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Office XP Price Cuts May Not Thrill Big Businesses

May 29, 2003 (12:05 PM EDT)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=10100485


Microsoft's announcement this week that it's cutting retail prices for some editions of Office XP--and that the upcoming Office 2003 will likely carry the same price tags--may end up antagonizing big business customers stuck with volume pricing.

At least that's the view of Paul DeGroot, analyst with Directions on Microsoft. He questions Microsoft's publicly stated reasons for chopping prices by about 15% for Office XP Standard and Office XP Professional, and approximately 30% for standalone applications such as Word and Excel.

The company said it was all about "a commitment to make it easier for consumers and small businesses to obtain" the popular productivity suite. But there may be more to it, and that may rub some business customers the wrong way.

DeGroot sees the cheaper Office XP Standard for Students and Teachers edition as a possible reason behind the dropping prices.

"The success of Students and Teachers showed Microsoft that people are interested in a full-featured office suite--if the price is right," DeGroot said. "It's shown them there is a demand for high-quality and powerful desktop applications, but that their pricing has not been right in the past."

Students and Teachers, which theoretically can be purchased only by educators and families with children at home, costs $149, $330 less than the older price of Office XP Standard at retail, and still $260 under the just-trimmed cost. Students and Teachers includes the same four applications found in the much more expensive Office XP Standard: Word, Excel, Outlook, and PowerPoint.

With its more attractive price, Students and Teachers has undoubtedly strayed from its intended audience. "I wouldn't be surprised if there aren't businesses out there that are using it," DeGroot said. "The chances that Microsoft's going to bust into someone's home office to check on whether they have kids in the house is extremely small."

But while the drop in retail prices for Office is good news for businesses buying in small quantities, the move is likely to further rile Microsoft's corporate customers, DeGroot said.

"This isn't going to make businesses happy if Microsoft keeps reducing retail prices but maintains the current volume costs. There are already a lot of people who see Microsoft's [volume licensing] efforts as a way to squeeze more money out of them," he said. "Watching Microsoft drive down prices in retail while they maintain prices in volume is not going to improve that feeling at all."

Alvin Park, a research director at Gartner who covers Microsoft's licensing and pricing, offers a different take.

"I was disappointed to see that Microsoft didn't also reduce volume prices, but I don't think it's going to have a big impact on businesses. [Corporations] can still get Office cheaper through their licensing agreements than through retail."

Before any reseller discounts, companies pay between $445 and $454 for a copy of Office XP Professional, he added.

"I don't see it as much of an issue for enterprises," Park said. "I think they'll just tell themselves that the retail version of overpriced."

DeGroot thinks there's a good argument for Microsoft to reduce the price of the upcoming Office 2003 in volume. Whether it's enticing corporate customers who have little or no intention of upgrading to do so, or as a way to drive sales of other Microsoft software, especially its server-based software, such a move would be smart, DeGroot said.

"They have to make Office 2003 attractive to drive a lot of other sales" to big businesses, said DeGroot. "If I have Outlook 2003, I need Exchange 2003 for some of its features. And then I need Windows Server 2003 to run Exchange 2003." Other features important in Office 2003, particularly those that deal with collaboration, require Real-Time Collaboration Server and SharePoint, he added, noting the domino effect that boosted sales of Office 2003 could provide for Microsoft.

But DeGroot optimistic that Microsoft will take his advice. "I think the odds are less than even that they'll do it," he said.

On this point, Park agrees. "The fact that Microsoft announced this drop in retail prices now tells me that most likely they won't reduce Office 2003's volume prices," he said. If Microsoft was going to have a reduction in volume pricing, "I think they would have gone ahead and done it now, or waited to announce this change in retail when Office comes out later this year."