Opinion: Microsoft is making all the right moves – but will 'freemium' be an issue?


Microsoft is a company in flux. Under the leadership of Satya Nadella, the ways of the old firm – i.e. the ways of Ballmer – have gone, or are disappearing, producing a company that is far more nimble and ready to do business in the ‘new world’. Gone is the intense focus on Windows (for desktop) and Office at the cost of everything else, replaced by the ‘cloud first, mobile first’ approach of Nadella, ensuring that Microsoft doesn’t fall behind as it did post-2007.

Because of this renewed focus, Microsoft is having to answer some pretty tough questions that could, if not handled correctly, be big trouble for the software giant. One of them, of course, is what happens to Office in a world where the main distributive channel is no longer the PC and customers are not willing to pay hundreds of pounds to obtain a license. Software no longer comes on a CD that is bought in a shop but instead from the internet, and Office is managing this transition in a way that is totally new to Microsoft.

Money matters

Unlike Apple or Google, which make money from things that are not (productivity) software – hardware in Apple’s case, advertising in Google’s – Microsoft has to manage its core services very carefully. Office 365, released in 2013, is an attempt by Redmond to bridge the gap between what it’s selling – in this case Office – and how people now purchase software, i.e. downloaded from the internet, with a price-point to match.

A few years ago, Office-as-a-product came in a box and cost a lot of money. Microsoft’s ability to do this, and it did so for many years, was down to its monopoly on the distribution of software, driven by the company’s total dominance over what software people used. Everybody had a PC and so everybody used Windows and, as such, everybody used Office which was the only productivity software that mattered.

Then, in 2007, the landscape changed and people no longer exclusively used Windows and its related products. Because Microsoft didn’t control the dominant operating system that people used anymore – at least outside of work – its ability to sell software to complement the OS slipped somewhat, leading to the rise of iWork on iOS and Open Office on Android, amongst other examples.

Freemium issues?

Luckily for Microsoft its grip didn’t slip that much, predominantly because Office is ubiquitous in the workplace. The most worrying trend for Microsoft is that because Office is now associated with the workplace, people are not willing to pay for it elsewhere and this has led to a new avenue for Microsoft: freemium. When it debuted, Office on iOS was free to download but required an Office 365 subscription for anything beyond the most simple of tasks (viewing documents, essentially). A little over a year after it was released, Microsoft relented and relaxed the need for a 365 account, opening up all but the most high-end features for free.

A recent article by the Economist pointed to a quote by Rick Sherlund of Nomura, an investment bank, who speculated that Microsoft’s new services and products – such as Cortana or HoloLens – will eventually overtake Windows and Office as the cash cows that it so desperately needs.


In the terminology of Silicon Valley, it is better to “self-disrupt” than be disrupted by an outside source. Just as Apple is constantly releasing new products that could potentially cut into new product categories (when the Apple Watch becomes self-reliant – i.e. doesn’t need an iPhone – Apple will cannibalise iPhone sales, but at least Cupertino is doing it, not another company) Microsoft needs to do the same.

Having been blindsided by the smartphone and tablet renaissance, Redmond needs something new as, right now, it is simply shifting its strategy on existing products. The gross margin of “classic” Office is over 90% while Office 365 sits closer to 55%, figures that should worry those who are interested in Microsoft.

In the long-term it’s unlikely that Microsoft will be negatively affected by Office’s new “freemium” approach – and the company is aware of this. According to a report from The Verge, Microsoft’s chief marketing officer, Chris Caposella, outlined at the companies’ Convergence conference that Microsoft’s strategy for making money from its new free products is a four step process: acquire, engage, enlist, and monetise.

The “acquire” and “engage” elements are focused on getting as many users “hooked” on the free software, “enlist” focuses on finding friends of those users and “monetise,” quite self-evidently, is making money off the software. According to its second quarter earnings report of 2015, Office 365 has almost 9.5 million users and is growing at a solid rate year-over-year.

The Nadella factor

Microsoft is also planning on giving away Windows 10 for free, in part to remove the massive fragmentation that has set in between different versions of Windows. XP, which is no longer supported by Microsoft, has more users than Windows 8 and 8.1 combined, sitting at around a 17% share compared to 14% for Windows 8 and 8.1.

Strategically, this play works well as Microsoft still generates revenue from software licenses being sold to manufacturers, but individual users can easily upgrade to the newest version of the operating systems, benefitting from better security and new features, such as Cortana.

Going forward, Microsoft’s willingness under Nadella to shake up the status quo is a key factor in the long-term survival of the company. Many column inches have been written about how Steve Ballmer was too keen on sticking to what Microsoft knew – enterprise and software licensing – to have a clear vision of the future, and it’s all true. Nadella is different and for a company that turned 40 at the end of last week (April 4), it is in surprisingly good shape, willing and able to out-innovate its much younger rivals.