Microsoft powers up for change
Chief executive says free software, downloadable online, is on the horizon for consumers. Josephine Moulds reports — Steve Ballmer, chief executive of Microsoft, yesterday signalled another step towards a dramatic change in the software giant's business model.
Context & Ripple Effects
Ballmer's signal lands three months after CNET reported that Microsoft's 'Cloud OS' was taking shape, and it attaches a business model to that infrastructure story: the company has already put $6 billion into its advertising business this year, and Ballmer now tells consumers that free, downloadable software is on the horizon.
The arithmetic behind the remark is straightforward — if the product is free, the money has to come from somewhere else, and Microsoft has spent 2007 building exactly that somewhere else. The same week it refreshed the Zune line across three models priced at $149, $199 and $249, underscoring how much of the consumer franchise now rests on devices and services rather than boxed sales.
First-order effects
- Consumers are the immediate audience: Ballmer is telling them to expect free downloadable software, putting Microsoft's per-license consumer revenue on a collision course with the ad-funded model its $6 billion advertising investment was built to serve.
- The announcement reframes Microsoft's own portfolio — hardware like the newly priced Zune range and the advertising platform become the monetization layer for software that stops charging upfront.
Second-order effects
- PC makers and retailers who sell boxed and preinstalled software face repricing pressure if the category's largest vendor gives away what their margins depend on charging for.
- Advertisers gain a new class of inventory as desktop software becomes a delivery channel, concentrating more consumer attention — and budget — inside Microsoft's walls and validating the $6 billion bet.
Third-order effects
- If the pattern holds, the industry's unit of sale shifts from the perpetual license to the ad-subsidized service — the endpoint the 'Cloud OS' reporting pointed toward — forcing every packaged-software vendor to find a substitute revenue stream or concede the consumer tier to whoever has one.
The trend: Consumer software is migrating from paid, boxed licenses toward free, ad-supported downloads, with Microsoft's 2007 advertising investments positioning it to make that substitution first.