News

The Internet is forcing Microsoft Corp. to change the way it sells software to businesses, but the technology giant says the industry will not be turned upside down overnight.

Increasingly, companies are looking at buying subscriptions to software that is run on third-party computers linked over high-speed networks.

Google Inc., for example, last week began selling an annual subscription to a package of online business software in a direct challenge to Microsoft. The product, Google Apps Premier Edition, is an enhancement of an earlier, free offering already in use by thousands of businesses and universities.

Software as a service is an emerging trend, but five years from now most businesses will still be running programs the way they do today, predicts Doug Burgum, senior vice-president of Microsoft Business Solutions group.

“People have not rushed to the numerous offerings that have been made available,” he said in an interview in Toronto Tuesday.

His unit oversees Microsoft's Dynamics product line, software that performs supply change management and financial management and is designed mainly for small and mid-sized businesses.

There is “an appropriate sense of urgency” in Redmond, Wash., he said, but nobody thinks that the market has already shifted to Internet-based software, some of which is free and supported by advertising. “We are not anywhere close to a tipping point,” Mr. Burgum said.

A handful of companies that include San Francisco's Salesforce.com Inc. and NetSuite Inc., of San Mateo, Calif., are today selling software as a service that competes directly with Microsoft's customer resource management and enterprise resource planning products.

“What we need to have over time is a diversification of business models that support the way customers want to buy,” he said. These will include the ability to purchase products in the traditional way, rent software through a subscription service, or even get free, ad-supported programs, he added.

The company is starting to experiment with new ways to deliver software. It has launched a free version of an accounting program for firms. The variation of Office Small Business Accounting is not ad-supported, but Microsoft hopes that by giving the product away it will turn people into paying customers down the road.

“It's our effort to leapfrog other people. If free is the price, then we've got a free downloadable version of our latest product, and the idea is that over time people would sign up for services associated with that,” he said.

Microsoft jumped into the market for business software six years ago when it made two of the biggest acquisitions in its history. The company paid $1.1-billion (U.S.) for Great Plains Software of Fargo, N.D., in 2001, and it bought Navision AS of Denmark for $1.3-billion in 2002.

Both companies were profitable, but Microsoft's business unit didn't get into the black until the end of the last fiscal year in June, 2006. Mr. Burgum attributes that to research and development costs incurred as Microsoft expanded the product line and markets.

The company doesn't break out full financial results for the division, but it generated sales of about $1-billion last year. In addition, licence revenue is up 19 per cent in the last two quarters, compared with growth of 17 per cent last fiscal year, said Mr. Burgum, who came to Microsoft through the Great Plains Software deal and intends to leave the company this summer.