How the Cloud Changes Microsoft's Business Model

Microsoft has announced rental prices for Windows and Office and, at first, I thought this meant they were announcing "cloud" prices for platform providers who want to offer these products.  But I seem to be wrong, since virtual versions of Windows and Office are excluded and the pricing applies more to people who rent physical PC's (or their use, as in an Internet Cafe), offering a legal way to rent the software (which certainly is used today, by such users, but not within Microsoft's licensing policies).

This brings to my mind the fact that the Cloud is affecting everything and everybody who is already in the software business.  Basically, ISVs (and Microsoft is the biggest and most important ISV) have to decide how their business model will change with the cloud.

Some changes are obvious:

• Will you offer cloud software?
• Will you undertake rewriting your software to better suit the architecture of the cloud?
• How will your pricing model change, as it must, to offer pricing by usage, or by period of access (monthly, yearly, whatever), and by whether you only support named users?

But there are more subtle changes.  In an excellent article, Adrian Kingsley-Hughes of ZDNet points to a problem I've written about before:  There is a clear relationship between what people pay for HW and how much they will pay for SW.  The ubiquity of the cloud and the thousands of applications and web sites it offers has propelled the sale of inexpensive netbooks, designed to offer cloud access (and lightweight capabilities off-line) .  SmartBooks and Tablets will follow, many of them below the premium price Apple is sure to charge.

These less expensive devices (and we should, of course, include SmartPhones), lead buyers to look for less expensive SW, from free software on the web to $3.00 iPhone apps.  In that world, more expensive (if much more fully featured) operating systems from Microsoft and applications like Office will be viewed as too expensive by many buyers.

It's true that many of us in the U.S. will start out by adding a netbook to the desktops and laptops we already have.  But for many first-time users, here and aboard, a netbook, a SmartPhone, a SmartBook, or a Tablet will be all they need.  For these users, Microsoft must offer web-based applications (as they will on Azure) and tune their business model to make money through some combination of free or inexpensive apps and advertising, while continuing to service a narrowing market (in total terms) of users who will continue to compute and surf from more generous (and expensive) platforms.

Comments

[Drew]

Hi Amy,

A good point would be to make that the general public isn't used to paying for Microsoft's software, so straight off, they are going to be put off that they have to "pay for it now". Even though all along they have been paying for Windows and office, but not many really realize it was already factored in to the cost of their computers.

Microsoft will have to have a very low-cost model for general users, but could spin off more feature-rich versions to businesses for a higher margin.

Great topic!