Last week I overheard two of the top Microsoft “watchers” discuss the Office group having bet against Windows 8, presumably because Office 2013 is not fully a (set of) Metro (aka, Windows Store) apps.  Ok, as much as it pains me to defend Office I’m going to do so.  I’m going to defend them because they are more right than wrong.  Especially when you take a shareholder perspective.  Not only will I defend what Office did for Windows 8, I’m going to defend some of their licensing decisions.  Oh that should be fun.

Let’s start with Office as a business, because that is at the center of making a “bet”.  Office is Microsoft’s largest and most profitable business.  Being the largest is a little transient as Windows ebbs and flows with the success or failure of various releases.  Being the most profitable has been pretty constant for years.  Many years.  If Steve Ballmer wants to get fired all he has to do is mess up the Office profit stream.  Seriously.  This profit stream is so important that even Bill Gates backed down from messing with it.  Seriously.  The Office leadership does not wake up every morning and say “What can I do today to make Windows more successful?”  They wake up and say “What can I do today to make Office more successful?”.  And as much as that pains a “Systems” guy, that is something any shareholder should be happy about.

Office has been up against four strong headwinds for over a decade.  The first has been its own success.  With near saturation of its traditional market for desktop productivity apps they have struggled to find ways to grow, or at least get existing customers to upgrade to new versions.  The primary response here has been to grow the Office suite, particularly through the creation of the Office Server products such as Sharepoint and addressing long-term weak points like collaboration.

The second headwind has been the emergence of free, or extremely inexpensive, alternatives to Office.  This started with the emergence of Open Office, though it wasn’t until Google Apps that free productivity software gained serious mind share.  Prior to Google Apps Microsoft was content to address the free/cheap consumer productivity app space with a separate suite called Microsoft Works.  The challenge from Open Office lead them to create a Works Suite that includes Microsoft Word rather than just the Works Word Processor.  For Office 2003 Microsoft created a “Student and Teacher” edition to bring Office into the academic world at low-cost.  By Office 2007, with Google Apps now a reality, Microsoft turned “Student and Teacher” into a “Home and Student” edition so they had a low-cost offering to counter Google Apps for consumers who wanted the real thing.

It’s important to current discussions to understand these efforts by Microsoft to counter free/low-cost Office competitors because they are playing out even in the latest offerings.  The Microsoft Surface and Windows RT come with Office Home and Student Edition for the same reasons it was created back in 2007.  How do you bring a free/low-cost Office to consumers without a material negative impact on Office’s margins?  Keep in mind that the vast majority of Office revenue and profit comes from sales to businesses, mostly larger businesses.  So the trick is to keep those businesses buying the more expensive and profitable editions of Office while making the same software available to consumers at low-cost.  Microsoft has tried a number of things to do this, from the composition of the suites to licensing restrictions.  In other words, Home and Student was carefully crafted so that it would not significantly cannibalize sales to businesses.  We’ll get back to this when it comes to the Microsoft Surface and Windows RT later on.

The third head-wind has been the cost of ownership associated with Office, and other products that don’t bring a strategic advantage to the customer.   This is not primarily the license price, although it is a factor, it is the associated capital and operational costs.  Microsoft was already struggling against this problem when Google brought GMail and Google Apps to the party.  As Cloud-based services they transferred much of the capital and operational expense to Google.  Microsoft had started work on bringing Exchange into a services world and Google forced them to accelerate the effort.  After several half-steps the arrival of Office 365 signaled Microsoft’s full commitment to Office as a Cloud service.  The complexity of the Office 365 licensing and pricing schemes is once again a tribute to Microsoft’s attempts to offer customers added value while preserving Office margins.  Again this plays into today’s world with Surface and Windows RT.

The fourth headwind has been the switch from formal communications such as memos and reports to informal communications such as email, instant messaging, and text messages.  This has reduced the Minutes Per Day (MpD) that users spend using Office and reduced its perceived value.  Microsoft has responded in numerous ways, from the addition of OneNote, to Lync, to the Office Web Apps, to the strategy that is playing out with Office on Surface and what is expected to appear soon on IOS and Android.  Again this will all come together in a little while.

Before I move on to what Microsoft’s overall strategy appears to be let me address the “bet against Windows 8” statement.  With Office as both Microsoft’s largest revenue and profit generator with most of that money coming from businesses, and with it being at the center of Microsoft’s real competition with Google, what topics dominated Office 2013 (a.k.a  Office 15) planning?  It wasn’t let’s build a Metro version of Office.   The discussions would have been more around topics like “How do we make the next steps in the cloud transition?”, “How do we improve collaboration?”, “How do we enable cross-organization collaboration?”,  “How do we respond to customer demands for Data Leakage Prevention capabilities”? , and many other topics that are top of (customer) mind for productivity software.   And somewhere down the list, not way down but not near the top either, was “What do we need to do to support Windows 8”?

I know this is hard to accept for those who think about Microsoft as “the Windows company”, but supporting Windows 8 was not “the high order bit”.   There has been endless discussion about how Enterprise adoption of Windows 8 is going to be light.  So how could Office, almost totally dependent on Enterprise sales, make Windows 8 the high-order bit in planning Office 2013?  Unless they wanted to drive revenue and profit towards zero, Office 2013 had to be a product that was attractive to Windows 7 customers!   Working on Windows 8 was a feature, not the driving focus, of the release.

And there is really nothing new here.  After the Windows 95/Office 95 wave the Office team became extremely resistant to betting the farm on new operating systems or other new technologies.  I can’t tell you how many frustrating conversations I had with the leadership of various parts of Office over trying to get them to adopt new storage technologies.  But that’s for another blog entry.

I think there are other factors at play as well.  Would the Office team even have had a stable enough environment to create applications as complex as Word and Excel with Metro in time for Windows 8 RTM?  Would they be full recreations, or new subsets (like OneNote MX that doesn’t have all of OneNote 2013’s functionality)?  Maybe more importantly, at the time Office 2013 planning was going on did anyone really think that Tablets would have as strong a focus as they do today?  (They didn’t.)  Or did anyone know that Windows RT wouldn’t be supporting desktop apps in general?  I think most people, all of Microsoft included, believed Windows on ARM would ship with general support for desktop apps.  So why try to prematurely shoehorn Office into Metro?  I will bet that the Office team was horrified when they became the center of a discussion about dropping support for desktop apps in Windows RT, making Office the only non-system app that runs there.

The bottom line here is that Office didn’t bet against Windows 8, they simply bet for the Office business.  And I think Surface buyers should be happy about this.  If Office had created a suite of (almost certainly subset) Metro apps then that is what the Surface and other Windows RT systems would come with.  Instead we get the full versions of Word, Excel, Powerpoint, and OneNote.  Something early Surface buyers seem thrilled about.

That brings us back to our broader discussion.  Microsoft already has a situation in which it derives only modest Office revenues from consumers while businesses provide it with huge Office revenue and profits.  It needs ways to strike major blows against the headwinds while preserving that revenue and profit.  How does its known and rumored plans do this?

Three principles are at the core for how Microsoft is approaching Office licensing and packaging.

The first is that many users, and nearly all business users, have a need for a range of Office applications and services beyond the core four (Word, Excel, Powerpoint, OneNote) applications.  So Outlook (and Exchange) have real value.  Access, Publisher, InfoPath, Project, Sharepoint, Lync, and features like IRM/DLP have value.  And so every business user is going to be licensed for some variation of Office that includes one or more of these applications or features.  And there will be offerings for bringing (some of) these to consumers as well.

The second principle is that users have multiple devices and will want to use Office from all these devices.  Their usage pattern will be linked to the type of device in question, the type of user they are (e.g., consumer vs. business), and their use of Office on other devices.

The third principle is that consumers will pay little or nothing for Office, but having offerings for them is important to maintain or increase MpD.  Or put another way, consumer use of Office protects and increases the demand for Office in businesses.  Having consumer Office offerings also enhances the attractivness of Windows and Windows Live, making it a good thing from a corporate citizen standpoint.

Put all these together and you get an explanation for Microsoft’s licensing and packaging behavior.  Packaging Office Home and Student on the Surface addresses consumer needs for free/low-cost productivity applications while protecting (both via the apps included in the suite and licensing terms) a business using Surface as a way to reduce its need to buy Office Pro (or other) licenses.  To be clear, an analysis would show that nearly everyone buying a Surface for work use already is entitled to use it for business use by way of an existing Office license the organization paid for.  Even an individual is unlikely to be impacted by these licensing terms, unless they attempt to make Surface their only computer running Office for business use (e.g., a home business).  There is a 99.999% chance that Microsoft will ignore these license violations, unless they become so common that Microsoft decides to offer a Home and Business Edition upgrade to address this scenario.

This philosophy will almost certainly spill over, as rumored, to Office on the iPad and Android tablets.  Microsoft envisions, and wants users to envision, tablets as an adjunct to a more Content Creation-oriented device running a more full featured version of Office.  They will use packaging and licensing to protect the Office revenue stream, and as a side effect keep Office availability on non-Windows tablets from becoming an excuse for (businesses) to make those tablets employee’s primary computing device.  How far will Microsoft go down this path?  The current rumors have the iPad and Android apps as document viewers for free, but requiring some other Office license for editing.  The latter would either a require code from an employer representing their licensing of Office in order to unlock the creation functionality, or an Office 365 subscription.  And, interestingly, they now have an Office 365 Home Premium subscription they will be trying to interest consumers in paying for.

The bottom line here is that Office is a business that is making decisions intended to preserve and expand its revenue and profit.  It isn’t subordinate to the Windows business, and while it does things to support Windows it won’t sacrifice itself on the Windows altar.  It is trying to adapt to the varying demands of an environment that looks extremely different today from how it looked in the 90s.  And while I think they’ve been doing it surprisingly well, that isn’t without throwing a lot of packaging and licensing confusion into the mix.

And what of Metro versions of Office apps beyond OneNote MX?  They are coming.  Just because the Office group needed to focus on the desktop apps for Office 2013, and probably need to do yet another rev on them for Office 16 (when most businesses will still be running Windows 7) The initial success of Surface and other Windows 8/RT systems represents a real opportunity for an Office MX.  I wouldn’t be at all surprised to see additional Metro members of the Office family in 2013!