Microsoft Works trial previews Office of the future?

Stan Beer
Sunday, 05 August 2007 11:16

Opinion and Analysis

Steve Ballmer and Ray Ozzie last week made it pretty clear that Microsoft understands what direction the company has to pursue if it wants to grow its business at an acceptable rate to shareholders. Microsoft is trialing an ad-supported version of its lightweight productivity suite Works. However, could Microsoft eventually extend this to Office?

There is no doubt that a key money spinner on the Internet is advertising. However, to date there are few if any examples of successful ad-supported desktop office productivity applications. The vast majority of ad revenue on the net comes from sponsored search results and ads built around content on the sites of web publishers.

Neither Google nor have any of the major software as a service providers have made any money from giving away ad-supported web-based productivity software, other than from perhaps inherently web-based applications such as email. Then again, no company other than Microsoft has a dominant market share in such software.

It would be easy to dismiss Microsoft’s experiment with Works as a mere toe dipping exercise. After all, Microsoft’s business software division pulled in revenues of nearly US$16.4 billion and earnings of more than US$10.8 billion for the 2007 fiscal year – impressive sums in any language.

The problem is growth.  On the surface, a 13% increase in annual revenue and 12.7% increase in earnings for the business software division seems impressive. However, those figures come in the year that Microsoft released Office 2007. They also pale in comparison to the 60% increase in revenues and 30% increase in earnings that Google is on track to achieve from its advertising business in 2007.

Even with its record revenues and solid earnings growth this year, the market is not convinced Microsoft can sustain the growth of its legacy businesses in the years following the release of its new generation software. That’s why the company is hell-bent on moving into the online ad game in a big way.

In search, Microsoft has a long way to go before it can catch and match Google’s dominance in the advertising space.  The same thing goes for context sensitive ads on the sites of web publishers.

An area of course where Microsoft absolutely dominates is productivity software. With an existing customer base of hundreds of millions of home and business users, Microsoft may have a readily accessible market for ad-supported software.

A major problem for Microsoft is figuring out how to offer free software using the advertising supported model without jeopardizing its legacy paid software business. Microsoft knows there’s a lot of money in ads but the company already makes US$16.4 billion a year selling software.

However, steady improvement in free online software such as Google Docs and Spreadsheets, coupled with the availability of free open source productivity suites, such as OpenOffice.org, may leave Microsoft no choice but to come up with its own free software model.  Such a model would eventually have to include Office rather than just Works in order to compete with other free software products already on offer.

The question is how much is could be lost against how much could be gained by offering a free ad-supported software model? This is a question for which Microsoft hopes to glean some intelligence with its Microsoft Works trial.