To Pay or Not To Pay: The World of Office Suites Opens Up

October 10, 2007

The ubiquitous Microsoft Office suite claims an impressive 95 percent market share. The software giant's business division, which includes Office, brings in annual revenues of $16.4 billion. Yet since 2000, a free suite of software that includes spreadsheet and word processing programs similar to Excel and Word has evolved, with potential to chip away at Microsoft's market dominance. Created by an army of volunteers, the open source has attracted a lot of attention but still claims a small percentage of the market. Given the choice between two similar office software packages, where one is free and the other currently retails for nearly $500, the choice would seem obvious.


So why aren't more people switching to OpenOffice from the more expensive Microsoft products? And how might a free alternative affect the price of Microsoft Office? W. P. Carey information systems professor Raghu Santanam and marketing professor Rajiv Sinha began examining these questions three years ago and the issue seems particularly relevant today. On one hand, open source software has continued to make inroads and offer free alternatives to popular software titles. On the other hand, Microsoft Office is facing a barrage of new, free threats from powerful players including IBM (Lotus Symphony), Google (Google Docs), and Adobe (Virtual Ubiquity) as well as from a number of smaller, upstart providers of online office productivity software.


Santanam and Sinha surveyed approximately 1000 college students, dividing them into two groups. One group was made aware of the free open source office suite while the control group was not told about it. Most of the students were very familiar with the standard Microsoft suite, but Santanam says that he was surprised by the low level of awareness of OpenOffice, even among undergraduate business students.



What's it worth to you, really?


Ideally, determining how a free alternative affects the price of the Microsoft package would be as easy as asking the survey participants just that: What would you pay for Office if you had the option of using a free, open source version? Unfortunately, such standalone questions rarely produce meaningful answers when people are given the ability to name their own price without any limitations or ramifications of that decision. Instead, Santanam and Sinha resorted to a research method called contingent valuation, using different levels of prices to elicit realistic willingness to pay for Microsoft Office.


"What it does is tries to estimate a consumer's willingness to pay based on a series of questions. There's always trouble if you call someone and say, 'Well, how much are you willing to pay for Office?' You're not going to get an accurate response. What you have to do is coax it out of the users in an indirect way and that's what this economics approach allows us to do," says Santanam.


They tied pricing questions to controls on how the Microsoft suite could be used with both prevention and deterrence measures -- both of which are often seen in the sale of so-called "digital goods" such as software or music downloads.



An ounce of prevention is worth a pound of deterrence


Prevention is a front-end restriction familiar to most computer users. It includes controls such as registering a licensed copy of software. Deterrence is more reactive and comes into play when an unregistered or pirated copy of software is used. Deterrence measures include legal recourse, such as the music industry's lawsuits challenging peer-to-peer music sharing.


In the study, the prevention measure used for Microsoft office was the regular software licensing procedure. The researchers also used a "social deterrent" whereby participants were told that the files created with an unlicensed copy of Microsoft Office would display a watermark that said the file was created with an illegal version. This message would be visible to everyone who received the file -- friends and colleagues. Some participants were exposed to the prevention measure, some to the deterrent and some to both.


The results surprised the authors, chiefly the discovery that the presence of the free OpenOffice alternative did not decrease participants' willingness to pay for Microsoft Office. (During the study, the researchers used the student price of $180; a new offer allows students to buy the suite for $59.)


The researchers conjecture that willingness to pay for Microsoft's product is the result of two factors. First, the software is valuable because so many people use it, making it easy to transfer files. OpenOffice largely worked like Microsoft's suite, but the translations, particularly with more complex documents, were not flawless. Similarly, users perceive a switching cost when moving from software with which they are very familiar to a new package which would take time and effort to learn.


In addition, the study showed that the two types of controls did not affect piracy equally. Prevention measures won out for effectiveness. People were considered more willing to pirate software when they were less willing to pay for it.


"Both prevention and deterrence work well, that is, they do increase the willingness to pay, so you're converting some pirates into buyers if you increase the controls," says Santanam. "But prevention control works better than the social deterrence controls. And if you notice, the prevailing approaches used in industry are the prevention controls; license and registration keys are more predominant than the watermark approach. They're getting that right."



One control is better than two


Another surprise was what happened when Santanam and Sinha "turned the screws," as Santanam says. While using prevention or deterrence measures alone decreased piracy, using both together created a backlash of sorts.


"It's not an additive effect. If you think that prevention and deterrence, if applied together, will increase willingness to pay, it doesn't. So just one of them is enough. The cost of applying both is not justified," says Santanam.


This paradox -- that putting in more controls to stop piracy can actually be counterproductive -- is also seen in studies of other crimes; after a certain point, people rebel against what they see as unjust restrictions or punishments.



Coming to the price point


Using their indirect method of obtaining an accurate price, the average price that students would pay was $98. Further analysis of the data showed that if Microsoft lowered its price to $98 from $180, the increase in buyers would more than offset the price reduction and thereby increase the company's total revenue. Microsoft's new student special of $59 is significantly lower than Santanam and Sinha's projected ideal price but probably reflects changes in the market where other, more economical alternatives to Microsoft Office now exist.


"With the $59 thing that they're going after, these [customers] are the ones who have a really low willingness to pay so [Microsoft] wants to include them in the 'legitimate buyers' category. This is clearly the right strategy for them at this time," says Santanam.


Ironically, while the Internet has made it easier to obtain illegal copies of software, it has also made it more important to have a legal, licensed version. It is the prevention controls that many software producers employ which allow users to receive updates for registered products that will protect their software from hackers and viruses. People now understand that free, pirated software can be costly down the road.


The study has implications for non-profit open source software as well as for-profit software -- and potentially other digital goods. It speaks to the fact that consumers are not as concerned with price as one might believe but, instead, value a product based on a variety of criteria.



The comfort zone


Part of what makes a product valuable is how useful it is and, in the case of software, this means how comfortable people are with it, the degree to which files can be shared with confidence and how hard it is to switch to another product. It's in the interest of open source developers to make new software intuitive to use and reliable in its interaction with other products.


Both for-profit software companies and non-profit developers' consortiums must also seek out new users untainted by previous software experience (young students, for example, or people in developing countries), because users are increasingly less willing to switch away from one product to another once accustomed to a product -- free or not.


Finally, software companies must drive home their commitment to keeping their products updated and safe. Consumers understand that for-profit companies have a vested interest in this for customer retention, but open source developers must also assure consumers that they too will stay committed to updates and improvements in the long run.


The world of office software suites may be opening up, but just because the new options are free doesn't mean that consumers will make the switch. Those producing the software need to underscore their value, because consumers are not just swayed by price.



Bottom Line:


  • Although Microsoft's Office suite remains dominant, it faces competition from OpenOffice, a parallel open source suite, as well as from products offered by IBM, Google and Adobe.
  • To prevent piracy, software companies can employ prevention measures (like requiring that users register their software) or deterrence measures (such as suing users who have illegal software).
  • While prevention and deterrence measures on their own increased people's willingness to pay for legal copies of software (and thereby decreased piracy), combining the two made people less willing to pay for legal software.
  • Having a free open source office suite did not make people less willing to pay for Microsoft Office because users assign considerable value to the reliable suite.
  • Much of the value that people ascribe to Microsoft Office and other established software offerings comes from the simple fact that many other people already use the software as a standard and users are uncomfortable with the prospect of switching to a new product.
  • While the Internet has made software piracy easier, it has also increased the need for legitimate products which can be updated to protect against the latest viruses and security threats.