November 16, 2005 4:00 AM PST

Microsoft eyes ads as consumers close wallets

Although Office and Windows continue to produce vast revenue and profits for Microsoft, some of the company's other well-known consumer titles are generating only a trickle of business.

According to internal documents seen by CNET News.com, Microsoft gets only about $2 for each copy of Works that is bundled on new computers. The standard version of Money isn't even a break-even proposition, and the company has had to heavily discount its OneNote application in order to get computer makers to include it.

Microsoft predicts that things won't improve from here, either.

"The outlook for the packaged consumer retail software market is poor," MSN workers said in an internal strategy paper seen by CNET News.com. "The size of the market is shrinking, and consumers appear less willing than ever to buy software applications off the shelf."

In the paper, Microsoft said that worldwide sales of full packaged software--which includes Works, the Encarta encyclopedia, digital imaging software and Money--dropped by 7 percent in fiscal year 2004. In addition, the company said it was seeing similar trends for fiscal 2005.

The tepid forecast, combined with concerns that others might offer free versions anyway, is prompting Microsoft to take a hard look at selling free, ad-supported versions of many of its consumer titles, like Works. And, in some cases, the numbers may well add up.

Calculating that the average person keeps their copy of its entry-level productivity suite Works--a kind of "Office lite" for consumers--for about three years, Microsoft reasoned that it wouldn't take a lot of ad revenue to justify moving the product to an ad-driven model.

"That means that if ad revenues exceed 67 cents per year, we could actually give Works away and still make more money," two Microsoft researchers and one person from MSN stated in a paper presented to Chairman Bill Gates at a Thinkweek brainstorming session earlier this year.

Microsoft is not alone in seeing its consumer business trail overall software spending. IDC estimates that consumers worldwide spent $4 billion on software last year, and that total is pegged to reach $4.7 billion by 2009--a compound growth rate of just more than 3 percent.

By contrast, global packaged software revenue is much larger--$91 billion in 2004--and projected to grow to a healthy $120 billion by 2009.

Software revenue chart

Consumers just aren't seeing enough value in what's inside most software boxes, IDC analyst Albert Pang said. With programs like Excel and Word, Pang said, most people just use a fraction of the features and aren't willing to shell out big bucks.

"Only professionals are willing to pay the full retail price for the software," Pang said. "Somehow, somewhere, a better strategy needs to be developed to expand the market," Pang said.

Members not wanted
The MSN strategy paper argues that subscriptions are not the way to go, pointing to the success of Google's ad-supported Gmail. If Google's Web mail service is successful, Microsoft estimates the annual revenue per subscriber could top $20 per user, leaving "no room left at all for mass market consumer subscription services."

Instead, the paper points to nontargeted advertising as the way to go to pay for basic, low-cost services.

"High-cost services (many of which are currently paid) will be funded by an exchange of user information that will allow better targeted advertisements," the Microsoft paper contends.

The software giant has confirmed that both papers are genuine, but has declined to comment further. A Microsoft source noted that both papers represent internal brainstorming around new business models and that no decisions have been made.

In the MSN-drafted paper, Microsoft points to controversial adware maker Claria, noting that Claria claims ad rates six to 20 times those of traditional Web advertising because of its ability to target to a user's activity. Microsoft was said to be in talks to buy Claria earlier this year, though no deal was announced.

CONTINUED: Ad funding a model for some…
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43 comments

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Who said you could?
First of all, I for one have no interest in being bombarded by ads that I didn't seek out, and didn't request.

Second, the item: "The product, originally code-named Moonshot, combines context of what a user is searching for with demographic information about who is doing the searching."

Who gave them the demographic information? If Microsoft is sucking it off of your machine, that's invasion of privacy. Exept of course the MS EULA pretty much requires you subservience to whatever MS decides is in your ("their") best interests.

Of course consumers as usual have no voice in what they are spoon fed. If the majority of vendors are doing it then voting with your wallet won't have much impact either.

So much for freedom of choice.
What do you think?
Posted by winmanjr (11 comments )
Reply Link Flag
What I think is...
>Who gave them the demographic information? If
>Microsoft is sucking it off of your machine,
>that's invasion of privacy.
>Exept of course
>the MS EULA pretty much requires you
>subservience to whatever MS decides is in your
>("their") best interests.
>Of course consumers as usual have no voice in
>what they are spoon fed. If the majority of
>vendors are doing it then voting with your
>wallet won't have much impact either.
>So much for freedom of choice.
>What do you think?

I think I will no longer use Windows. Imagine Microsoft as Claria, the Ulitmate in Spyware, logging everything that you do on the desktop.

No thanks.
Posted by R. U. Sirius (745 comments )
Link Flag
Clueless Memo Author
The article states that an internal MS memo cites the $2 per copy cost Microsoft is charging per copy of, say, Money. And then jumping to the conclusion that $0.67/year in ad revenues with generate the same revenue stream for Microsoft. Can someone really be that clueless?

If Microsoft is OEM-ing Money to be bundled on PC's for $2 per PC, then they are making much more than $2 per USER. When I get a new PC, it is so loaded with crap it takes me a couple of hours to delete it all. The vast majority of it is uninteresting to me [as a side note - I wish PC manufacturers would STOP this annoying bundling practice and just give me plain-vanilla Windows].

So, how many users actually use a particular bundled program? Maybe 5%-10%? Microsoft is really capturing on the order of $20 per actual USER. This expected usage rate is factored into the negotiation on bundled pricing.

So, if MS switches to an ad-supported model, they will have to capture $20 in revenue per year from that user to break even. For an untargeted ad (which would typically be the case for users of a generic program like Works or Money), I doubt MS could get more than $0.05/click. So, a user of Works would have to click on 400 ads per year to pay for it.

I don't see it. Would YOU click through on an ad every day? And even at optimistic click-through rates, you have to be shown 100's of ads per day to find even one per day that was on interest to you.

It doesn't make economic sense (to me), and you're going to alienate your customers since you'll have to make the ads obtrusive enough to get click-throughs in order to make them valuable.
Posted by mckoss (3 comments )
Reply Link Flag
A difference in definition...
There's a little confusion here in the term
'user' as it is used in the memo. You're
interpretting it to be someone that 'uses' the
software -- thus if 10% of the people that get
it OEM for $2 use it, they're getting $20 per
user.

However, the memo is actually the Microsoft
definition of user: an individual that is used
to generate profit for the company / a profit
generating unit. In this sense, every recipient
of the software is a 'user', whether they fire
up the application or not. Further, you
presuppose that you could avoid the adveritsing
in question by not using the application, but I
think the idea is that by receiving the
application you'd be enrolled in an advertising
campaign and the advertisement would be
delivered to you through other applications
(e.g., if you have MS Money installed
financially oriented ads pop-up in your browser,
IM, or on your desktop).
Posted by Gleeplewinky (289 comments )
Link Flag
re: Would YOU click through on an ad every day?
Have you ever set down at the average home user's machine and seen the melee of adware they have installed? All MS would have to do is have one banner that said click here for 1 gajillion free smiley's and they will make a mint on the add revenue.
Posted by Bob Brinkman (556 comments )
Link Flag
pre-loaded crap
>I wish PC manufacturers would STOP this annoying
>bundling practice and just give me plain-vanilla
>Windows

I just bought an Acer laptop (TM4402WLMi NoteBook Turion 64 AMD ML-30) and it has no garbage apps, just WinXP Pro.

More manufacturers should follow their lead. And more consumers should support mfg's like them, not follow HP/Dell in lockstep!
Posted by Heymull (13 comments )
Link Flag
Is It That Redmond...
... has reached its limitations as the opening paragraph of this article reads; "Although Office and Windows continue to produce vast revenue and profits for the Microsoft, some of the company's other well-known consumer titles are generating only a trickle of business". Yet they are talking about entering the Services arena... What has happened to I-N-N-O-V-A-T-I-O-N-S... out of Redmond -- as per the example below:

Synchronising Software for PDAS - 10/17/05 @ 09:22

Task: Synchronising Software for PDAS

Description: It is already possible to connect to two of the major strains of PDA: Palm (via the Palm desktop) and Psion (via the add-in to NetDrive). However there are no synchronising applications. I would like an application which takes data created on a PDA (principally Psion EPOC, since I own a 5mx) and convert it to and from application formats available for OS/2 (principally SmartSuite, since that is my main productivity Suite, but also OpenOffice). I'm sure that connectivity for Microsoft handhelds would be useful to somebody as well.

Current Bounty: $0

Sponsors: none

Submitter: Stuart Gray

Posted by: Kim Haverblad

, and coming from:

<a class="jive-link-external" href="http://www.os2world.com/cgi-bin/news/viewnews.cgi?category=58&#38;id=1129533770" target="_newWindow">http://www.os2world.com/cgi-bin/news/viewnews.cgi?category=58&#38;id=1129533770</a>
Posted by Captain_Spock (894 comments )
Reply Link Flag
From the above...
From the above it must be quite apparent that Redmond now has a confromtation at hand for delivery on SOA (Service Oriented Architectures) with StarShip "Enterprise Warp" with Commander DATA (for Enterprise Search) on board. Three to beam up IBM!
Posted by Captain_Spock (894 comments )
Link Flag
What has happened to I-N-N-O-V-A-T-I-O-N-S... out of Redmond?
What innovations are you implying ever came out of Redmond?
Posted by Bill Dautrive (1179 comments )
Link Flag
Isn't this just making Works a type of spyware?
If we start with non-targeted ads, what's to say the next version of Microsoft Works/Money/etc won't use targeted ads to make more money for Microsoft. And the best kind of targeted ads (i.e. those that make the most money) will use information from the Windows operating system to monitor user behavior.

Sounds like Microsoft is considering an approach that may well lead to Windows having lots of preinstalled spyware, or at least spyware hooks to increase Microsoft's profits.

To me, that makes using an Ubuntu Linux desktop a much more attractive alternative unless I need to use Windows-specific software.
Posted by bluemist9999 (1020 comments )
Reply Link Flag
Just what I want --
-- personal finance software that uses "demographic information" to show me advertisements. Oh goody. The temptation of misusing personal financial data is just going to be too great, no matter how much someone promises they won't.

Has Microsoft ever thought that maybe consumer software growth is so slow because most of the stuff out there is about 1 notch above trash?

It would be interesting to compare some really good consumer software with the mediocre stuff and see the difference in revenue and growth.
Posted by xeroply (4 comments )
Reply Link Flag
Sounds like a bit of P-R spin to me
Anyone who has seen the Works package as offered in OEM form since say 2000 will know that it has for a long time been far more an "advertorial" effort than a "here's real software effort." The reasonable impression one gets is that Works is NOT INTENDED to make money as a sold item; rather, it provides starterware that seems aimed at directing the end user to payable and repayable features. As for the Money software, that appears to be a buy-each-year proposition, as is some of the other date-dependent software supplied in Works proper. We may presume MS makes Money on Money by tieing in financial services, which we may presume it charges financial firms to do. This article suggests a positioning of Works--which isn't intended to make money itself quite obviously--as a "no money maker," perhaps as a prelude to making it perpetual pay webware. We may presume that too many end users were not rebuying the stuff Works routed them to.
Posted by PolarUpgrade (103 comments )
Reply Link Flag
Deja Vu?
Is it just me or havent' we gone through this before? It seems like the 'golden age' of the internet is coming back, where ad supported services were all over the place and internet access was free, so long as you could stand looking at banner ads.

Microsoft works isn't a good package. it's such a bad package that one version of works can't even read the files from a previous one. Talk about lack of backward compatability!
Posted by thedreaming (573 comments )
Reply Link Flag
EUREKA! EUREKA!
With Synonyms such as - Invention, Discovery, Finding, (a Worm Hole in the Empire's once thought impregnable ship's armour) New Insight, and a Breakthrough with Open Office 2.0 (WOW). Captain's Log: StarDate 2005-11-16 As Warp Ships are launched under Voice Type Commands: Computer - Wake-up Please; Launch Open Office ( <a class="jive-link-external" href="http://www.ecomstation.com/openoffice.phtml" target="_newWindow">http://www.ecomstation.com/openoffice.phtml</a> ) with Open Document Standards at MS Office (for free for universal freedom from perpetual lock-ins... Whoooaaa! What a astonishing COUP DE TAT! It must be "pay back" time!
Posted by Captain_Spock (894 comments )
Reply Link Flag
As iIt Appears...
... open source or not the "1000lb Gorilla" that OS/2 is it will stretch those "bars" apart and make for those desktop spaces... Hello Houston! Redmond Has A Problem! Beam us up quickly this is no FUD!
Posted by Captain_Spock (894 comments )
Link Flag
Forest for the trees
Maybe, they should just SELL a coy of the software for $2 to the end user. No ads, happy customer, Microsoft get revenue. Maybe its time to fire their marketing manager since (s)he can't seem to see outside his/her own cubicle.

Consumers do not want ads, (Making out desktop apps additional points of spam) will just cause consumers to delete the apps, and look for non invasive apps elsewhere. If MS is TRYING to loose the desktop, then the strategy is brilliant! Carry on!

Tom
Posted by (4 comments )
Reply Link Flag
Ad supported programs + ad blockers?
I've got no problem with ad-supported software. Especially
since it is easy to block the ads. I keep a list of what I consider
safe ad supported Windows software for my friends and provide
them with a host file that prevents the ads from being
downloaded.

I'm sure that if MS starts giving away ad-supported software,
there will be a wealth of MS adblockers spring up on the net. So
after a while few users would ever see the advertisements.

Perhaps a better solution would be for MS to start selling their
products at a decent price. IMO, $100 for either Windows or
Office ($200 for both) sounds like a fair price.

Personally, I don't care. Years of supporting Windows has
convinced me to avoid it like the plague. All my computers are
Macs or Linux.
Posted by rcrusoe (1305 comments )
Reply Link Flag
That would likely
violate the terms of agreement... and quite probably be illegal
Posted by volterwd (466 comments )
Link Flag
The real strategy is obvious
Corporate America has been desperately trying to get ads onto our desktops for years. This is just another M$ gambit in that direction. I see it as just another reason to never use ANY M$ software or buy ANY pre-built computers; they're just junk anyway. If you can't build your own just talk to your friendly computer tech. You'll be amazed at what kind of bargains Dell, Hp and the rest aren't.
Posted by Michael Grogan (308 comments )
Reply Link Flag
Ad Supported For Certain Markets
Microsoft's ad strategy might work in certain situations. It's probably true that middle and upper-class folks won't go for it, but that is not the total market. Some markets might welcome MS ad supported software in order to get the application software for free. Parents might find it compelling to install these apps on little Johnny's computer. Non-profits, libraries, and start-ups are also candidates. Lastly, 3rd world developing countries that are currently pirating MS app software, assuming MS finds an unhackable method to deliver the ads.
Posted by Stating (869 comments )
Reply Link Flag
Talking about "3rd world developing countries"...
What ever happened to the "Starter Edition" strategy from Microsoft; perhaps, a different strategy now with Linux, Open Office, FireFox all being available for free, Microsoft should also now consider offering an ads supported "Starter Edition" for free -- offering any additionally required productivity "applications as a service" (software as a service) from which revenue may be derived.
Posted by Captain_Spock (894 comments )
Link Flag
Is it Really a Surprise?
Who would pay for some of that microsoft software. There are usually better alternatives than paying full price on a microsoft product. There are other brands out there that are just as good, if not better. There are also free software that you can download that accomplish the same tasks as the expensive ones. You can also find scripts that can convert any file to another file for free. A third option would be to get OEM Software. some places sell it on online and its super cheap for the same program, but normally you dont get a warranty or tech support or any of those extras. Sometimes the software can be bundled with a hardware product which can save to tons of money, you just need to look. My last point is that most people already have most of the microsoft programs, so is it really worth it to go out and buy an upgrade that hardly accomplishes anything worth your 50-100 dollars? No. Once you buy it, you should never have to buy it again. WE want innovative new products, not just "new" version of the same old programs. Just my 2 cents.
Posted by Masterchris11 (9 comments )
Reply Link Flag
Increase in piracy?
From what I gather, they intend to make free, ad supported versions and commercial, no ads versions. All this will do is increase the piracy for the no-ads versions, because people don't like ads. In fact, if MS is really considering this, they should also consider dropping all support for MS Antispyware. Proclaiming to have a cure for a sickness you are also helping to spread? Definitely unethical. People will seek the no ad versions, and piracy will rage on as it always has. Besides, no one uses either Money or Works, or at least very few people do. Those who do, do so because the app came preinstalled in their PC.
Posted by Sentinel (199 comments )
Reply Link Flag
ad blocker
i dont think an Adblocker would be too hard to make. The Only problem would be if they made the software inoperable if it could not access the net or run its ad set. Im also sure that it would be possible to turn that ad bar into something useful - like having it scroll your favorite webpage instead of ads.
Posted by Masterchris11 (9 comments )
Link Flag
There is no way
I will ever use a financial program (which contains my data) in an environment where non-targeted ads run rampant. This is just inviting the further spread of viri, worms, spyware, and all the other garbage that seems to be part of Microsoft's market strategy.

BTW, they want to emulate Claria? You have to be joking. Claria is spyware central isn't it?
Posted by R. U. Sirius (745 comments )
Reply Link Flag
then maybe they should offer them for free
maybe msft should offer product like money and work (at least the standard versions for free withthe incentive of using "extra" features or services from a web portal
Posted by kirkjohnson (1 comment )
Reply Link Flag
MS "INTUIT-ion" about MONEY
Windows 95 Big PR event &#38; developer "upgrades" for the "OS of the future" (i.e. another small step towards the Mac OS)

INTUIT's Money app's developers were upgrading to "new &#38; improved Win95" &#38; Citizen Gates makes them an offer they couldn't refuse... MS buys INTUIT.
Citizen Gates: "nice little niche you have there in the financial-biz INTUIT".
INTUIT: "Thanks, but no thanks MS."

Presto-chango MS announces "new" MS MONEY app for Win95 &#38; beyond...(huh, I wonder where they got the app-code for that one...?)

FLASH FOWARD 2005 : MS announces that it isn't really making any money with MS-MONEY. Gee, do you really think their mission was to make money with this? NO?
Smells like the FREE MS-IE produced to give the public "new options" instead of Netscape's Navigator.
Lost leader to suck money away from "threat of competition" until they go out of business.
MONOPOLIES HATE COMPETITION.

This time Intuit seems to have "out-pokered the MS-Sharks" at their own game.

You got enough money Citizen Gates.
Time to retire.
Posted by Llib Setag (951 comments )
Reply Link Flag
I seem
to notice it's the cool thing to use terms such as Citizen Gates and M$ and Windoze when referring to Microsoft. Jee, I sure wish I was 13 again.
Posted by Charleston Charge (362 comments )
Link Flag
They Don't Get It
The reason why Money isn't selling as well is because it isn't as good as it used to be. In addition NO ONE wants Money's online integration (or Quicken). Read customer responses on Amazon (Money or Quicken) to this trend in financial software from 2002-2003, 2003-2004, 2004-2005. You need a Passport account to use Money and people don't like it. The responses are increasingly negative. The problem isn't putting Money online, the problem is getting it offline, esp in this age of identity theft. They have been forcing people online and people don't like it. Not with MS Money.

I was using a 2002 version of Money last Christmas and it really impressed my girlfriend. She went out and bought the 2005 version. The online setup was so persistent she was flustered before she made it past the initial setup because she doesn't trust anyone(not just MS) with her financial info. Then she wanted to change her password. That was an exercise in hell. NO ONE TRUSTS online banking 100%. NO ONE TRUSTS others with their financial info, unless it is "others'" specific job. Money stores all kinds of sensitive information. Users don't want it online - they want it sandboxed.

Money needs only 3 versions - Regular Folk, Upper Middle Class Developers Who Don't Hire Accountants, and Small Business. The Basic Version is too Basic and the Deluxe version has too many features. There's no fine line. Quicken isn't any better.

Works' problem is that it suffered from both lite and old versions of software. They fixed the "old" part but now have to eliminate Standard/ lite versions. The integration is progressing, but it hasn't gone all the way to being a full-fledged Home Suite. Office has full versions of software. There are no basic, deluxe and premium versions of Word. There's Word. MS always looks at Works as a way to give consumers enough of a product to whet their appetite to buy the full stand-alone versions. When they do, the Money/ Streets-Trips/ and Encarta standalones don't integrate back into Works. The Deluxe software is all top-notch but the Standard versions aren't very useful.

I love the idea of Works. I just don't like the implementation.

Encarta and Streets/ Trips are the same. Much better than anything online, but it's just easier (and cheaper) to look things up online. Why 2 or 3 versions? Just sell 1. For $20. With 1 yr of updates and $5/ yr updates after that. There's your subscription revenue. They beat anything online hands down and you can take them anywhere you can take your laptop, whereas online access isn't available widely or cheaply.

The reason why the products aren't selling as well are many-fold, but the largest reason is that MS isn't focused on regular consumer software. Works as a Home Suite isn't even 10th class compared to the effort on Office. The perception is that Works is crippleware.
Posted by Hae-Yu (1 comment )
Reply Link Flag
What Microsoft Should Do - Windows Media Center
Microsoft should have an ad service called "Microsoft Clickthrough" for the Media Center PC. Basically, what would would happen is a program shows on TV and is received by the Media Center PC as the user watches. The ad will then become "interactive" where the user can clickthrough and go directly to the advertiser's site via the media center PC. MS would need to coordinate schedules with the Major TV Networks, and presumably get some of the profit from the ad, or get a clickthrough percentage. This way, when a user sees an ad on TV while on a Media Center PC, an ad which they would see anyway, they can click through it or make it interactive to learn more.

This way, also, MS Could push the Media Center PCs, have this ad system, and not encroach on user's personal data.

Brandon Rusnak
<a class="jive-link-external" href="http://www.rusnakweb.com" target="_newWindow">http://www.rusnakweb.com</a>
Posted by BMR777 (61 comments )
Reply Link Flag
It can be amazing
what will happen when a company produces a product people want to buy. I always get the impression from stories and interviews that MS tends to focus too much on what consumers should buy and not what they want to buy. Just listen to the tone of this "memo", it's about maximizing revenue to MS not providing a product consumers would actually want.
Posted by jmmejzz (107 comments )
Reply Link Flag
Open source it
Open source it
Posted by Blito (436 comments )
Reply Link Flag
Which ones...
The IBM's OS/2 Family or Windows? Cheers!
Posted by Captain_Spock (894 comments )
Link Flag
Microsoft
What would you do if you were working at Microsoft as a Marketing Manager?
Posted by Yuhong2 (27 comments )
Reply Link Flag
Ads good - money bad
The Internet has replaced paper money. But
because of greed and tradition and the refusal to
offer products and services to the less wealthy
and poorer nations the rich have retained the
paper money trump card and shunned the new
technology called digital transaction or free
trade over the Internet.

Ads are fine I guess because they are not
directly related to paper money and so they
provide a service of advertising one's website or
whatever; similar to Google Base so I have always
supported Ads. But why not everyone give
everthing away for free. We have a simple
transaction 'Base' so let's all go for it and
create a utopia! Everyone gets what they want no
reason to steal.
Posted by Blito (436 comments )
Reply Link Flag
 

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