Why Microsoft continues to embrace the freemium model

Microsoft's business strategy for the cloud appears to amount to this: ‘Be more like Apple.’ Here’s why that approach works.

When it comes to the Cloud, Microsoft is taking a page out of Apple's playbook.

For evidence, look no further than Chris Capossela, Microsoft's chief marketing officer. Speaking on a recent podcast, he talked about users of the company's cloud products experiencing "the delight of the engineering work." And if that word "delight" sounds familiar it's probably because it is one that Apple loves to use. As in "surprise and delight." Or "The first thing we ask is: What do we want people to feel? Delight. Surprise. Love. Connection."

Capossela also uses the word "love" in relation to Microsoft's products, but there are other ways too that Microsoft seems to be aping Apple: It's using a "five minutes to wow" – as Capossela calls it – design goal for some of its cloud-based business apps, and it's adopting a freemium model for many of them too.

That looks similar to the way many games are sold in Apple's AppStore. However, the reality is that 40–50 percent of apps downloaded from the AppStore are deleted within 45 seconds of being downloaded (according to code marketplace Apptopia), so successful apps have to be easy to understand and appeal to users very quickly. That's 45 seconds to wow, in other words, instead of Microsoft's five minutes. And many games are offered available free to hook users, with in-app purchases offered to unlock more levels, features or functionality. Or freemium, to put it more succinctly.

"If you are going to be successful in the cloud you need to provide a service that anyone can get started with, they can sign up for in 30 seconds and they can be blown away within the first five minutes and then they start using the thing," Capossela said. "Making the product free, or some set of the functionality free, is a very important way to make that happen."

Getting started with an iPhone app is as simple as pressing a button to get the app, and possibly entering a password. Microsoft is aiming to make its cloud apps just as easy to access.

"You have to make the sign up process and the first five minutes really smooth and easy," Capossela said. He added that if the sign-up process requires a phone call to Microsoft or for some procurement person to do something then these cloud services simply won't get adopted.

Making ‘freemium’ work

Microsoft's hope is that the right users – leaders in their departments – will get hooked on the free product, and then push the necessary people with purchasing authority to drive though adoption of the paid version of the product.

"Hopefully we are smart about what we put behind a paywall so they will run into some reasonable limitation to the free product that will lead to a procurement discussion – but you can get people to fall in love with the product by making an important set of the functionality free."

In fact Microsoft's freemium strategy is more complex than one of offering a free product with limited functionality, plus the option to pay to unlock the rest of the features, Capossela said.

For example, its Skype VoIP product is free for consumers but enterprises have to pay to use it for business purposes. The principal is still the same though – get people using the product as consumers, and then rely on them to drive its adoption in the workplace.

Another freemium strategy which Microsoft has adopted for its Office 365 cloud productivity suite is to offer it free on devices with screens that are ten inches or smaller, while charging both consumers and businesses for its use on larger devices including laptops and desktop computers.

The Office 365 strategy seems to be working. According to Microsoft's latest figures, about 50 percent of consumer Office users (18 million people) are Office 365 subscribers, while commercial Office 365 seats grew by 66 percent year on year – with 50,000 new small business customers added in each of the last nineteen consecutive months. Commercial Office 365 monthly active users grew to 60 million, and Office mobile on iOS and Android has been downloaded over 200 million times.

Selling up the chain of command

Wes Miller, a former Microsoft program manager who is now an analyst at Directions on Microsoft, believes that Microsoft is right to go freemium with many of its cloud-based apps. "This model has proven successful for games developers, and enterprise players like Yammer also used it successfully," he says. "It's a response to the fact that this type of technology is more cumbersome for procurement people to understand. Now people use it, and sell up the chain. It's a sign of the times – part of the BYOD trend."

But Miller is cautious about the extent to which enterprises are really buying in to the supposed advantages of computing in the cloud because many are still worried about security and compliance.

He adds that companies subscribing to Office 365 Pro Plus can use the suite while storing their documents locally. "We are seeing organizations move to the cloud just for the beneficial licensing being offered, but they are not storing data in the cloud. They are giving up some value because of that but some organizations just aren't ready yet to use SharePoint (for example) in the cloud."

No discussion of Microsoft's cloud strategy would be complete without looking at the company's Azure cloud platform, and Capossela believes that 2015 was the year that Azure established itself as the number two platform behind Amazon's AWS.

[Related: The real reason Microsoft open sourced .NET]

"We think that (the cloud) is a two-horse race," he said. "I think the other players in the space are going to have a hard time with the scale that Amazon and Microsoft are operating at. This is complicated stuff..."

Microsoft's Wes Miller says Microsoft is employing three tactics to attempt to overtake AWS and become the leading could platform.

The first is to make Azure the best cloud platform for any system, not just Windows. "Linux running on Azure is a very big deal. So is Docker on Azure," he says. "This is a huge difference from the Microsoft of the past."

The second is to make Azure a cloud service that is developer focused, he says. "Microsoft is working very hard on its developer story, deploying apps using an IDE and so on. AWS is really a commodity."

The final tactic is making Azure part of a best of breed hybrid story. "For a Windows Server 2016 shop, Azure rather than AWS will very much be the obvious cloud to use," Miller says.

Microsoft may want to be more like Apple in the cloud, but when it comes to hardware, the two companies are likely to remain very different. Apple gets about 63 percent of its revenue from its iPhone, while Microsoft's phones continue to languish. "I fully expect that Microsoft will continue to beat the drum for hardware, Miller concludes, "but when it comes to phones I think it will be a very rough year for the company."

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