Microsoft Office as a Service

While Windows 8 and Surface were holding everyone’s attention, Microsoft began radically changing its Office business model. Office 2013 retail editions no longer ship with physical media and are permanently locked to the first computer they are activated on, just like OEM editions. (edit: Transfer rights were grudgingly restored after user protests.) There are no options for “family packs” of multiple licenses, nor installations on multiple machines. Clearly Microsoft no longer wants you to buy these editions. What it does want you to buy is a subscription to the new Office 365 for consumers and small businesses, including SkyDrive cloud storage and the full range of Office applications.

Why would Microsoft do that? As Peter Bright points out, Business Division already saw 60% of last quarter’s revenue coming from subscriptions. For the whole of 2012, businesses accounted for 80% of overall sales, and Windows Division got 75-80% of its revenue from OEM sales – often including an Office version that’s already chained to that machine. In other words, even if all the consumers and small businesses who used to buy Office retail editions decided to go off and pout, Microsoft would still keep the majority of its revenue. Worth the gamble for a much more profitable subscription scheme that brings in each year what customers would otherwise pay only once every five years or more!

But this isn’t just about tweaking some licensing models. Microsoft has also announced Office for iPad, in addition to the existing Office for Mac OS-X – and Microsoft already provides multi-platform Office Web Apps that are available both for free and as part of an Office 365 subscription. Ed Bott connects the dots: Microsoft Office is being untied from Microsoft Windows. Let that sink in for a moment because it’s a radical departure from Microsoft’s old double lock-in strategy of selling Windows as the system that runs Office, while selling Office as the must-have software for Windows. Ed Bott guesses (and I agree) that Office for iPad will be free, just like the Office Web Apps are free – and who’s to say there won’t be a free Office for Android client in the future? It only makes sense when the actual revenue comes from a service subscription.

(2013-07-31: And indeed, Microsoft has released free Office 365 clients for both Apple iPhone and Android phones. Dedicated tablet apps are still missing but expected.)

So where does unbundling Office leave Windows clients? Nowhere. Windows is still a popular gaming platform but Microsoft would very much prefer that you play games on its Xbox system. That’s where Microsoft already sells another profitable subscription (Xbox Live Gold), gets a cut from each game sale, and shows some advertising to boot. Third-party Windows desktop applications give Microsoft nothing but support calls and compatibility headaches. Moreover, new Windows copies are usually acquired as OEM installations for a small one-time fee. The extremely cheap upgrade promotion for Windows 8 and the rumored “Blue” plans (frequent OS updates at little or no cost) both indicate that Microsoft no longer sees the sale of Windows client editions as a profit center.

But with Office moving towards a multi-platform subscription model, Windows is no longer necessary as an Office platform either. Similarly, while you could use Windows tablets for Xbox SmartGlass, or as an alternative to iPads in enterprise networks, it’s quite unlikely that Microsoft will require Windows clients for such purposes. Windows Division will have to survive on its own now, and that’s why selling Windows Store apps costs a fee – even for business sideloading. If you want to run a traditional open system and install your own software you can go use Linux for all Ballmer cares.

What if consumers and enterprises continue to shun Windows phones and tablets, depriving Microsoft of such revenue? I’m beginning to think Microsoft has not only considered that outcome but actually expects it. That would explain why the company is hastily decoupling Office from Windows, but also why the tacked-on Metro interface in Windows 8 is so obviously clunky and immature. Why waste money and effort on what is likely a lost cause? A future without mass-market Windows has now become conceivable.

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