Trilight Zone

[tricore]

esterday's release of Virtual PC 2007 continues a longstanding Microsoft trend: Give away free something valuable to gain market share against a dominant competitor.

Other recent pricing low-balls or giveaways include Office Accounting Express and Visual Studio Express. Microsoft can so blatantly undercut competitors, because its larger objective is to make gains for other products, typically Office and Windows and more recently Windows Server.

The tactic doesn't always succeed, and Microsoft must build a supporting network, typically with partners. But Microsoft's notches in the win column far exceed those in the loss column.

Give It Away to Take It Away
Many factors account for Microsoft's success, but two longstanding business practices stand out: release of software that achieves a "good enough" standard and offer of lower-cost, or free software that enhances the value of its platform products like Windows.

When, in the early 1990s, WordPerfect was the dominate word processor, Microsoft responded by bundling together Word, Excel and PowerPoint as "Office." The three products together sold for about the same price as WordPerfect. The lower-cost tactic is most effective when the software is "good enough"—meaning covers the 70 to 80 percent of features most end users would use most of the time.

Microsoft has repeated this pattern over the years. I remember when in the later 1990s, computer stores sold Microsoft's FoxPro for about $100; meanwhile, competing products from companies like Borland sold for many hundreds of dollars more.

"Microsoft is quite willing to go after competitors as a defensive strategy," said Paul DeGroot, an analyst with Directions on Microsoft. WordPerfect and Sony PlayStation are two examples DeGroot cited. "Microsoft takes the long view and bets that it can lose money longer than the other guy."

Microsoft Give Aways

Lower cost is a good tactic, but Microsoft has done much better with free—and really valuable technology. Probably the best-known example is Internet Explorer, which Microsoft integrated into Windows during the browser wars with Netscape. While Netscape had to separately sell its product, Microsoft could give away its competing software for free. Microsoft regarded its Web browser as adding value to Windows, so it gave away the technology as a way of enhancing the appeal of the operating system and subsequently sales. On the server, Microsoft took on Netscape software by giving away for free FrontPage (for creating Web sites) and Internet Information Server (for hosting Websites).

Windows Media Player is another example. Microsoft invested $500 million developing Windows Media Player 9 Series, which the company gave away for free with Windows XP. Other companies, such as RealNetworks, charged for their digital media products. Microsoft's bundled the software, for free, as way of enhancing Windows' appeal. Like Netscape and other developers, Real had to give away—and open-source—its core digital media technology in response to Microsoft's free software.

"You can even see it with a product like SQL Server, by giving away OLAP," DeGroot said. "It doesn't generate direct revenue for [Microsoft], but it harms Oracle. It used to be a revenue stream for Oracle."

These examples are by no means isolated, nor are they a clean sweep. Microsoft has failed, too, such as search bundling's ineffectiveness against Google.

The Accountant and the Virtual Machine
Office Accounting Express and Virtual PC 2007 are both classic examples of the longstanding Microsoft tactic of giving away something valuable for free.

Virtualization is one of the hottest growth areas on the server and presumably the desktop. Based on research from Gartner, Forrester and IDC, about 75 percent of Fortune 2000 companies now regularly use virtualization on production systems.

Virtual machines let IT organizations run multiple operating systems on a single server. For Microsoft, the opportunity is migration. Many businesses standardize on a single platform or embark on pockets of standardization based on department or function. The result is fragmentation, with many companies running several different versions of Office and Windows. Virtualization allows consolidation on a newer Windows version, while letting an IT organization to maintain compatibility with older applications and desktop or server software.

Conversely, virtualization would let a company switch over to another operating system, say, Linux, while continuing to run older Microsoft software. For obvious reasons, Microsoft would want to mitigate such an occurrence.

Vendors like IBM, VMware or Sun are pushing hard into the virtualization market, where Microsoft is a contender but by no means a leader. Free is Microsoft's calling card to gaining users against more entrenched competitors.

mall business accounting is another example. Yesterday, Microsoft revealed that its free Office Accounting Express 2007 product had achieved 1 million downloads from the IdeaWins Web site. Microsoft is trying to achieve with a free product the success unobtainable from a paid product.

Microsoft released its small business accounting software in late 2005 and started offering the free Express version in October 2006.

Retail sales of Office Accounting 2007 are insignificant compared to entrenched competitor Intuit QuickBooks. While Intuit's product commands more than 90 percent share, as measured in dollars, Microsoft's small business accounting software's share is less than 2 percent, according to NPD.

"Microsoft is really giving a lot of features and functionality to customers for free," said Chris Swenson, NPD's director of Software Industry Analysis. Intuit's entry-level product, QuickBooks Simple Start, costs $99 and has fewer features than Office Accounting Express.

"It's tough to unseat an entrenched competitor like QuickBooks," Swenson said. The free product, with possible upsell to the full product, would appear to be Microsoft's strategy. He described free as an "interesting strategy."

The share gains Microsoft could win from Intuit are more about Office than Office Accounting. The company hopes to upsell small businesses to Office, which applications like Excel and Outlook tightly integrate with the accounting software.

Swenson believes Microsoft must break out its wallet and do some real marketing to really gain market share. Free isn't the right strategy. He observed that Microsoft's first target market is the small business using Excel to keep the books.

"That target market that uses Excel probably never heard of Office Accounting," Swenson said. "The key is awareness and ratcheting it up with marketing."