Microsoft (NASDAQ:MSFT) was slow to recognize that in the last few years everything changed.
The company has built its business by having the dominant operating system -- which pretty much everyone had to buy -- and the leading productivity suite, which was the business standard. There was a time not too long ago when using anything other than a Windows-based computer was only an option for those willing to pay more and deal with the compatibility issues of using an Apple (NASDAQ:AAPL) Mac. The same was true of Office, which was really the only choice for word processing, spreadsheets, and presentations.
Because of that monopolistic dominance, Microsoft could (within reason) name its own price for both Windows and Office. It was a wonderful setup for the company, which was really only marketing against itself. Sales would rise or fall based on the customer base's willingness to upgrade over sticking with earlier versions, but there was no threat of large numbers of people leaving the company's ecosystem.
Over the last few years -- largely due to the rise of machines running Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android OS and Apple's iPads -- that has all changed. People certainly no longer needed Windows and, though the alternatives remain somewhat poor, many decided they could get by without Office.
Though it was slow to respond, the new Microsoft, under CEO Satya Nadella, has made up for that by being bold. Now the company has acknowledged that it can't keep everyone on Windows, so it has brought Office to iOS and Android. To further push that change, Microsoft has announced that it won't charge for core Office functionality on any devices with screens 10.1 inches or smaller.
What exactly is Microsoft doing?
Simply offering Office on non-Windows platforms was a bold move for the company. In doing so, Microsoft has admitted that Windows may never dominate the tablet market and acknowledged that PCs will never return to their previous heights.
The company is also conceding that Office alone was not enough of a draw to stop consumers from using Android tablets or Macs and iPads. If Microsoft kept Office as a Windows exclusive, it would allow large parts of the population to grow up without using Word, Excel, Outlook, PowerPoint, and the rest of the Office suite.
It's hard to miss something you never had, so by keeping Office as a paid experience solely on its own platform Microsoft was ultimately conceding dominance. If things had stayed as they were, a generation would have grown up using Google's free productivity tool or Apple Office knockoff products.
Stopping that required dramatic action and Microsoft took that, first by offering paid versions of Office for iOS and Android and now by making it free for what it is deeming non-professional devices. The company explained its thinking in a blog post by Kirk Koenigsbauer, corporate vice president for the Office 365 Client Apps and Services team:
Currently, we are also using screen size to delineate between professional and personal use. Based on our research, we are classifying anything with a screen size of 10.1 inches or less as a true mobile device: You're probably using it on the go, when it's not practical to use a larger computing device such as a PC or a Mac. You probably aren't using a mouse or a keyboard, instead navigating via touch interface. It's probably not a "pro" category tablet that is used for design or presentations. On these devices, the core editing and viewing experience is free.
It's a bold move, but a necessary one that's certain to lead millions of Android and iOS users (and even some using Windows tablets) to use Office when they might not have, had it still cost money. That at least gives Microsoft the chance to win them over as paying customers on their laptops, desktops, and in their professional lives.
It's going to work
The big change here is that the company is allowing free access to editing functions on tablets that meet the screen-size requirements. Previously, the company did offer free versions of the Office apps that, despite being view-only, were very successful.
"Offering a free, basic mobile app exposes more people to the innovations we're bringing to mobile," Koenigsbauer wrote. "Our goal is to make Office and other Microsoft services available on small screens to the broadest population of mobile users -- and in less than a year, we've already seen more than 80 million downloads of Office for iOS."
More sampling should lead to more buying, facilitated by Microsoft now selling Office on a subscription basis, which lowers initial investment for customers. The company had to do this -- or Office would have become a niche product only used in business -- but it should work because the various programs bundled in the suite generally are best in class. It's hard to use any other word processor once you have used Word and the same is true of Excel and PowerPoint.
By going free to users who were never going to pay for Office on their mobile devices, Microsoft has increased its future market. It's a bold, but sensible bet which should keep Office relevant and perhaps even dominant.
Daniel Kline owns shares of Apple and Microsoft. He used to use WordPerfect in DOS with a keyboard overlay. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.