Microsoft Considering Free Web-Based Version of Office

Microsoft (Nasdaq: MSFT) is contemplating a plan that would have it post online a free, ad-supported version of some of its productivity tools, a shift in strategy likely spurred by Google's (Nasdaq: GOOG) entry into the same space.

Though Microsoft has moved to make more of its software available online through its Windows Live initiative, it has held back on bringing Office into the fold, most likely because the suite is so popular and profitable for the software giant.

Instead, Microsoft may offer a version of Microsoft Works tools on the Web. Works is a lower-end alternative to Office -- it often comes bundled with lower-cost PCs, with an upgrade to Office an option that costs US$250 or more -- and Microsoft may be more willing to give it away in exchange for the chance to reap advertising revenue from it and to prevent market share losses to Google and others.

Microsoft's Office Live has been rolled out with online versions of the e-mail program Outlook, Web-building programs and other tools, but without the core of the suite -- Microsoft Word, Excel and PowerPoint.

Google's Writely, a free word processing program it's now offering online, is winning strong reviews for some of its features, including the ability to allow long-distance collaboration on a single document.

Giving Up the Franchise?

Microsoft has plenty of reason to think twice about giving away Office products, regardless of the potential for driving ad revenue. Office makes up as much as a quarter of Microsoft's annual licensing revenues, with much of that coming in massive license sales to enterprises with hundreds or thousands of Office users.

Works is often sold for as little as $50. An updated version of Office is due out early in 2007. Microsoft has yet to announce pricing for that suite, but the standard version of Office 2003 is currently for sale on Microsoft's Web site for $399 and the Professional edition is available for $499.

Each missed sale of those suites -- they are sold at a discount to PC makers when bundled with new machines -- would need to be replaced with significant advertising sales in order for Microsoft to avoid a drop in revenue over time. The company may also worry that users would be less loyal to a Web-based program than packaged or pre-installed software already loaded onto their computer.

Going Live

The earlier versions of Writely and the follow-on efforts to use Google Calendar to challenge Outlook and to produce an inexpensive spreadsheet to challenge Excel likely don't amount to enough to prompt Microsoft to change its overall strategy, according to JupiterResearch analyst Michael Gartnenberg.

He and other analysts have wondered why Google would challenge Microsoft at its core strength of productivity programs anyway, where the chances of building a superior product to unseat Office are slim.

"There's still the question of how well a Writely or other Web-based program can be monetized," Gartenberg said.

Indeed, even though Microsoft has pushed ahead with its Windows Live initiative, the Web-based software approach is still largely unproven, while Microsoft has 25 years of proof that packaged software can be a lucrative and profitable business line.