Microsoft may price Office 365 as low as $2 per month

Microsoft must aggressively price its Office 365 subscription plans, perhaps as low as $2 a month, to convince consumers that it’s better to rent software than to buy it, analysts said today.

When CEO Steve Ballmer and other executives unveiled Office 2013 and new Office 365 subscription plans two weeks ago, they left out some important details. Price was at the top of the list.

“They just have not been forthcoming with pricing,” observed Michael Osterman, president of Osterman Research.

Microsoft has laid out four new Office 365 subscriptions that include the right to download and install the upcoming Office 2013 for Windows or Office for Mac 2011 on as many as five devices — desktop or notebook PCs or Macs, as well as Microsoft-powered tablets — per user.

All editions offer Access, Excel, OneNote, Outlook, PowerPoint, Publisher and Word from Office 2013 (or Excel, Outlook, PowerPoint and Word from Office for Mac 2011). The consumer-oriented Office 365 Home Premium will also include an additional 20GB of storage space on SkyDrive and 60 Skype calling minutes.

The for-business editions, called ProPlus, Small Business Premium and Enterprise, add InfoPath and Lync, and access to hosted copies of server-side software including Exchange, Lync and SharePoint.

Without hints from Microsoft, analysts struggled to place their bets on the company’s new strategy that will try to convince everyone to “lease” Office rather than buy a perpetual license.

In lieu of direct comparisons, they used what yardsticks were at hand: Google Apps’ pricing and that of the current Office 365 crop, which target only businesses.

“They’re competing directly with Google Apps,” said Osterman. “[Google Apps for Business] costs $5 per user per month. Google is the nemesis of Microsoft. So Microsoft’s [pricing] has to be comparable to that. They need to compete.”

Patrick Moorhead, principal analyst at Moor Insights & Strategy, agreed.

“They need to be competitive with Google Apps for Business,” said Moorhead in an email reply to questions Thursday. “For those businesses and users not married to Office, Google’s offering can be very, very compelling, particularly to users with Android phones and those who grew up on Web tools.”

Others relied on Microsoft’s Office 365 subscription plans, even though the comparisons were apples-to-oranges.

Unlike the current Office 365 plans, the new ones will target consumers, too. In fact, that’s one of the most intriguing concepts to come out of the Office 2013 preview announcement. But today’s Office 365 programs include services unsuitable to consumers, and most do not give users the right to install Office on their computers.

Only the highest priced “E3” and “E4” plans provide five installs of Office 2010 on the desktop, but their $20 and $22 per user per month fees were quickly discounted by the experts as unreasonable for Office 365 Home Premium. At the bottom of the scale, the “P1” program, while only $6 per user per month, offers the cloud-based Office Web apps for Excel, OneNote, PowerPoint and Word, not Office on the desktop.

Some experts were convinced that Microsoft will be very aggressive, and will peg Home Premium’s price even lower than P1’s.

“I expect most of the plans to stay at current prices, and to see Home Premium coming in below the $6 tag,” said Daryl Ullman, the co-founder and managing director of the Emerset Consulting Group, which specializes in helping companies negotiate software licensing deals. “My guess is $2-$4 per month, but with less functionality then the Small Business Premium [plan].”

Ullman is a former Microsoft licensing manager in the company’s Enterprise & Partner Group, and is the author of Negotiating with Microsoft.

Rob Helm, an analyst with Directions on Microsoft, declined to put a price on the table, but said one of the benchmarks he’ll use when he analyzes Office 365 will be an earlier attempt by Microsoft to get consumers to rent the suite.

That stab was Equipt, a subscription bundle of Office Home and Student 2007, its now-defunct OneCare antivirus product, and several then-for-free online services, including Hotmail. Microsoft priced an annual Equipt subscription at $69.99, or about $5.83 per month. Customers were allowed to install Equipt, and thus Office 2007, on as many as three PCs for that fee.

Microsoft pulled the Equipt plug in April 2009, just nine months after launching the offer.

Helm noted the obvious, that Microsoft failed three years ago at a price point less than $6 a month.

His other yardstick? The current Office 365 P1 plan, which runs for $6 per month.

So if there was a consensus among the four analysts, it was the expectation that Home Premium’s monthly fee will come in under $6.

That would cost consumers $72 annually — although Microsoft could offer both monthly and yearly prices, discounting the latter — for the right to install Office 2013 on up to five PCs, Macs and tablets.

But consumers aren’t stupid, said Moorhead: They’ll do the math.

Several of the analysts noted that the average user runs a version of Office for about five years before upgrading. Using that timespan, the numbers are straight forward.

At $72 annually, a consumer subscribing to Office 365 Home Premium would pay $360 total, or $72 for each of the five allowed copies, over a five-year period. That comes out to $14.40 per license per year.

In comparison, Office Home & Student 2010, which provides three perpetual licenses, lists for $149.99 and is commonly discounted at retail., for instance, sells it for $124.74.

Thus a copy of Office Home & Student 2010 would run $125 total, or $41.66 for each of the three provided copies, over the same five-year stretch. Bottom line: $8.33 per license per year.

Ullman’s estimate of $2 to $4 per month for Home Office straddles the cost of a perpetual license. The top end of his range translates into $48 annually — $240 total or $48 per license, over five years — and produces a $9.60 per license per year fee. Halve the monthly charge and the per-license-per-year drops to $4.80, a bargain compared to a perpetual license.

The experts were certain that some consumers would do those same calculations.

“Microsoft needs to know that it has some very smart customers who will aggregate and disaggregate the pricing to see what is the better deal between an Office ‘lease’ versus ‘buy,'” said Moorhead.

It’s one of the reasons why others, including Ullman, argued that Microsoft will keep the price of an Office perpetual license at current levels. (Microsoft has said it will sell Office 2013 in the old-fashioned way, whether on discs in a box or via download, for a one-time, upfront payment that offers a perpetual license.) If Microsoft drops the perpetual license price of Office 2013, it will look even more attractive when customers start comparing costs with an Office 365 subscription.

But the advantages for customers in Microsoft’s subscription strategy — spreading out costs — may be enough to justify higher monthly fees, even when customers get out their calculators, said Moorhead.

“Microsoft will price the new Office 365 above purchasing the perpetual license, as this would make sense for a buy versus lease,” Moorhead said. “People will always pay more for a lease versus purchase as it lowers the upfront cash requirement.”

However Microsoft prices Office 365 — and the analysts admitted their numbers were back-of-the-envelope estimates — only one thing is certain, said Osterman.

“This is going to be a hard sell,” Osterman said. “[People] will be hard-pressed to come up with compelling reasons to migrate to Office 2013. That’s the real issue for Microsoft.”

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. 

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