Must Microsoft and others modify their business model to compete against OSS alternatives?

With the increasing popularity of high quality OSS alternatives, do you think it likely that proprietary systems producers such as Microsoft can continue using the same business model to ensure their dominance of the software market? Why?

I heard that now Microsoft is developing a new licensing model called "shared source" which enables to share source code with users and partners while keeping intellectual property. This is a way to compete against OSS while keeping the software business.
It will help improving the feedback process, maintaining the integrity of the consumer environment and building the development community.

I think that for PS firm there are 2 important issues: selling to companies and selling to individuals

-for companies, they are less flexible as they will think twice before
switching to an OSS solution (high switching costs + risky move for a
company). So I believe they as long as the quality of their products
and services outpace the costs of switching, OSS isn't a threat.

-for individuals, I think that they need a loyal customer base, that
will rather keep buying and using a product they are familiar with
rather than just switch to a free alternative.
I know that my university for instance has "subscribed" to msdnaa: this
is a microsoft service that offers free downloads to students or
personnel of universities (if the university has signed up and paid the
fee). Most Microsoft products are available (MS office, MS server,
Visio, Windows 97...).
By providing these products free of charge to students, they reduce the
risk of seeing OSS become popular within this category of the
population. I think it is also important to target studetns as they are
the ones most likely to switch to OSS alternatives.

Ok, just to clarify what Microsoft's business model is, because without that I guess that we will not start this discussion.

Well, this is what Microsoft say about themselves:
"At Microsoft, we employ a low-cost, high-volume business model that supports local economic development. From the beginning, we have built our business by creating inexpensive software that millions of customers can use without extensive training, services, and support. (...) The Microsoft business model also embodies respect for the rights of innovative companies and individuals worldwide. To survive and grow, local ICT industries must be able to protect their innovations and reap the benefits from widespread use of the technology they create. (...) The tax revenue governments derive from a growing economy can then be reinvested to provide more community services."

But the case we consider is slightly different:
You can buy a decent laptop, with sufficient memory, speed etc. for around 250$. This will not be something great, but just right for working. However, you still have to buy software. That is: operating system - Windows - which price in shop may be around 150$, and office will cost twice as much - 300$. So you buy a computer for 250 and software for 300. After some research you will find Windows and Office on discounts and different versions (for example Office Student) which will lower the cost to 175$. But still - it is almost the price of the computer!

So the business model we talk about is: we have an expensive product, which prices vary, but we want the costumers to buy the most expensive one.

Now there is OSS which is getting more popular and is going to try to steal our market share. Do you think that Microsoft will change their business profile (price policy)? or simply will invest more in marketing so that the society will still perceive this product as the crucial one/the only one?

I think Microsoft now uses a way that is well known in economic theories. They use the concept of strong price discrimination. The way they discriminate is by the group of users. They combine this approach with another concept, the product differentiation. They know that there are several WTPs on the market and it would be unreasonable to launch just one version of their product. To exploit all those WTPs they launch several products.

Microsoft Office 2007 (Home and Student): 139€
Microsoft Office 2007 (Standard): 599€
Microsoft Office 2007 (Professional): 649€
Microsoft Office 2007 (Ultimate): 849€

In my opinion there is a stronger focus on the price discrimination than on the product differentiation, because the additional use of the "professional" version compared to the "student" version is hardly worth 510€.

I think Microsoft should modify their business model. Even if everybody is not able to use OSS, they are still a market segment which use it and Microsoft should not lost market shares on this.

OK people, focus: HOW Microsoft should modify the business model? Is the threat of open source as big as it seams and more people will use it so Microsoft should reduce prices? or maybe increase the usability of the products? introduce new ones to the market? What if in office there was also a "photoshop similar" product without changing the price of the package? would that make it more attractive?

So: what new approach in business model/pricing/marketing/consumer interaction/... (your ideas here ) ? and why of course:)

Anais_Grelet wrote:I heard that now Microsoft is developing a new licensing model called "shared source" which enables to share source code with users and partners while keeping intellectual property. This is a way to compete against OSS while keeping the software business.
It will help improving the feedback process, maintaining the integrity of the consumer environment and building the development community.

Yup, I heard about this also. this is the only way that Microsoft can be "up to date" with all the trends while saving money on the almost bi-yearly updates of Windows OS.
Here is the link to the Microsoft Shared Source Initiative, check it out:
http://www.microsoft.com/resources/sharedsource/default.mspx

I would like to focus on the student population and how Microsoft has maintained a competitive advantage. By offering substantially reduced prices to universities and students, Microsoft has been able to develop a strong consumer base. One argument seen thrown about concerning OSS/FS is that they are difficult to learn. But is that any different from Microsoft Office? We spend a considerable amount of time as students learning to use these programs, and some universities offer complete courses on just Office. This approach has kept many users from switching to OSS/FS, and keeps the largest population of buyers (the businesses) as its customer, because the students after graduation are the ones in the end that buy the product for business purposes. If Microsoft is going to lose its dominance, the university is where it will start. So, I believe Microsoft can continue is price discrimination, but should not lose focus on the university population.

I think
they will modify the business model in near future due to the high competition
and new product availability otherwise they might lose market share in the
future. They could make for example the basic version of MS office for free and
then make some applications that you have to pay for. That way they could make
almost the same money since a lot of people already use pirate versions.

Well, as we all know linux and other FS are slowly gaining popularity, but the succes of linux over windows is still relative. At some point, when linux and other FS overcomes the compatability problems, windows might have to change their strategies. I have some suggestions for windows on how to compete against linux.

Increase its own demand-side learning.
1: Listen to the demands of the user community to better exploit the benefits of demand-side learning. Microsoft must facilitate communication between the user base and the company to have prompt feedback on the performance of its products.

2: Make an effort to incorporate improvements in the code (fix bugs and introduce new features) as soon as possible.

3: Reward those who propose improvements for the code. At the very least, Microsoft could publicly acknowledge those who proposed new features or discovered bugs.

Reduce costs to be able to sustain long periods of time with low prices

Lessen Linux's direct and indirect network effects
1: Make it as hard as possible for Windows applications to work on Linux.

2: Same for MS Office documents.

Feed its direct and indirect network effects
1: Support as much as possible the independent software vendor community so that the quantity and quality of complements is substantially above that of Linux.

2:Encourage competition between the different vendors of microsoft products. The lower the prices of applications, the more appealing the Microsoft system will be.

3: Price discriminate. Give Windows and applications away to schools and universities so that users build their file libraries on Microsoft, not Linux.

Whats your opinion on my suggestions and are there other solutions?

jeremie_francois wrote:I think that for PS firm there are 2 important issues: selling to companies and selling to individuals

-for companies, they are less flexible as they will think twice before
switching to an OSS solution (high switching costs + risky move for a
company). So I believe they as long as the quality of their products
and services outpace the costs of switching, OSS isn't a threat.

-for individuals, I think that they need a loyal customer base, that
will rather keep buying and using a product they are familiar with
rather than just switch to a free alternative.
I know that my university for instance has "subscribed" to msdnaa: this
is a microsoft service that offers free downloads to students or
personnel of universities (if the university has signed up and paid the
fee). Most Microsoft products are available (MS office, MS server,
Visio, Windows 97...).
By providing these products free of charge to students, they reduce the
risk of seeing OSS become popular within this category of the
population. I think it is also important to target studetns as they are
the ones most likely to switch to OSS alternatives.

I agree with Jeremy in regard to students. Actually Microsoft is using a similar strategy to the medical devices industry - where companies give their devices and appliances for free to universities, and by the time the students graduate and become practicing doctors, they are already used to using these specific devices and the switching costs become are too high. This way the company has succeeded to build a substantial installed base who would continue to use and pay for their products.
Microsoft is doing the same - students who can dowload Microsofts applications from their university get used to them and after they graduate they wouldn't feel comfortable using anything else... thus enlarging Microsoft's installed base, increaing switching costs and network effects.

walter_muller, some excellent suggestions there on how Microsoft can adapt to counter the rising attractiveness of OSS.

Would I be right in saying that you are suggesting they deal with the threat from OSS producers by becoming more 'open' themselves?

As for your point:
Lessen Linux's direct and indirect network effects
1: Make it as hard as possible for Windows applications to work on Linux.

2: Same for MS Office documents.

As the case has shown, such preventative controls (tech based) can be effective, however when used excessively the reduced flexibility can result in a negative reaction from consumers. It is certainly the case that Microsoft already suffers poor PR in terms of its existing efforts to tie consumers to its products and supporting platforms.
If the the market realities continue to shift toward a truly more open approach, perhaps such action by Microsoft may only further weaken it's position.

Btwm I'm not disagreeing with your point, simply questioning it to hopefully get more feeedback!

Andrew