Microsoft Office’s Market Share, and the implications of Network Effects in the Mobile Market
Yesterday, Microsoft announced that they would release their entire suite of Microsoft Office products available without advertisements for free on iOS and Android platforms. According to the New York Times, Office currently nets in about 1/3 of Microsoft’s total revenue, amounting to 26 billion US dollars last year.
What has caused such to make such a dramatic change to their business model on a product that has been a cash-cow since it was released 24 years ago? The answer, I believe, is that Microsoft finally is feeling threatened by the competition from Apple and Google in the mobile space.
According to Forbes, Microsoft’s has a 95% market share in the productivity software market. How have they been able to maintain such a tight grip on the market? For years, the widespread usage of Office made it very difficult for competitors to gain traction, not that there has been any shortage of them – Apple has produced iWork, Apache develops OpenOffice, and Google has aggressively expanded their Google Drive platform as well. But none of these alternatives have caught on. Why? The answer, I believe, is a network effect.
Each additional person who uses Office makes the product more useful for all other users. Since Microsoft uses a proprietary file format, it’s much easier to share presentations and documents amongst people who all use the same editing applications. Because of Microsoft’s dominant market share, the .doc, xls, and .ppt file formats have become the de-facto standard for office documents. All of Microsoft’s competitors use alternative file formats, making it much hard to collaborate with Office users. For this reasons, people deciding between productivity suites are inclined to chose office, exacerbating the network effect, and increasing Microsoft’s market share.
So if this effect is self-reinforcing, why has Microsoft decided to give away their product for free?
According to the New York Times, the answer is the rapid growth of the mobile tech industry. Apparently, Microsoft is concerned that the transition away from full-blown PC’s to tablets and phones will result in many consumers no-longer purchasing a computer running Windows or OS X. In order to extend their domination of the desktop-computing market share to the mobile space, where the market is still developing, and where Microsoft faces fierce competitions from Google and Apple, Microsoft’s management decided to slash the price of their product, cutting their revenue to gain market share.
Useful Links:
New York Times Article: http://www.nytimes.com/2014/11/07/technology/microsoft-to-give-away-mobile-version-of-office-software.html?src=twr&_r=3
Forbes Article Discussing Microsoft’s Market Share: http://www.forbes.com/sites/greatspeculations/2013/01/09/an-overview-why-microsofts-worth-42/