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Software in hard times...

...rent or buy? You are about to be exposed to a global advertising campaign for Microsoft urging you to acquire their new Office 2013 software package.  But it’s not the advertising that caught my attention, but a major change in the way this software is to be marketed.  Up to now, most companies have purchased software yearly subscription licences for each of their employees, while individual customers and tiny businesses have always bought the product outright.  But now, as an individual customer, you will be enticed to pay a monthly subscription to use the software instead of buying the product: renting, rather than buying. You could, of course, consider purchasing what is known in the trade as a: “perpetual” software licence, but you’ll be heavily discouraged from doing so on three counts.  Firstly, it appears to be much more expensive to do so, secondly, each bought copy of Office 2013 is locked to a single personal computer, whereas a subscription allows for “family use” on multiple devices, and thirdly, you won’t receive any of the promised future product updates unless you become a subscriber.  The primary reason behind this novel sales strategy is that renting out the software will be far more lucrative for Microsoft in the long-term than selling it outright.  Roughly 80% of the revenue for Office software comes from businesses which pay a yearly subscription, typically $150 per user per year.  Microsoft hopes to switch the remaining 20% of their Office revenues gained from individual consumer purchases into long term, locked-in subscriptions.  Its target is home users who, until now, have felt that their older versions of Office are more than adequate for writing letters, creating spread sheets and presentations etc.  So why should they change especially as Microsoft Office software has had very few genuine innovations since its launch in 1989.  The new version of Word, for example, is only just beginning to possess alignment guides to position images within text and that’s been around for years.  So is Microsoft’s plan likely to work?  I'm not so sure. You may be surprised to find the purchasing options of Office 2013 are so complex and muddling, especially for the general public and even for some companies, that it may be necessary to create a spread sheet to be able to decide whether to rent (have a subscription) or buy.  However, what clearly stands out from all the charging confusion is that Microsoft desperately wants you to choose to subscribe.  Let’s compare the options:  Buying a single Office 2013 Home and Student perpetual licence in the U.S. will cost $170 which gets you a single copy of Word, Excel, PowerPoint and OneNote for one computer.  The previous version, Office 2010 Home and Student, allowed you to run three copies and was 17% cheaper.  So, apparently disregarding the fact that we’re in the greatest business depression for over 50 years, Microsoft is hiking the price and providing much less in return.  Compare that with signing up for the family friendly subscription which costs $100 per year, paid in monthly instalments, which superficially appears to be a good deal.  For this you get five licences to run Word, Excel, PowerPoint and OneNote on any computer or tablet, as well as three additional pieces of software: Outlook, Publisher and Access, and 60 Skype minutes to use per month, plus an extra 20 gigabytes of cloud storage.  But do the sums, read the small print, and beware the lock-in.  Over five years, you’ll pay a minimum total of $500 because I doubt that Microsoft won’t increase the charges in that time frame.  If your monthly payments creep up and you subsequently change your mind and want to cancel your subscription, you may lose some of your files.  Better be safe than sorry so keep copies of all your cloud content on hard disc, although to be able to retrieve and read them you may need to get some free open source software. That said, what really interests me is the extent of the gamble that Microsoft is taking, as I've written about previously, the company is extremely vulnerable to market changes and these are volatile times.  To understand the reasons behind this, and to appreciate the size of the bet that Microsoft’s CEO Steve Ballmer is making, let’s examine the context:  You only need to glance at the chart above to see how the Windows/Intel (WinTel) market share is disintegrating.  The source of this data comes from Mary Meeker’s recent Internet Trends presentation at Stanford University.  As Steve Ballmer explained to his local paper, The Seattle Times, in the past Microsoft was thought of as a software company but in the next few years the goal is to alter that perception to one of a “devices-and-services company.”  For the fiscal year 2012 the Windows division produced $11,460M of operating income, whilst the Business division responsible for Office software made $15,719M.  Even more significant: the operating income from the Windows division declined 6% from the previous year, whilst the Business division grew by 7%.  The Microsoft cloud hasn't been doing as well as expected in domestic computing and the company’s intention is to leverage the Office part of the business to drive further adoption.  Make no mistake, Office 2013 is a vital product for Microsoft and likely to generate far more money than Windows 8 if the lock-in subscription strategy is successful.  But there’s many a slip... To quote from the classic economic text book on digital lock- ins in the network age: “the quickest and surest way to take a bath in lock-in markets is to count on a lock-in that doesn't materialize.”  That was written in 1998 by two economists, one of whom is Hal Varian, currently Chief of Economist at Google.  Microsoft should take heed.  The company has already misjudged the potential lock-in that Windows 8 might generate for operating system sales, and rumours suggest production has already been halved for the recently launched Microsoft Surface touch device Microsoft is probably trying to copy what Adobe successfully achieved with its Creative Suite product which has been sold by subscription for some time.  Adobe began this process in 2011 and they had to disclose the reasons for it in their 10-K filing to the United States Securities and Exchange Commission.  Adobe described its own development from software selling to software subscription as a move from “a perpetual licence” to one of “perpetual revenue.”  According to Adobe this “...will allow us to target new users as well as increase the amount of recurring revenue... creating the potential for our business to be more predictable.”  The company goes on to explain that the benefits of subscription selling include the ability “to attract more price sensitive customers”, as well as to “attract more people than [previously] bought outright.”  It’s important to note that this move to sell software subscriptions, by both Adobe and Microsoft, is all about benefiting the companies as it won’t do much to benefit their customers.  At the heart of all this, these companies are using the transition to cloud computing to apply a lock-in on their loyal consumers with a simultaneous price increase, even though the offer of bundled cloud storage costs these companies comparative peanuts. But Adobe has a much stronger hold on their customers than Microsoft does.  Most purchasers of an Adobe Creative Suite, or one of the other bundles, are professional, or at least semi- professional.  After all it costs in excess of $2,000 to purchase Adobe software, or $46.88 per month for a subscription.  Software like PhotoShop takes years to master and that in itself is a strong lock- in.  Whether it’s a freelance artist or a big business customer, paying a monthly subscription is easier on the cash flow.  Another factor in Adobe’s favour is that there appear to be no really professional alternatives for products like PhotoShop or Illustrator.  Except that I found one in a little known company called Xara, and as a consequence I haven't bothered to upgrade my Adobe Master Collection as I've hardly used it in the last year and, happily, I’ve found Xara software to be superior to Adobe’s. As well as Microsoft’s comparatively weak lock-in power, its Office software is vulnerable to competition.  There are some excellent free alternatives – I'm actually writing this with LibreOffice, and Intel is now promoting the software in their app store as they helped optimise the LibreOffice software for their microprocessors.  So Microsoft is now building hardware without Intel microprocessors and Intel is helping to build alternative Office software suites?  My...how things are changing!!!  I also frequently use a very good, and free, Chinese Office suite by Kingsoft because it’s been on Android as well as Windows for some time.  Both LibreOffice and Kingsoft Office have very useful features that Microsoft Office doesn’t, although they lack a few trivial features and some of the fashionable slickness of Microsoft Office 2013.  Nevertheless, the gap is closing.  A product like LibreOffice, as well as having all the features that even power users need, happily runs on Apple, Windows or Linux platforms.  This open source, free software already exceeds the majority of the capabilities required by most business or domestic users, and cloud and Android versions have already been demonstrated. It is now being promoted by the French Government as a credible alternative to purchasing Microsoft Office.  Both of these alternative products also have an easy file import from older versions of Microsoft Office so, as well as being free, there’s zero switching cost. As for Microsoft’s much touted extra gigabytes of storage -it must have its head in the clouds if it hasn’t noticed that it has a major competitor in Google which has a vastly superior cloud platform.  So if it’s reliable access to cloud services you want, Google already has the infrastructure in place.  You may also have noticed that in June 2012, Google purchased the best Android Office app company available in order to not only improve their app but also their Google Docs and spread sheet cloud software.  Any day now you can expect to see upgraded versions of Google Office software released, increasing the alternative choices to Microsoft's Office 2013. So what do you think? As a potential individual customer, are you going to consider paying monthly for the capacity for producing word processing and spread sheets in the same way that you pay for your telephone or broadband rental?  Are you willing to subscribe to a software product in perpetuity with no control over the future annual costs?  Or would you prefer to own the product providing that capacity outright, with no lock-in rental payments?  Personally I fit into the latter category and it will be intriguing to see how many people are like me.  The switch from outright purchase to subscription revenue allows companies all sorts of creative accounting which means company spread sheets become predictive models of what is hoped for rather than reflecting actuality, so it’s likely to be some time before we really know how things are going. January 2013
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Software in hard times...

...rent or buy? You are about to be exposed to a global advertising campaign for Microsoft urging you to acquire their new Office 2013 software package.  But it’s not the advertising that caught my attention, but a major change in the way this software is to be marketed.  Up to now, most companies have purchased software yearly subscription licences for each of their employees, while individual customers and tiny businesses have always bought the product outright.  But now, as an individual customer, you will be enticed to pay a monthly subscription to use the software instead of buying the product: renting, rather than buying. You could, of course, consider purchasing what is known in the trade as a: “perpetual” software licence, but you’ll be heavily discouraged from doing so on three counts.  Firstly, it appears to be much more expensive to do so, secondly, each bought copy of Office 2013 is locked to a single personal computer, whereas a subscription allows for “family use” on multiple devices, and thirdly, you won’t receive any of the promised future product updates unless you become a subscriber.  The primary reason behind this novel sales strategy is that renting out the software will be far more lucrative for Microsoft in the long-term than selling it outright.  Roughly 80% of the revenue for Office software comes from businesses which pay a yearly subscription, typically $150 per user per year.  Microsoft hopes to switch the remaining 20% of their Office revenues gained from individual consumer purchases into long term, locked-in subscriptions.  Its target is home users who, until now, have felt that their older versions of Office are more than adequate for writing letters, creating spread sheets and presentations etc.  So why should they change especially as Microsoft Office software has had very few genuine innovations since its launch in 1989.  The new version of Word, for example, is only just beginning to possess alignment guides to position images  within text and that’s been around for years.  So is Microsoft’s plan likely to work?  I'm not so sure. You may be surprised to find the purchasing options of Office 2013 are so complex and muddling, especially for the general public and even for some companies, that it may be necessary to create a spread sheet to be able to decide whether to rent (have a subscription) or buy.  However, what clearly stands out from all the charging confusion is that Microsoft desperately wants you to choose to subscribe.  Let’s compare the options:  Buying a single Office 2013 Home and Student perpetual licence in the U.S. will cost $170 which gets you a single copy of Word, Excel, PowerPoint and OneNote for one computer.  The previous version, Office 2010 Home and Student, allowed you to run three copies and was 17% cheaper.  So, apparently disregarding the fact that we’re in the greatest business depression for over 50 years, Microsoft is hiking the price and providing much less in return.  Compare that with signing up for the family friendly subscription which costs $100 per year, paid in monthly instalments, which superficially appears to be a good deal.  For this you get five licences to run Word, Excel, PowerPoint and OneNote on any computer or tablet, as well as three additional pieces of software: Outlook, Publisher and Access, and 60 Skype minutes to use per month, plus an extra 20 gigabytes of cloud storage.  But do the sums, read the small print, and beware the lock-in.  Over five years, you’ll pay a minimum total of $500 because I doubt that Microsoft won’t increase the charges in that time frame.  If your monthly payments creep up and you subsequently change your mind and want to cancel your subscription, you may lose some of your files.  Better be safe than sorry so keep copies of all your cloud content on hard disc, although to be able to retrieve and read them you may need to get some free open source software. That said, what really interests me is the extent of the gamble that Microsoft is taking, as I've written about previously, the company is extremely vulnerable to market changes and these are volatile times.  To understand the reasons behind this, and to appreciate the size of the bet that Microsoft’s CEO Steve Ballmer is making, let’s examine the context:  You only need to glance at the chart above to see how the Windows/Intel (WinTel) market share is disintegrating.  The source of this data comes from Mary Meeker’s recent Internet Trends presentation at Stanford University.  As Steve Ballmer explained to his local paper, The Seattle Times, in the past Microsoft was thought of as a software company but in the next few years the goal is to alter that perception to one of a “devices-and-services company.”  For the fiscal year 2012 the Windows division produced $11,460M of operating income, whilst the Business division responsible for Office software made $15,719M.  Even more significant: the operating income from the Windows division declined 6% from the previous year, whilst the Business division grew by 7%.  The Microsoft cloud hasn't been doing as well as expected in domestic computing and the company’s intention is to leverage the Office part of the business to drive further adoption.  Make no mistake, Office 2013 is a vital product for Microsoft and likely to generate far more money than Windows 8 if the lock-in subscription strategy is successful.  But there’s many a slip... To quote from the classic economic text book on digital lock-ins in the network age: “the quickest and surest way to take a bath in lock-in markets is to count on a lock-in that doesn't materialize.”  That was written in 1998 by two economists, one of whom is Hal Varian, currently Chief of Economist at Google Microsoft should take heed.  The company has already misjudged the potential lock-in that Windows 8 might generate for operating system sales, and rumours suggest production has already been halved for the recently launched Microsoft Surface touch device Microsoft is probably trying to copy what Adobe successfully achieved with its Creative Suite product which has been sold by subscription for some time.  Adobe began this process in 2011 and they had to disclose the reasons for it in their 10-K filing to the United States Securities and Exchange Commission.  Adobe described its own development from software selling to software subscription as a move from “a perpetual licence” to one of “perpetual revenue.”  According to Adobe this “...will allow us to target new users as well as increase the amount of recurring revenue... creating the potential for our business to be more predictable.”  The company goes on to explain that the benefits of subscription selling include the ability “to attract more price sensitive customers”, as well as to “attract more people than [previously] bought outright.”  It’s important to note that this move to sell software subscriptions, by both Adobe and Microsoft, is all about benefiting the companies as it won’t do much to benefit their customers.  At the heart of all this, these companies are using the transition to cloud computing to apply a lock-in on their loyal consumers with a simultaneous price increase, even though the offer of bundled cloud storage costs these companies comparative peanuts. But Adobe has a much stronger hold on their customers than Microsoft does.  Most purchasers of an Adobe Creative Suite, or one of the other bundles, are professional, or at least semi- professional.  After all it costs in excess of $2,000 to purchase Adobe software, or $46.88 per month for a subscription.  Software like PhotoShop takes years to master and that in itself is a strong lock-in.  Whether it’s a freelance artist or a big business customer, paying a monthly subscription is easier on the cash flow.  Another factor in Adobe’s favour is that there appear to be no really professional alternatives for products like PhotoShop or Illustrator.  Except that I found one in a little known company called Xara, and as a consequence I haven't bothered to upgrade my Adobe Master Collection as I've hardly used it in the last year and, happily, I’ve found Xara software to be superior to Adobe’s. As well as Microsoft’s comparatively weak lock-in power, its Office software is vulnerable to competition.  There are some excellent free alternatives – I'm actually writing this with LibreOffice, and Intel is now promoting the software in their app store as they helped optimise the LibreOffice software for their microprocessors.  So Microsoft is now building hardware without Intel microprocessors and Intel is helping to build alternative Office software suites?  My...how things are changing!!!  I also frequently use a very good, and free, Chinese Office suite by Kingsoft because it’s been on Android as well as Windows for some time.  Both LibreOffice and Kingsoft Office have very useful features that Microsoft Office doesn’t, although they lack a few trivial features and some of the fashionable slickness of Microsoft Office 2013.  Nevertheless, the gap is closing.  A product like LibreOffice, as well as having all the features that even power users need, happily runs on Apple, Windows or Linux platforms.  This open source, free software already exceeds the majority of the capabilities required by most business or domestic users, and cloud and Android versions have already been demonstrated. It is now being promoted by the French Government as a credible alternative to purchasing Microsoft Office.  Both of these alternative products also have an easy file import from older versions of Microsoft Office so, as well as being free, there’s zero switching cost. As for Microsoft’s much touted extra gigabytes of storage -it must have its head in the clouds if it hasn’t noticed that it has a major competitor in Google which has a vastly superior cloud platform.  So if it’s reliable access to cloud services you want, Google already has the infrastructure in place.  You may also have noticed that in June 2012, Google purchased the best Android Office app company  available in order to not only improve their app but also their Google Docs and spread sheet cloud software.  Any day now you can expect to see upgraded versions of Google Office software released, increasing the alternative choices to Microsoft's Office 2013. So what do you think? As a potential individual customer, are you going to consider paying monthly for the capacity for producing word processing and spread sheets in the same way that you pay for your telephone or broadband rental?  Are you willing to subscribe to a software product in perpetuity with no control over the future annual costs?  Or would you prefer to own the product providing that capacity outright, with no lock-in rental payments?  Personally I fit into the latter category and it will be intriguing to see how many people are like me.  The switch from outright purchase to subscription revenue allows companies all sorts of creative accounting which means company spread sheets become predictive models of what is hoped for rather than reflecting actuality, so it’s likely to be some time before we really know how things are going. January 2013
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