Can Microsoft Survive on a Freemium Model?

Microsoft Productivity

When Bill Gates and Steve Ballmer ran Microsoft, profit was king. As far back as 1976, with Gates’ “Open Letter to Hobbyists” memo, the company focused on getting as many dollars as possible in exchange for its software and hardware.

Under new-ish Microsoft CEO Satya Nadella, the focus is still on making money; the company’s shareholders and board wouldn’t tolerate anything different. Nonetheless, Microsoft’s recent decision to allow iPad and Android tablet users to create and edit Office content without an Office 365 subscription suggests that the company is veering toward a different revenue model, one in which all payments aren’t necessarily up front, and not everything costs money.

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By making more of its products free—the other rumor is that, after the upcoming Windows 10, Microsoft will stop charging for Windows upgrades—Microsoft heads off a potential challenge from up-and-coming startups, many of which offer productivity apps for either zero or a pittance. In addition, the strategy might persuade longtime customers to stick with Microsoft rather than experiment with a cheaper platform.

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Giving away products also puts Microsoft in a bit of a bind. Google can depend on a steady stream of online ad revenue to underwrite its free email and productivity apps; Apple makes so much money from devices such as the iPhone, it can easily afford to make Mac OS X and other software free. But Microsoft’s own efforts in online advertising and hardware have largely been a wash; the company actually needs revenues from software to finance its gargantuan operations. In theory, by giving away big chunks of Office on mobile, which has rapidly become the platform of choice for most consumers and many businesses, Microsoft risks slaughtering the golden goose; if some Microsoft executive had proposed such a move a few years ago, Ballmer would have probably fired him on the spot.

Nadella is betting that customers within the Microsoft ecosystem will sign on for premium subscriptions and whatever upgrades his engineers can layer onto products in coming years; he’s also depending on businesses to continue shelling out lots of money for cloud services, with the hope that the pricing war between Amazon and Google won’t drive the market prices for those services through the floor. That’s a strategic model that’s benefited some smaller companies really well, but it remains to be seen whether it’ll work for a firm as large as Microsoft.

In the meantime, for smaller businesses and entrepreneurs, all this free software is an unmitigated good.

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Image: Microsoft