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by Bryan Chaffin

Microsoft's Next Stunt Offers Apple An Opportunity
May 11th, 2001

Remember the days when you could sheen off to the local Computer's R Us and pick up a copy of Office for many hundreds of dollars? Oh wait; you can do that today. Microsoft wants to bring these heady days of willy-nilly "buying" to a close, and introduce a new golden age of "renting."

Hi, welcome to Bryan's World. I am a hard core capitalist and an idealist all wrapped up in one. In Bryan's World, people compete for their money and strive to earn what they get. They seek to trade value for value, and they don't steal. Companies try to beat each other by making new or better products, selling those products cheaper, and offering better service than the company next door. People are honest, and... well... you get the idea. It's a true Objectivist's Utopia.

In the real world, way too many people just plain suck. In the real world, it is acceptable to win by any means necessary, and being the best is hardly ever necessary. In the real world, ethics and integrity just get in the way of making a profit, and lying, trickery, and deceit are all A-OK. Heck, you don't even need to bother with trying to provide the best solutions for your customers as long as they are willing to fork over enough cash for the swill you are serving. In the real world, companies like Microsoft rule the roost.

Microsoft has gotten so big and blind to their own bloated state, they have totally lost site of their customers' well being. Back in Bryan's world, people compete by being the best. In the real world, Microsoft seeks to circumvent a changing industry by leading the herd animals they call customers through a new ring of fire called Subscription Licensing. For those not versed in the ways of techno-speak, Subscription Licensing means that instead of buying your software, you have to rent it. That may be by the year, by the month, or by the minute, whatever floats Microsoft's boat.

You see, Microsoft is suffering from the upgrade cycle-blues. Slowing PC sales, a saturated market, and customers that won't upgrade to a new version of Office/Windows/Bloatware every two years are just way too frustrating. Hey, it's hard making something compelling enough to make people *want* to upgrade, and well, they have to do something. Right?

Much of Microsoft's business model depends on an ever-increasing revenue stream. Bill Gates' obsession for winning depends greatly on his company's ability to buy any competition they can't beat, and that requires high stock values and/or lots of cash. In addition, their employees get their big payoff in stock options, not cash. Stock options only pay off if your stock goes up, and your stock goes up only if your profits increase. Lose the ever-increasing stock price and you lose your employees. There is nothing wrong with that model as far as it goes except that it's as sustainable as any other pyramid scheme. Ask those wacky kids at Cisco who have been hammered by the same trap; If everything you do hinges on an ever-increasing stock value, when your stock ceases to increase in value, everything you do goes right to hell. The lesson here is that stock options make a great bonus, but are a lousy model for base pay.

Cisco has dealt with the collapse of their own bubble by saying that nothing is their fault and the economy is to blame. Being in the hardware business, they also wrote off US$2.2 billion worth of inventory in just one quarter. Microsoft, however, is in a different place altogether. They can change the rules, or at least they think they can. The company wants to move away from being dependent on their customers to choose their products, and instead wants to make those customers have to pay for their software forever. Sounds great, eh? It does for Microsoft, but it is a hell-come-true for their customers, at least most of them. Is your company having a hard time right now and need to put off buying that new version of Office? Too bad, it expires in *ding* three days.

There are some large corporations that upgrade their software so often that paying a subscription is really the difference between having 6 of one thing or a half-dozen of another. For the rest of the world that will use their OS for 4 years, or their copy of Office for 5 years, Subscription Licensing is nothing short of highway robbery. But that's OK, customer habits are a nuisance to Microsoft, so it's time to change them.

If anyone still needed proof positive that Microsoft had monopoly power, this is it. Only a company with monopoly power could move their customers to a new licensing model that is so clearly and blatantly NOT beneficial to anyone except the company. If it was not for that monopoly power, another company could step up to the plate and say "Hey, don't rent their products, buy ours. You can keep it for as long as you like." Don Young, an analyst with UBS Warburg, said it best:

"Now just using the software, even old software, ensures revenues. It's an ongoing revenue stream. It's really a perpetual revenue stream when perpetual licensing becomes non-perpetual," Young said.

"I don't think there are any customers today who have the option to walk away from Windows and Office. It's as entrenched on the desktop as it ever has been," Young said.

Mr. Young also added "This is good for investors." That it is, but it's not good for customers. There we are back to that "winning by any means necessary" mode to which so many of my fellow capitalists have descended. Whatever happened to honesty, integrity, and a good work ethic that is what capitalism is really about? Be sure and duke it out in the comments whichever end of the spectrum you inhabit, and if you don't like me talking politics, you can bite me.

Anyway, Microsoft has been planning on moving to this model for some time, but now they are actually implementing it. The company will be offering Office XP as a subscription in Australia. They were planning on doing this for the US market too, but pulled back because they were fearful that the short term hit on revenue might make them miss their 4th Quarter estimates. Instead, they are moving some large European customers to this model and experimenting in Australia at the same time.

A couple of contrary notes: Subscriptions as an option are a fine thing. For instance, Qualcomm made Eudora a subscription product. Now, they committed an unethical act by saying that those who had bought the product after a certain date would find their license changed into a subscription (which I can NOT see as being legal). On the flip side, they are also offering ad-sponsored versions of the product (which I use) and a free "lite" version. In my never-humble opinion, the fact that there are options one can choose make all the difference.

Microsoft too is initially offering subscriptions as an *option* in Australia. Make no mistake about it, however, if there customers allow them to get away with it, Microsoft will make all of their software available *only* as rental products as soon as they possibly can. When they do, you can say goodbye to major upgrades every two years. Instead, we will see a constant series of very minor updates coming out every few months to help their customers rationalize being raped every year.

Will Microsoft be successful with this scheme? Yes. There are enough herd animals hiding in human form to make it work for them. I think there are also enough people willing to compute differently that will check out alternatives like Apple, Sun, and the various Linux solutions available. Remember that what is setting this in motion in the first place is that not enough people are upgrading often enough. At least some of these people are not going to be happy about the choice of sticking with old version of their apps or beginning a lifelong payment plan with Redmond. Those defectors won't be enough to break up the Wintel hegemony, but it will be a big shot in the arm for companies like Apple, Sun, Red Hat, and others. It wouldn't take a very big percentage of Microsoft's customers to start Thinking Different for Apple to double their own sales. That would be what we in the industry call a Good Thing.

Special thanks this week to Observer Charlie Kille who so succinctly put his finger on something I had been thinking about for years. He mentioned in a letter to me that Windows users were divided into exactly two categories:

1) Herd animals
2) Hobbyists

This is painfully true, and since I used part of it in my column today, I wanted to give credit where credit was due.

began using Apple computers in 1983 in a high school BASIC programming class. He started using Macs in 1990 when the Kinko's guy taught him how to use Aldus PageMaker, finally buying a Power Computing Power 100 in 1995. Today, Bryan is the Editor of The Mac Observer, and has contributed to the print versions of MacAddict and MacFormat (UK).

You can send your comments directly to him, or you can also post your comments below.

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