Microsoft’s New Strategy for Office: Freemium


In a recent appearance at Convergence 2015, Microsoft Chief Marketing Officer Chris Capossela explained the software giant’s new strategy for Office: a freemium business model in which the most common features are now given away for free in order to drive adoption of the evolving platform. The most interesting bit, I think, is how Microsoft plans to drive paying customers as well.

Note: A special thanks to Mary Jo Foley for drawing attention to Mr. Capossela’s talk. She was away last week, and I hadn’t even realized that he had keynoted Convergence let alone so fully explained this new strategy.

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Oh, the times they are a-changin’. For decades, Microsoft’s three biggest product lines—Office, Windows (client) and Windows Server—drove the firm’s revenues, profits, and success. But as the world changed to more mobile- and cloud services-oriented personal computing paradigms, Microsoft was at first slow to react because it’s hard to walk away from traditional products that continue to generate billions of dollars in revenues every single quarter.

But walk away they are. Microsoft got the memo quickly with its Azure cloud services, though one might argue that such a transition—from on-premises servers to cloud-hosted services—is fairly straightforward. More problematic, of course, are the client-focused Office and Windows businesses. These product lines are under fire by less capable but quicker moving competitors and more popular mobile devices. Reviving them—or at least the lost profits and revenues they generated—for the 21st century is … well, trickier.

Microsoft’s response to the threats to Windows are two-fold.

First, it has made Windows free in a variety of ways—current-generation products are free—”available for zero-dollar licensing”—to device makers who make phones or tablets/PCs with screens smaller than 9 inches. On consumer-oriented devices and PCs with bigger screens, Windows is cheaper than before. And with Windows 10, everyone with a modern Windows or Windows Phone version will get the OS upgrade for free during its first year in the market.

Second, Microsoft is adapting Windows 10 so that it has a common core OS, apps platform, and store across multiple form factors—phones, phablets, small tablets, large tablets, 2-in-1s (tablet or laptop), laptops, desktop PCs and all-in-ones, Xbox One, Surface Hub, HoloLens, and Internet of Things devices. This part of the strategy is called One Windows, and it should make the platform more desirable to developers and more consistent for users.

But what about Office?

According to Mr. Capossela, who oversees Microsoft marketing, Office is pushing forward with a freemium strategy that mirrors that employed by Windows, and in ways that may surprise you. That is, if you use Office on a phone or small tablet—again, the exact same devices on which Windows is free—you get Office for free as well. “You can just go download Word in the iPhone store or in the Android store on your phone, and it’s free,” Mr. Capossela explained. “There are certain high-end features that you have to pay for, but the vast majority of it is free.”


The dividing line between free and not free is slightly different on Office—10.2 inches, as opposed to 9 inches with Windows—but that’s driven, no doubt, by the realities of each market. Office targets multiple platforms—Windows, of course, but also Android, iOS (iPad, iPhone), and even Amazon Fire OS—so it needs to accommodate the needs of the mobile devices market—largely non-Windows devices—differently than those of the larger PC (which is both Windows and Mac) market.

“If you want to use Word on a larger-screen device, we think there’s a lot more value to Word and Excel and PowerPoint and Outlook on a big screen,” Capossela continued. “So once you cross the 10.2-inch threshold of a device, you need to pay us a subscription. And then that unlocks the premium value on the small devices as well. That’s a really radical shift for us.”

That’s not hyperbole. That really is a radical shift.

Two years ago, if you purchased a Windows device of any kind, you probably received some entry-level Office product with limited Word and Excel applications and a regular up-sell to full Office. Now, on small devices, you will generally get one year of Office 365 Personal—a $69.99 value—for free. This isn’t a trial, it’s the real thing … for free. It provides full Office plus some amazing cloud-based capabilities (unlimited OneDrive storage, for example), and the goal is that users will find this offering so attractive that they’ll start paying at year two. We’ll see how that goes, but that’s the plan.

Of course, there are short term ramifications of this change as well.

Many have complained that Microsoft’s embrace of competing platforms somehow diminishes Windows, for example. But as Capossela explained, it is “Microsoft,” and not “Office” or “Windows” that is the most—and best—brand that the company owns. More to the point, Capossela says that Microsoft sells about “70, 75 million copies of Office a year. And all of a sudden in less than a year we have 40 million more downloads on phones that weren’t running Office. Amazing. Like that’s just a total mindbender in terms of opening up your mind to a different business model that your marketing can really help you advance.”

The most interesting part of Capossela’s talk is hard to find: the official Microsoft video of the sessions leaves out this slide, and I had to hunt around online to find it. But at one point, he compares Microsoft’s ecosystem to those of Apple and Google.


“It shows you that we’ve got a lot of big businesses at Microsoft,” he said. “Windows is big, IE is big, Office is big, et cetera. But it also shows you that we don’t have nearly the connectivity between our products that Google has engineered and that Apple has engineered.” Apple, he said, focuses all of its marketing on iPhone and iPad, because that’s where they make money and in marketing those products they can drive the rest of the business. Microsoft, meanwhile, is focusing on Surface Pro 3, third party hardware that runs Windows, Xbox, and Cortana (which drives Bing usage). Same reasons. It’s why Outlook lets you access Skype, and Windows Phone is connected to every Microsoft service automatically: usage drives usage.

The one question I have about this strategy is businesses. Today, businesses must be noticing that the products they’re still licensing at great cost—Office and Windows in particular—are now free to many consumers. I’m curious whether there will be push back from this quarter at some point. But as Capossela sees it, the functionality that businesses are paying for is not free to consumers either. And maybe that’s a natural dividing line after all.

“Not everything is free,” he explained. “There’s essentially a basic tier of service that’s available for free. But we think that this is the future of our business, is building super simple services to get started with that are free, that are easy to share, and you build that network effect, and then we’re going to behind the paywall have lots of interesting capabilities that we think are going to be what people are willing to pay for … this notion of freemium innovation just changes the way we think about marketing.”

This is the future of Microsoft’s business. Interesting.

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