The great puzzle of Microsoft Office

What will Microsoft do with Office? Or, what should Microsoft do with Office?

Microsoft built an empire with Office. Office was the most powerful word processor and spreadsheet package. It used proprietary formats. It read files from other word processors and spreadsheets but did not write to those formats, making the trip for data one-way: into Microsoft Office. Through marketing, fierce competition, and the network effect, Microsoft convinced most businesses and most home users to use (and buy) Microsoft Office.

Those were the days.

The world is changing.

Large businesses still use Windows for their desktop environment. Small businesses, especially technology start-ups, are using Mac OS or Linux.

Large businesses still use Microsoft Office. Small businesses are looking at LibreOffice (an open source desktop package with word processing and spreadsheets) or Google Apps (an on-line office package with word processing, spreadsheets, e-mail, calendaring, and other things).

The tablet world is dominated by iOS (on iPads) and Android (on just about everything else). Windows holds a tiny share. The same goes for smart phones.

These are the pieces of the great puzzle that Microsoft must solve. What is a software giant to do?

First, some observations.

Microsoft is the latecomer Microsoft is late to the market, but they have been in this position before and succeeded. They were late with C#/.NET after Java. They were late with Internet Explorer after Netscape Navigator. They were late with spreadsheets after Lotus 1-2-3. They were late with word processors after Wordstar and WordPerfect. They were late with databases after dBase and R:Base. Being a latecomer has not doomed Microsoft yet.

New hardware platforms Microsoft must live (and compete) in a world beyond the PC. Phones and tablets must be part of the solution. Tablets and phones are a very different arena for software design, due to the size of the screen, the touch interface, and intermittent connectivity. Any product on the tablet or phone is a different creature than it's PC counterpart.

Multiple software platforms Microsoft must live (and compete) in a fractured world of software, with multiple operating systems (some not of Microsoft's making or control). Offerings from Microsoft must work with iOS and Android as well as Windows.

The desktop software model doesn't work on mobile devices Microsoft's past technique of selling premium software and obtaining market share through marketing won't work on the mobile platform.

Giving these conditions, Microsoft needs a new approach. Here are some ideas:

Sell services, not software Microsoft will not focus on selling copies of Office for the mobile world. Instead, it will focus on subscribers to its services. The mobile versions of Word and Excel and Outlook will be offered at low prices -- perhaps at no cost -- but they will be useless without the service.

Cloud storage, not local files Microsoft Office will store data in the cloud (Microsoft's cloud).

Not documents and workbooks, but pieces assembled Instead of entire documents and complete spreadsheets, Microsoft services will stitch together fragments of documents and spreadsheets. Think of it as an advanced form of OLE. (Remember OLE and our excitement at embedding a spreadsheet in a document?)

Versioning and tracked changes Microsoft's cloud will keep track of the versions of each document (or document fragment), allowing us to see changes over time and the notes for each change.

Access control (for enterprise users) With all of these fragments floating in the cloud, enterprise users (businesses and their support teams) will want to control access by users.

Promotion and publication (also for enterprise) Users will be able to publish data to other users. Users will also be able to work on new versions of data, reviewing it with other members of their team, revising it, and eventually marking it as "available to everyone". Or maybe "available to selected users".

The idea of Office as a service seems a natural fit for mobile devices. Notice this this vision does not demand Windows tablets -- one can use it with iPads and Android devices. I expect Microsoft to move in this direction.

The software market for mobile is not the software market for desktop

With mainframes, software was expensive. Not, "expensive like an MSDN subscription" expensive, but *really* expensive. When not bundled with the hardware (an early IBM business model), it often cost as much as the hardware. Often, the license included a "maintenance contract" which saw annual payments in addition to the initial "licensing" payment.

With PCs, software was less expensive. Some high-end expensive software for PCs does include a maintenance contract, but for the most part, the only fee is the initial payment, and that payment is a fraction of the cost of the hardware. Early PCs cost $5000 (in 1980 dollars) and the popular software packages (Lotus 1-2-3, Wordstar, dBase III) went for several hundred dollars. Today, PCs cost about $1000 (perhaps less) and popular software packages cost $200-300.

The change from mainframe to PC was a large one. Some companies attempted it, and few succeeded. The well-established companies in the mainframe space did not know how to approach a market with many more purchasers of software that sold for fewer (lots fewer) dollars. Their inability (and lack of desire) let "upstarts" like Microsoft into the market. The result was a dynamic market with many new companies and many new ideas.

Now we have mobile devices that sell for even less than PCs. The one well-established companies in the PC software space (Microsoft, Adobe, Intuit, Symantec) are struggling to cope with the mobile market -- or showing no interest in it. Apple's lead has defined a lower level for software prices and new rules for licensing. Software sells for a few dollars, not hundreds. Software can run on any of your registered devices, not just the activated device.

Microsoft's Windows 8 is an attempt to combine the desktop PC and the tablet PC. I think that this is a mistake.

Don't get me wrong -- I like Windows RT and the live-tile interface. (I think it needs some tuning, but nothing major.) The new user interface is suitable for tablets and phones, as is the pricing of software in the Microsoft App Store.

But the change in pricing is a large one, too large for the desktop market. Yes, desktop users want cheap software, but they also want documentation and support which are not part of the mobile world. This is why people keep buying Microsoft Windows and Microsoft Office instead of Linux and LibreOffice.

I think the mobile market will stay separate from the desktop market. The divide between these two worlds of computing is large. Some packages may span that gap, but most will stay on one side.

I expect that the expensive software will stay on PCs, and people will continue to use it (and buy new copies). Perhaps not as many as in the past, as some mobile software will meet the needs of people. (E-mail, for example, can be handled on a tablet or phone.) I also expect that PC software will stay expensive.

I also expect that the mobile market will continue to see low prices for apps. The business model has been established, and it works.

But perhaps not for the current set of PC software vendors.