or what ISP you use, they ALL pass through the net (the cloud).

          Come to think of it, maybe you should cancel your ISP account now. Since the cloud is this evil place.

          "How many 'privacy' or 'hacking' issues do people need to read about regarding internet cloud services like:"
          How many banks have been hacked? How many government agencies? What is your point?

          My 2c
          IceQ
    • Yep just look at the MMO industry

      The elephant in the room is Blizzard with over 10 million subscribers.

      Would I pay a monthly fee to get Office with patches and updates delivered as long as I subscribe? Of course I would, but then I can see the benefits of Blizzard's model too, as well as the other successful MMOs (albeit at a lower level) that still use subs.

      Going free to play is more a judgement on the game, than a repudiation of the business model and even those games that just sell once, nickel and dime you with stores.

      In fact I'm considering the same method for selling my company's software, it just makes sense.
      Tony_McS
    • ...

      "Subscription based software doesn't work very well... just look at the video game (MMORPG) industry... most MMO's have had to dump their subscription based services in favor of free-2-play models because people just don't want to eat a monthly fee. We're not stupid."

      Not quite.

      - World of Warcraft, Sub based. I let my sub expire because I got bored. *
      - Guild wars, always been free to play, stopped playing because I got bored. I do play from time to time.
      - EVE Online, Still Sub based. I still have my 3 subs running.
      - Star Wars TOR, Sub based. I let my sub expire because I got bored. *
      - AION, was sub, now free to play, was good for a month, then got bored.*
      - Star Trek Online, free to play, was good for a month, then got bored.*

      (* = My account is inactive)

      So I have no objections to paying a subscription fee for something. However if I get bored with it I will stop paying & playing. I still pay & play EVE because that game changes and updates almost every quarter.

      So be careful when you generalise.

      If Office gave me something at home that I could not get out of Libre Office and if it is a feature that I cannot live without, then I would pay a sub. But since the current office does not pass those two points I won't be getting office there.
      IceQ
  • No-one 'has' to buy an Office subscription

    If you want to buy a perpetual licence, you can still do that.

    On the server side, remember the 'licence mobility' option; if you paid for an on-premise server licence, you can switch it to the cloud and use it there instead without paying for a new licence - it would be really interesting if you could convert an Exchange 2010 licence to Office 365 subscriptions for a number of months, say.
    mary.branscombe
    • Yes, for now...

      Yes, for now you can purchase the perpetual license. But my worry is that subscription services are where things are moving, just as the in-app purchase model is slowly but surely replacing the one time payment model for mobile games. I understand why software companies are moving in that direction, but as an end user I do not like it. I'd rather pay $10.00 to own the full game, than $.99 cents to install it, and then keep paying to advance in the game. It's the same with other software. I'd rather pay a one-time $99.00 for the Home/Student Office suite I'd probably use than $10.00-$15.00 a month for an ongoing subscription.
      dsf3g
      • If they ever did that...

        ...then boycott buying the game. Vote with your $$ wallet.

        Or are you that hopelessly addicted to games that you pathetically won't be able to help it?
        CaviarBlack
    • Re: "If you want to buy a perpetual licence, you can still do that."

      Until you find that copy of Microsoft Office won't work on some new hardware in the future, or breaks after a Windows upgrade. And the only way to fix it is to spend more money. So much for "perpetual", eh?
      ldo17
      • perpetual licence not perpetual software

        no software is guaranteed to work for ever on all new hardware, because your licence only covers the costs of creating updates to support a certain amount of new hardware; that's called the support lifecycle and you can look it up for Microsoft software in advance.
        mary.branscombe
  • Where's the value?

    Companies get $$dollar signs$$ in their eyes and become blinded to what people need. "Oh LOOK, we can have 5x the income if we do this!" They don't realize that it has to be something the customer wants.

    Just because you can finance it (pay over time) doesn't necessarily make it more accessible. Adobe *might* get it to work, because CS is ridiculously expensive, and almost needs financing, but much less so with Office.

    And as dsf3g alluded, there's only so many times you can eliminate a weekly $5 cup of starbucks from your budget. (Me, I drink water.) I think most people who aren't idiots realize that paying $20 a month really adds up, unless its your only expense, you make $200K a year, or don't have to support a family. Business will do the math, and notice that there is no benefit.
    Dan__
  • It may not be required by all users, but professionals will buy

    The cloud option gives 5 local copies to be installed, so it might turn out to be a good deal for professional users. These users do not care about free alternatives, they will spend money for the right tool. Few hours saved in learning open office can actually pay for it.
    ninjacut