Can Microsoft count on inertia to spur Office 2010 upgrades

Habits, once ingrained, are hard to break. Just ask any smoker -- or the 250 million people that have bought Microsoft Office.

For sure, there are power users who covet Office's handling of macros and complex forms. And there are plenty of corporate employees who swear by Office as a central front-end for SAP, SharePoint and other line-of-business applications.

They'll likely be among the first to sign up for Office 2010's beta, which will become available in the third quarter, Microsoft said today. The final release of Office 2010 is scheduled for the first half of next year.

For most users, the last 'must-have' feature debuted by Office was probably many years ago. But companies stay on the Office upgrade treadmill -- despite the $155 annual per-head tax to do so -- mostly out of the "tremendous inertia" the software has built up over the last 20 years, according to Paul DeGroot, an analyst with the independent firm, Directions on Microsoft.

Every new version of "the Office suite gets more and more components," he said, "and even though most people won't use most of them, you only need someone to depend on one of them to make it sticky."

Chris Capossela, senior vice president of the Information Worker group at Microsoft that produces Office, doesn't take exception to that characterization. "The fact that employees don't use every nook and cranny of Office doesn't reflect much," he said in an interview last month. "I challenge you to tell me how many of the features of your Tivo do you really exercise? Could it do a lot more stuff than you use it for?"

Eyeing the MacBook Pro laptop a reporter was typing on, Capossela asked: What about iLife? How many Mac owners actually use GarageBand, iLife's DJ app, and how many just enjoy the glory of association?

Meanwhile, "Office may not be cool," Capossela said, "but man, everyone uses it."

But habits can die. Lifelong two-packs-a-day smokers do quit. And even longtime Office users are starting to make the switch to free or low-cost office suites, which are as plentiful today as a foreclosed home in Florida.

With everyone focused on netbooks' erosion of Windows revenue, few noticed that profits at the Microsoft Business Division in the most recent quarter were down 6% sequentially. Defections to OpenOffice.org, Google Docs, Zoho Docs and others have happened mostly among consumers and small businesses. With fewer users, it is easier for them to break free of Office's orbit and its $240 to $540 upgrades.

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To keep them, Microsoft is offering Office 2007 Ultimate to students for just $60, or one-tenth its list price. Microsoft is also offering Office 2007 to military retirees and their dependents for $50.

For the first time since the mid-1990s when WordPerfect and Lotus SmartSuite were still legitimate competitors, Microsoft is taking major steps to keep its most loyal and profitable customers, enterprises. It's letting cash-strapped companies thinking about terminating their Office contracts switch to software leases that are up to 26% cheaper.

More significantly, Microsoft is investing $7.7 billion in R&D for Office -- double its investment in Windows -- to broaden the Office 2010 menu and create an unprecedented number of choices so that companies have no financial excuse to switch from Office to a cheaper rival.

Sticking with Windows XP for the next several years? No problem, Office 2010 will run on Windows 7, Vista and XP, said Capossela.

Not upgrading from your old 32-bit PCs? Office 2010 will come in both 64-bit and 32-bit flavors.

If your IT department is retrenching as you shift operations into the cloud, take note: Office 2010 will come in a Google Docs-like Web version that will be partly or wholly subsidized by advertising.

And for those 'deskless' workers who only need occasional access to e-mail and related services, Microsoft is offering Web-based Exchange and SharePoint at just $36 a year.

Many of these measures will cut mightily into Office's profitability. But they may also stanch enterprise customer defections in the near-term, said DeGroot.

Still, DeGroot warned that the inertia propelling Office upgrades forward is "losing a lot of steam" among both smaller companies as well as "companies that started out bigger but need to find ways to reduce staff and overhead." And as "the online products get spiffier interfaces and more features, Microsoft could find it harder to pull these companies back into the Office orbit," he said.