Microsoft and the future of software pricing–when free isn’t quite free

The excellent, but paywalled, Lex column in the FT has an interesting article today which speculates on how Microsoft will price its forthcoming releases of Windows 8 (tablet edition) and Microsoft Office. Software prices are dropping and the importance of local operating systems and having locally installed productivity software is declining which makes the future for Microsoft’s consumers software a challenging one. The interesting question is how challenging.

The biggest competitor in mobile, Google’s Android is free, and Google docs is getting better every year (although in my opinion still not up to the standards of Office for anything complicated or difficult). To keep their burn low many startups I know eschew Microsoft entirely and run on Google’s free software. For these reasons I’ve long thought that Microsoft will lose their monopoly positions in OS and productivity software and is in for a tough time.

I still think that is true but they may be able to hold pricing better than I had previously assumed.

The interesting new news, as reported in the FT, is that Bernstein Research have analysed the hidden costs of working with Android (software integration, support costs and royalties for the parts of Android that are based on Microsoft’s intellectual property) and estimate that if Windows 8 is priced at $40 per tablet it could actually be cheaper for tablet makers who ship fewer than 9m units a year, rising to $50 if Office is bundled in. Apparently that is broadly comparable with what Microsoft charges PC makers now.

If Microsoft can maintain profitability whilst their market share declines then they still have an interesting paid for software business.

The centrepiece of the ‘free’ argument is that the price of everything drops to its marginal cost of distribution. In theory software delivered over or downloaded from the web has a marginal cost that is very close to $0 and a lot of people believe that software companies of the future will derive their revenues more from support, services and hosting than licenses.

The Microsoft analysis highlights that in practice their are other costs (software integration, royalties) which can keep the marginal cost significantly above $0 hence allows for successful license based business models – this is a rehash of the total cost of ownership argument that software companies like Oracle and Microsoft have been making against open source for some time now. $40-50 isn’t that much though, and software companies with license business models will need to keep their costs low and find efficient routes to market if they are to make good profits and become very valuable.

  • http://www.facebook.com/people/Sharky-Rechinas/100003609817993 Sharky Rechinas

    Do you think a shift is coming with Pay as you use, cloud licensing, lite versions and so on ?

    MsOffice is overall the best tool by far in my opinion – maybe they can capture some non-pro users by depackaging, lite versions, clould versions etc ?

    Actually beeing able to sync and  acccess (and edit) you physical documents from your hardrive from anywhere would be quite awesome. like google docs for your own laptop/PC.

    In the other hand their MS Windows license is in a much worse position – hugelly expensive and strong competition from Apple (at least on mobile Windows is just dead) and PC is slowly becoming obsolote.

  • http://www.theequitykicker.com brisbourne

    Hi Sharky,

    A couple of thoughts:
    – windows has probably lost on mobile, but tablets are still open, and I think keyboards (ie PCs) will be around for some time – MS Office and Skydrive should deliver on the promise of access to the latest version of all your docs on all your devices. I haven’t tried it though. – yes, I think software pricing will shift to pay as you go