May 29, 2003 4:00 AM PDT

Microsoft feeling Office heat?

Microsoft's decision to cut retail prices for some versions of its Office software is more a reaction to internal pressures than to outside competition, analysts said on Wednesday.
Read more about Microsoft and Office

The software giant announced Tuesday that it would trim the price of Office XP Standard and Office XP Professional by about 15 percent, with steeper cuts for standalone versions of the applications included in those packages--Word, Excel and so on.

Microsoft executives said the cuts reflect the company's commitment to serve consumer needs, but industry analysts saw more complex forces at work, most the result of Microsoft's own actions.

Chief among them are the software giant's release last year of a scholastic version of Office XP for $149--at the time more than $300 below the price of the standard version of Office XP. The version for schools has been a hit with consumers, accounting for the vast bulk of retail Office XP sales over the past year, with Microsoft and retailers making little apparent effort to enforce licensing restrictions that limit sales to educators and students.

Paul DeGroot, an analyst with researcher Directions on Microsoft, said the scholastic version was a success in terms of expanding the market for Office XP.

"It's demonstrated (that) consumers can be interested in a full-bore Office suite if they have the option," DeGroot said. "It's basically shown Microsoft that they've been leaving a lot of money on the table."

But prices for business customers haven't changed, creating, DeGroot said, a disparity that the company has found increasingly difficult to justify.

"I think they've kind of put themselves in a bind with the student-teacher edition," DeGroot said. "You look at that and think that apparently Microsoft can make money on a bundle like this at less than $200--why would I pay them twice as much for the same thing?"

The new retail prices trim the gap for some buyers but leave out most businesses, which buy their software through volume licensing agreements. Microsoft announced changes in its controversial licensing terms earlier this week, but those are unlikely to go far enough to persuade business customers, many of whom have stuck with earlier versions of Office, DeGroot said. The upshot is that Microsoft may have to institute price cuts for volume licensing when it introduces the next version of Office, Office 2003, later this year.


Commentary
For businesses,
an Office dilemma

In the next two years, all firms
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"They're looking at the retail product being available at a far lower price than what they charge their biggest customers," DeGroot said. "That's upside down from the way it normally works in the business world. If you walk into a store and buy a thousand chairs, you usually expect to get a better price than the guy who comes in and buys one. I think that's an ongoing dilemma for Microsoft."

Microsoft has also found that it's getting harder and harder to convince consumers and businesses that they need to upgrade their software, said Toni Duboise, an analyst for research firm ARS. Changes in the last few versions of Office have been incremental, and most folks already have all the word processing capability they need.

"It's no secret that the advantages of upgrading operating systems or application software has diminished quite significantly over the last few years," Duboise said. "If you look back over history, there were great advantages from one release to another. You just don't get that anymore. You just don't get the bang for your buck switching from 2000 to XP."

From push to pull?
Michael Gartenberg, research director at Jupiter Research, sees the company trying to address that problem in Office 2003. The package, he said, will include dramatically expanded XML (Extensible Markup Language) support that should make it a more compelling upgrade for businesses.

"They're taking a much better approach in (Office) 2003, providing a case for the added benefits and gains from working in XML," Gartenberg said. "They realize the biggest competition Microsoft faces for 2003 is Office XP and Office 2000."

Gartenberg added that the XML reinvention of Office may be an encouraging sign of Microsoft emphasizing innovation over hardball business tactics.

"There have always been two approaches Microsoft has had in terms of upgrades," Gartenberg said. "One is to try to pull people in with feature upgrades and great new stuff. The other is to push them by doing something like saying, 'We're going to change the file format and force you to switch.' More and more, Microsoft wants to gently nudge people into upgrades."

Duboise said plunging prices for PC hardware have also prompted people to re-evaluate their ideas about how much software is worth.

"If you're paying $800 for a machine...paying half (that) for a software application is a hard sell," Duboise said, noting that PC makers typically count on major software upgrades to boost sales of new machines. "I think maybe there's been some industry pressure on Microsoft to bring their products more in-line with trends in hardware prices."

As far as outside competition, analysts discounted the effects of gains made last year by Canadian software maker Corel, which signed deals with a number of PC makers to bundle its WordPerfect software on low-end PCs. Duboise said Microsoft can obviously cut whatever kind of deal is necessary if it decides it needs to win back PC makers, as evidenced by Gateway's recent decision to return to Microsoft Works as the standard productivity software it ships on new PCs.

Recent gains by OpenOffice, the free open-source office suite hatched by Sun Microsystems, are more interesting, said Gartenberg, but they pose no immediate threat to Microsoft.

"I think you have lots of folks that are looking at OpenOffice...but there are very few organizations that could easily pull (Microsoft) Office out of their environment," Gartenberg said. "I think the potential threat for Microsoft is more a question of people trying to use OpenOffice as a leverage point when they're negotiating license renewals."

Some Microsoft customers are taking action, though. This week, the government of Munich, Germany, said it was planning to switch 14,000 PCs from Microsoft Office to OpenOffice as part of a larger move to open source and the Linux operating system.

 

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