Microsoft (NASDAQ:MSFT) is like Oprah of tech companies. It has tons of loot with close to $100 billion in cash and investments, and it's starting to give away stuff to its fans.
Earlier this month, Microsoft was mulling free upgrades to Windows 8.1 for Windows 7 users. Now, the company is offering its popular Office suite on Apple's (NASDAQ:AAPL) iPhone and Google (NASDAQ:GOOGL) Android phones free of charge.
New CEO Satya Nadella is shedding Microsoft's conservative ideology, recognizing that Windows shouldn't be the company's centerpiece in an era of declining PC sales. Nadella's Microsoft appears willing to sacrifice Windows revenue for the chance to welcome new and old users into its web services ecosystem.
Allow me to reintroduce myself
Microsoft is offering the Office apps, with full functionality, for free on smartphones. On the iPad, users will be limited to viewing documents, unless they pay $99 for an Office 365 subscription (of which Apple gets its 30% cut).
This is an interesting strategy for Microsoft as it hasn't been a fan of the freemium model in the past. Remember, this is the company that charges a licensing fee for its phone OS.
But if Microsoft charged a premium upfront, it could have trouble attracting an audience. Apple, with the release of the iPad Air and iPad mini with Retina, now includes its productivity apps pre-installed. Google gives away its cloud-based productivity suite to anyone who wants it. To get a chance at attracting the market, Microsoft has to give away its best product.
Microsoft understands its real competition
The Mac vs PC debate is so last decade.
Today, it's Apple vs Android, and Microsoft is just an afterthought. Microsoft's goal is to "drive Office 365 everywhere" as Nadella said at the Office for iPad launch. As the software becomes platform agnostic, Microsoft will need to prove to customers that Office is worth the premium.
That means its real competition is Google, which famously gives away its best products like Google Docs. It's not just productivity software that Microsoft is competing with Google. They're also battling it out in cloud computing, web search, and mobile devices. Microsoft has decidedly lost the battle for the latter, despite hoarding its popular product for its own mobile OSes.
The Surface has lagged in sales, forcing Microsoft to write down inventory on its first generation. Meanwhile, Windows Phone has made only a small dent in the smartphone market. If the plan was to use Office to attract consumers to its mobile platforms, (which seemed to be the case), it hasn't worked.
It can still win the cloud
The future of Microsoft and Windows is in the cloud, which is perhaps why Nadella, the former head of the cloud division, was tapped for CEO. Microsoft Azure relies on Windows servers, and Office 365 runs on the platform. By extending Office 365 to the iPad, Microsoft is increasing the potential audience for cloud computing (and Windows customers through clever accounting).
Microsoft already works with Apple, which runs much of its iCloud service on Azure. The extension of Office to the iPad is just a further concession that Microsoft needs to play nice with its one-time rival to win share outside of the tablet and PC markets -- particularly the cloud.
Staten and Forrester predict cloud computing will grow to a $40 billion industry in 2020, and both Google and Amazon.com are aggressively attacking the market. After a recent price-drop at Google, Amazon replied in kind just 24 hours later. Microsoft, meanwhile, has yet to respond, but it shouldn't be too far behind.
Microsoft -- the web services company
Microsoft is finally adapting to a new era of computing. Its Windows monopoly is eroding as more consumers elect to purchase iOS and Android devices over a new PC. With software available across multiple platforms Microsoft can't afford not to follow suit.
Microsoft has already made several indications that it's moving away from traditional Windows licensing fees to drive revenue and more toward web services like Bing, Azure, and Office 365. Office for iPad is just another step that moves Microsoft toward a web services company, much like Google.
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Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.