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How Microsoft Corporation (NASDAQ:MSFT) Is Transforming Into A Subscription-Revenue Based Company

Written by on May 10, 2015

From selling software and video game units, Microsoft Corporation (NASDAQ:MSFT) is slowly turning into another kind of company that gets most of its revenue from a subscription-based model.

Here’s how Microsoft Corporation (NASDAQ:MSFT) is turning into a Netflix or into a cable company.

Microsoft Corporation’s Big Makeover

Sometimes, historic structures go for makeovers to make sure they don’t fall prey to the ravages of time and fall over. The White House is a case in point. The old mansion, built in the late 18th century has gone for such a makeover as this New York Times article details.

The makeover of Microsoft, unlike that of the White House, is an ongoing story.

Microsoft made much of its revenue and profits from selling copies of Windows and Office to individual and corporate customers. But that old model is now under severe strain as competitors such as Apple and Google offer different models including free operating system software and free alternatives to Microsoft Office.

Microsoft is now waking up to the new reality and offering more and more of its software for free — such as an iOS Office app.

For Microsoft though, software being the heart of what it does, it cannot offer everything for free. Hence, under the new Office 365 model, it offers annual subscriptions to customers. Same will be applicable to the Windows 10 OS when it is unveiled. Microsoft has even promised a free upgrade to Windows 10 for all those who use Windows 7 or Windows 8 — even to users using pirated versions of Microsoft’s OS.

What going for a subscription-based revenue model will ensure is that Microsoft will be earning steady revenue without too many seasonal ups and downs related to Christmas or the release of new versions of software. The subscription-based model applies to enterprise software such as Sharepoint and Microsoft’s cloud offerings under the Azure brand.

Of course, the subscription-based model entails its own business challenges such as letting people sign up to use their software for free for a month or three months before they are asked to pay. Either Microsoft will need to go for a free tier with basic capabilities and a paid tier if the user wishes to access more advanced features of the software.

This is how music subscription works. Or, Microsoft could offer very affordable entry points to entice users — something that publications such as The New York Times, The Washington Post and every other publication is doing as they seek digital subscribers and try to survive in a world with shrinking demand for print newspapers and burgeoning options for readers.

Companies of course should change their business models if they wish to survive for long. Just look at the White House. It looks the same from the outside but is a brand new building from the inside, constructed in the mid 20th century — and not in the late 18th. Microsoft too can hope to survive for long if its own plans for ‘renovation’ work out as well as they did for the house that is the seat of the US Presidency.