[A2k] New York Times: Facing Free Software, Microsoft Looks to Yahoo

[Thiru Balasubramaniam]

February 9, 2008
Facing Free Software, Microsoft Looks to Yahoo
By MATT RICHTEL

SAN FRANCISCO =97 Nearly a quarter-century ago, the mantra =93information
wants to be free=94 heralded an era in which news, entertainment and
personal communications would flow at no charge over the Internet.

Now comes a new rallying cry: software wants to be free. Or, as the
tech insiders say, it wants to be =93zero dollar.=94

A growing number of consumers are paying just that =97 nothing. This is
the Internet=92s latest phase: people using freely distributed
applications, from e-mail and word processing programs to
spreadsheets, games and financial management tools. They run on
distant, massive and shared data centers, and users of the services
pay with their attention to ads, not cash.

While such services have been emerging for years, their rapid adoption
has been an important but largely overlooked driver of the $44.6
billion hostile bid that Microsoft made to take over Yahoo this week.

That proposed deal would give Microsoft access to Yahoo=92s vast news,
information, search and advertising network =97 and the ability to
compete more squarely with Google.

But a merger would also allow Microsoft to adapt its empire to compete
in a world of low-cost Internet-centered software.

Yahoo=92s huge user base could provide the audience and the
infrastructure for Microsoft to change how it distributes its products
and charges for them.

=93Microsoft makes its money selling licenses to millions and millions
of people who install it on individual hard drives,=94 said Nicholas
Carr, a former editor at The Harvard Business Review and author of
=93The Big Switch,=94 a book about the transition to what the technology
industry calls cloud computing.

=93Most of what you need is on the Internet =97 and it=92s free,=94 he said=
.
=93There are early warning signs that the traditional Microsoft programs
are losing their grip.=94

Certainly, analysts said, Microsoft=92s revenue =97 $51 billion last year,
most of it from software =97 is not yet suffering in any meaningful way.

The company said, to the contrary, that business is booming, and that
Microsoft Office, a flagship product, is having a record-breaking year.

=93Last year was our best year, and this year is better,=94 said Chris
Capossela, a Microsoft vice president with the Office division.

At the same time, though, the company has lowered prices. Last year it
began selling its $120 student-teacher edition to mainstream
consumers, who had been asked to pay more than $300 for a similar
product.

The bulk of the company=92s profit comes from selling to corporations,
which unlike consumers may be slower to adapt to a system in which
proprietary data is not stored in corporate-owned data centers.

Microsoft said that corporate customers prefer using software that
they are familiar with and that provides more functions and better
security.

But the corporate business, too, is coming under increasing assault
from lower-cost Internet competitors, including Microsoft=92s
archnemesis, Google.

On Thursday, Google took its attack to a new level. It released Google
Apps Team Edition =97 a version of its productivity software that
includes word processing, spreadsheet and calendar programs. In a form
of guerrilla marketing, the fans of Google Docs can take it into the
office, bypassing or perhaps influencing decisions made by corporate
executives, who until now have overwhelmingly bought Microsoft software.

Google, while it gives such software free to consumers, charges
corporations for a premium edition, though the fee is less than what
Microsoft charges for productivity software, analysts said.

The change is coming not from corporations but on the computers of a
growing base of individuals who increasingly expect their software to
be free =97 and for it to be processed and managed over the Internet.

Kevin Twohy, 20, a mathematics student at U.C.L.A., uses a free
service on Facebook to store and share photos, a program called Picnik
to edit the images, and Gmail.

For his English class last semester, he wrote a term paper about
William Blake using Google=92s free word processing software, even
though Microsoft Office had come loaded on his personal computer.

The advantage of the Google program, he said, was that it allowed him
to keep his information on Google=92s servers so that it was accessible
at any computer, whether he was working at his fraternity, a coffee
shop, a campus computer bank or the library. The experience, he said,
has persuaded him not to pay money for software.

=93I don=92t ever see myself buying a copy of Office,=94 he said.

Those individual users may be able to do what an army of lawyers and
regulators in the United States and Europe have never been able to do
=97 rein in Microsoft=92s monopoly power. There is some evidence that the
erosion in its pricing power has already begun.

Last fall, Microsoft lowered prices of its most powerful productivity
software for students, whom it regards as important future customers.
For a limited time, it said, students could buy a $60 downloadable
version of its most feature-rich version of Office, which ordinarily
costs around $460.

Microsoft has also had ad-supported online competitors who have
challenged other prominent brands, like the Encarta encyclopedia and
Microsoft Money, personal finance management software.

=93If Microsoft had to start over today, it wouldn=92t even think about
charging money for its software,=94 said Yun Kim, an industry analyst
with Pacific Growth Equities. =93Nobody in their right mind is
developing a business in the consumer market to charge=94 for software.

Mr. Kim said that he expected Microsoft at some point to introduce a
free ad-supported version of Office for consumers, though the company
insists that it has no such intention.

Mr. Kim, however, expects that Microsoft=92s corporate business is more
entrenched and resilient, and less susceptible to the influences of
free or ad-supported cloud computing.

Microsoft=92s online competitors disagree. Among them is Zimbra, a
division of Yahoo that offers Internet-centered productivity software
for e-mail, word processing and spreadsheets.

Consumers pay nothing for the product, but corporations pay as much as
$50 a year per license. About 20,000 companies, most of them small,
are paying customers.

For Office software, Microsoft charges $75 a year per license to large
companies, and up to $300 for small companies, according to Forrester
Research.

Satish Dharmaraj, general manager of Zimbra, said the company could
undercut Microsoft because it costs far less to create, maintain, fix
and upgrade software that runs in a central data center instead of on
thousands of individual computers.

But the relative quality of Microsoft=92s software continues to attract
customers, argued J. P. Gownder, an industry analyst with Forrester
Research.

He said that Microsoft has an opportunity to develop a hybrid version
of its software that combines the convenience of cloud computing with
the security of processing on the desktop, thus helping it maintain
and further its empire.

=93This is the predominant reason why Microsoft has gone after Yahoo,=94
Mr. Gownder said. =93The ad revenue is a nice short-term achievement,
but in the long run it is much more about delivering apps over the Web.=94

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


Tel: +41 22 791 6727
Mobile: +41 76 508 0997