Microsoft's big gamble with free Office

SAN FRANCISCO--Microsoft has a new plan to make more money from Office: give it away.

With Office 2010, one of the biggest changes is how many ways there are to get Microsoft's most profitable software program for free.

In addition to the free, browser-based Office Web Apps, Microsoft is also offering PC makers the ability to install a basic version of Office on new computers. The new program, Office Starter, includes a stripped-down version of Word and Excel. PC makers, retailers and Microsoft can all make money if the PC buyer later upgrades to a paid version of Office.

New buying options for Office 2010 include a "product key card" that can be used to upgrade the basic version of Word and Excel on new PCs.

(Credit: Microsoft)

"People will be exposed to the Office 2010 experience from the minute they turn on that PC," Microsoft Business Division President Stephen Elop said Wednesday in an interview here. Microsoft is estimating that 80 percent of new PCs sold at retail after the launch of Office 2010 will have the starter edition of Office pre-installed, he said.

It's obviously a huge gamble for Microsoft, which still makes the bulk of its profits from Windows and Office. That said, most of the Office money comes from businesses and, on the consumer side, Microsoft is also trying to contend with free rivals like Google Apps.

Plus, while Starter is new, Microsoft has always had a lower-end productivity suite. Office Starter replaces Microsoft Works, a product that was both sold at retail and heavily pre-installed on new PCs. While Office Starter only shows the user the slimmed-down versions of Word and Excel, PC makers are actually loading the full version of Office, ready to be unlocked as soon as the buyer pays for an upgrade.

To make buying that full copy of Office easier, Microsoft plans to flood stores with options to buy the product. In addition to the traditional boxed copies of the suite, Microsoft is also planning to sell "product key cards" that can be used to upgrade a single copy of Office (boxed copies can be used for two or three computers, depending on the edition).

The product key cards have a number of other subtle differences as compared with traditional boxed products. One is that the cards, like gift cards at a supermarket, are just pieces of plastic or cardboard until they are activated. That means stores don't have to pay for lots of copies of the software upfront.

"We're migrating to an inventory-less model," Elop said.

But saving retailers the cost of stocking inventory is just one aspect.

The move to product cards also allows Office to be carried in more places within the store.

"If it is an inventory product, if it is a real boxed product with real value, there are always concerns about the security of that product," he said.

By contrast, the product key cards can be placed at all the positions where someone might think of buying Office (or be convinced by a salesperson)--in the software section, near the PCs, and, most importantly, right by the cash register.

Microsoft also plans to use the Web apps as a way to sell the full Office. Elop said there will be a prominent button within the browser-based programs to open a document in the desktop versions of Office. Those that have the latest Office will see the document immediately, while Microsoft will have an opportunity to sell those with an older version or no version of Office on the benefits of buying Office 2010.

The challenge, Elop said, is making sure that Microsoft doesn't mess up the user experience in its efforts to sell users on paid products.

"You have to balance the absolute importance of the quality of the user experience against the desire to also have an upsell opportunity," Elop said. "We will bias toward making sure the user experience really hangs together...We've seen situations in other companies, on other days where people have become too aggressive on that."

For more from my chat with Elop about Office 2010, check out the video interview above.