Australia an Office XP test bed

The announcement comes after Microsoft confirmed on Friday that it is rescinding its plans to sell the desktop software on a subscription basis with the release of Office XP in the US on 31 May.

With the slated debut of the latest Office suite -- the first of Microsoft's desktop software products to incorporate functions tied to its .Net initiative -- select customers in the US were to test the software maker's planned subscription model. The company announced the Office XP subscription plan for the US in November 2000 at Comdex in Las Vegas.

But since then, Microsoft has scrapped such plans in the US this year, and said it will test the model outside the US when Office XP ships in select countries.

"We're taking a more conservative approach with this new delivery mode," a spokeswoman for the company's Office XP division said.

"This is a big move in their business model," said Michael Silver, research director at Gartner Group. "Doing it in some market that might not be as large and risky as the US will offer a better test run at figuring out how to do it right."

Microsoft has already tinkered with a nonperpetual licensing model, where customers pay a fixed price for periodic upgrades, maintenance and services. The company also uses a subscription model in at least one type of licensing agreement with academic customers, according to Gartner analysts at the recent Windows 2000 conference. While a more aggressive migration toward subscriptions sales has been put on hold in the U.S., Gartner still predicts Microsoft will offer such a model to business customers by the year's end.

"We have been predicting that they're going to do more in subscriptions as time goes on," Silver said on Monday. "I think they just need time to figure out what their pricing and strategy will be."

The shift to offering maintenance and version upgrades to customers through a monthly fee will be an important evolution for Microsoft as its traditional strategy of pumping out continual version upgrades withers in a slowing economy. Office and other desktop applications account for about 46 per cent of Microsoft's gross revenue and the majority of its earnings, but that is becoming less dependable, Gartner analysts said at the recent conference.

Also, as Microsoft retools much of its product line to be compatible with the .Net framework, which will focus on adding new services and functions at a greater clip, subscription deals will allow the company to offer more small upgrades to customers.

"Microsoft cannot grow new licence revenue on the desktop because it already owns about 90 per cent of the market," Gartner analyst Alexa Bona said in April at the research firm's annual Windows conference. "They are going to depend on upgrades."

Gartner predicts that Microsoft will latch on to the subscription sales model in the next few years, in effect squeezing more revenue out of its desktop software division. While subscriptions are expected to have a lower initial price point, Gartner analysts said that over a five-year period, customers will spend 20 percent more. Also, corporate customers who have typically not kept up with every product upgrade that is announced could incur penalty fees for not staying current with upgrades, analysts said.

If the model is not met with objections from customers, Bona predicted Microsoft will mandate the model by 2006.

While Microsoft is breaking new ground in its move to distribute software through subscriptions rather than selling perpetual upgrades, the sales model will be shared by many in the industry, analysts predict. A number of small software vendors already employ a leasing or rental model, and a number of larger vendors are expected to follow.

"From a corporate point of view, having an annuity stream is a really attractive alternative," Silver said. "It's a really nice way to make revenue a bit more predictable and not really have to worry about massive upgrades for new revenue.

"If an upgrade is too minor its hard to sell. If it's a major upgrade, it may be too complex, and it slows it down. This way, Microsoft can worry a little less about what the upgrades look like."

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