Cutting Office XP Prices

Overnight, Microsoft reduced the price of two retail versions of Office: Office XP Standard by 17 percent and Office XP Professional by 14 percent. Prices for individual applications, such as Word or PowerPoint, dropped by as much 32 percent.

The repricing is an important first step to bringing the cost of retail Office versions in line with competing products. But only companies buying “full” retail versions would see any real benefit from the reductions, as Microsoft has not lowered upgrade pricing. The assumption being that most companies use older Office versions and would be eligible for a lower-cost upgrade version. Additionally, companies participating in one of Microsoft’s volume licensing plans will see no pricing changes as a result of the announcement.

Still, the price reductions are a dramatic shift for the retail price of Office, which has stayed fairly constant over the years. In 1997, the standard version of Office cost $499, or $209 for the upgrade, according to a Microsoft. Office 97 Professional Edition cost $349 as an upgrade and $599 for the full version. The developer version sold for $799, or $539 as an upgrade. When Office XP shipped four years later, in May 2001, the standard version cost $479 and the upgrade $239, according to Microsoft. Office XP Professional Edition was priced at $579 for the full version or $329 as an upgrade. The developer edition cost $549 as an upgrade, otherwise $799.

The new prices, as reflected on Microsoft’s online store, are $499 for Office XP Professional and $399 for the standard version. Full versions of individual applications would be reduced anywhere from $80 to $110, according to Microsoft.

The larger implication is what the cuts might mean for retail Office 2003 prices, which Microsoft has not yet announced. Microsoft plans to release six Office 2003 versions when the product ships later this year. The company has indicated pricing of the full standard and professional retail versions would be consistent with today’s cuts on comparable Office XP versions.

Microsoft’s cuts could be an attempt to carefully test how the market receives the price reductions. A significant sales boost could lead to additional repricing, particularly as Microsoft focuses on ancillary products as a means of boosting Office’s appeal. (Microsoft has given no indication this is the objective for the XP repricing.) With Office’s huge market share, Microsoft has had little incentive to cut prices. But over time, the company faces increased competition from older versions of the productivity suite, creating more incentive to adjust pricing.

The financial risk would appear to be little. Retail sales tend to be strongest immediately after the release of a new version and taper off over the lifespan of the product. According to Microsoft’s fiscal 2003 third quarter 10-Q filing with the Securities and Exchange Commission, volume licensing currently accounts for the majority of Office revenue growth: “Office and other standalone applications revenue growth was $194 million or 9 percent due to recognition of unearned revenue from strong multi-year licensing in prior periods.”

The price cuts also reflect Microsoft’s attempt to bolster sales among small- and medium-businesses, which the software giant categorizes as operations with 1,000 or fewer employees. By Microsoft’s own estimates, less than 20 percent of the market, which accounts for about 50 percent of revenue, buys software through volume licensing. This market would appear more likely to buy “off-the-shelf” copies of Office than many other segments Microsoft sells to.

But many small- and medium-businesses running older versions of Office eligible for upgrade, would be better off spending less on either a version XP or 2003 upgrade. Another option would be buying through Microsoft’s “Open Value” licensing program, which specifically is designed for smaller businesses.

Posted by Joe Wilcox at May 28, 2003 10:54 AM