Microsoft Changes Tack, Making Office Suite Free on Mobile

Few golden geese in technology have survived as long as Office has for Microsoft.

   The suite of applications that includes Word, Excel and PowerPoint, first released in 1990, generated nearly a third of Microsoft's revenue during its last fiscal year — about $26 billion of $87 billion in total. By some estimates, the software accounted for an even higher portion of the company's gross profits.

Microsoft CEO Satya Nadella gestures while speaking during a Microsoft event in San Francisco, October 20, 2014.

But in a sign of the seismic changes underway in the tech industry, Microsoft, the world's largest software company, said on Thursday that it would give away a comprehensive mobile edition of Office. The free software for iPads, iPhones and Android tablets will do most of the most essential things people normally do with the computer versions of the product.

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Just a few years ago, giving away a full free version of Office would have earned a Microsoft chief executive a visit from a witch doctor. Now, the move is following through on the rallying cry coming from Satya Nadella, Microsoft's new chief executive, who has pushed cloud and mobile computing as lodestars for the company's future.

The old Microsoft hemmed and hawed about creating Office apps for mobile platforms from Google and Apple, pushing its Windows platform instead. But the center of gravity in the tech industry has quickly shifted to mobile and cloud computing. Power players like Apple and Google and many of the most successful new start-ups now offer free software, often with premium perks for sale.

That shift has started to weigh on Office. While sales of the software to businesses grew about 8 percent last year, consumer revenue rose only 2 percent. Sales declined by double-digit percentage points during the first two quarters of the year.

"We'd like to dramatically increase the number of people trying Office," John Case, corporate vice president of Office marketing at Microsoft, said about the new offering. "This is about widening the funnel."

The Office business suffered in recent years from a global slump in sales of PCs, which were hurt as people began to do more and more basic computing chores on tablets and smartphones. For years, Office was not available on mobile devices, and many consumers began to wonder whether they needed the software at all. Those who needed productivity apps turned to free or cheap alternatives from Apple,Google and start-ups like Evernote.

"Lots of consumers don't need a PC," said Rick Sherlund, an analyst atNomura Securities. "They just need an Internet connection. They don't need Office as much."

The outlook for Microsoft's apps has improved in recent quarters with the growth of Office 365, a cloud version of the product that includes constantly updated apps, unlimited online file storage and free Skype calling to traditional phones. Consumers pay $7 to $10 a month for the service, rather than buying a copy of Office for about $150.

Microsoft started to suggest a more open posture earlier this year, when it released an iPad version of Office that could be used to read documents, spreadsheets and presentations.

If users wanted to edit or print those documents, though, they needed to pay a subscription fee to Microsoft. Now Microsoft is doing away with those hindrances. It is starting to test similarly full-featured and free Office apps for tablets running Android, Google's mobile operating system. And it is updating Office apps for iPhone to allow editing, at a time when Apple's new big-screen smartphones are making it easier to get work done on the devices.

Microsoft says it has more than 7 million consumers subscribing to Office 365. It says there have been more than 40 million downloads of its Office apps for the iPad. In its most recent quarter, which ended Sept. 30, Microsoft said its consumer Office revenue grew 7 percent.

By making an unabridged version of Office available for free on mobile, Microsoft is betting it can get even more people to start using the software, without stealing sales from the PC and Mac versions of the product, where it still makes truckloads of money.

The calculation is similar to the one made by software makers in the mobile industry. Instead of the one-time fees long associated with software sales, most app makers give away basic versions of their products — from games to productivity software to online storage services — while charging for premium features.

"We're seeing the consumer valuation for those things start to approach zero," said Wes Miller, an analyst at Directions on Microsoft, a research firm that tracks the company.

Apple, for example, made its iWork suite of productivity applications free a year ago for new buyers of Macs and Apple mobile devices. Google has won converts to a free suite of Web apps that competes with Office.

Microsoft announced this spring that it would give away some versions of Windows, its other big cash cow, to hardware companies that want to put it on devices with screens smaller than nine inches.

It was an attempt by Microsoft to claw its way out of a severe deficit in mobile by encouraging more companies to make Windows smartphones and tablets. Notably, the change in its terms did not include versions of Windows for personal computers, which have larger screens.

One view is that Microsoft has little to lose in giving away mobile versions of its Windows and Office products. Its market share in smartphones is in the low single digits. Only about 13 percent of Microsoft's Office revenue comes from consumers, estimates Mr. Sherlund, the Nomura Securities analyst.

The biggest risk to Microsoft is that, in the long run, the line it is drawing between free mobile versions of Windows and Office and premium versions for computers will not hold, as boundaries between devices get blurry. If Apple and others create tablets that are more serious laptop replacements, perhaps with detachable keyboards and mice, the case for paying for a premium version of Office could get weaker.

Mr. Case, Microsoft's vice president of Office marketing, said the company was walking a fine line by making Office free on mobile, but he expected the impact would be positive for the company.

"This is not a small change," he said.