#Digitalskeptic: Microsoft Flirts with Free Software

NEW YORK ( TheStreet) -- Nikkia Carter figures the best shot at making money selling Microsoft Office 365 is to give it all away.

"It does not help me get revenues," Carter told me over the phone from her King George, Va., office. She owns Carter-McGowan Services, a software development and training shop that's manages the coding needs of small and nonprofit firms.

"It helps me get more seats so Microsoft ( MSFT) will start referring me more leads," she said. "And that drives my services business."

McGowan, a wily former Booz Allen Hamilton technology consultant, is riding a peculiar wave surging from software giant Microsoft: Low or no-cost versions of flagship software products that are offered in the hope of driving other businesses.

Carter says that, starting about a month ago, she took advantage of new, free pricing options from Microsoft that allowed her to give away powerful versions of Office 365, Redmond's red-hot by-month subscription-based Web riff on Windows. Though most of her new clients are smaller nonprofits and educational institutions -- no enterprises or bigger firms yet qualify for the free deal from Microsoft -- Carter was unabashed about her expectations of giving away Microsoft's once-costly software.

"Once I get a company set up, then I can really be a resource," she said. Office 365 will make her no money as a product. Rather, it connects her to customers so she becomes the logical choice for Web-hosting services, business consulting and other by-fee packages

"I have to be very efficient about what I charge, but that is where the money is these days."

Microsoft out. "Micro-service" in
It is no secret that Carter's software-as-loss-leader worldview is shared by MIcrosoft's top brass. This year at the Worldwide Partner Conference, where Microsoft resellers from more than 160 countries descended upon Houston to get the straight dope from then-retiring CEO Steve Ballmer, the new "software ain't worth what it used to be" mantra was clear.

"About a year ago in our annual report, we talked about the move from being a software company," said Ballmer in the event keynote, "to a devices and services company."

And in early July, Jon Roskill, corporate vice president for the Microsoft's Worldwide Partner Group, said in an extensive blog post that to drive this new services business, Office 365 would offer a dizzying array of sub products targeting small businesses, enterprises, government sectors and nonprofits.

"To provide increased flexibility and choice for both customers and partners," said Roskill, Microsoft "announced several new and transition SKUs for Office 365."

These products have forgettable names such as E1, E3 and Office 365 ProPlus, but behind all of them -- if you look carefully -- is discounting. Apart from the free offerings for educational and nonprofits that Carter resells, Office 365 itself is getting cheaper. Back in 2011, when it first hit the market, subscriptions were a fixed $6 per user, per month. That price has quietly fallen to $5 per-user for small-business plans bought in bulk. And top-of-the-line enterprise versions that once ran $24 per month can be found with similar features at $20 per user, per month.

Keep in mind, this margin compression is not for pathetic flameouts such as Windows 8, but rather for Office 365, the Web powerhouse that is on track to have a $1 billion run rate this year -- making it about the size of Twitter.

Charging for software gets hard
Some Microsoft watchers point out that Redmond is merely doing the right thing with its limited, no-cost software model.

"Giving away the service to some nonprofits and schools is a charitable act," Richard Hay, owner and editor of online Windows research blog WindowsObserver.com wrote to me in an email. "This is not going to cause them to lose the big contracts."

But Carter is certain that in today's bare knuckles, Web software business, charging for software will be a luxury of a bygone era. "When I was at Booz, we were responsible for getting our clients," she explained. "So when you got something like Office 365 for free to go get some new customers, you went and got them before someone else did."

Carter says that businesses such as hers -- built from the ground up to be lean enough to compete in a no-cost software world -- will pose a serious challenge to traditional software resellers.

The new pricing model "does burn the businesses set up to sell software," she explained. "But I got in on the cloud. I am used to this model."

"I see no shortage of opportunities."

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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