CASE

Free$-$Product Competition Challenge Microsoft

Since $2007,$ Microsoft's Office software, a highly profitable product that has long enjoyed a near

monopoly position in the office applications business, has been under attack from free

alternatives: Google Docs and Oracle's Open Office. Reluctantly, Microsoft responded in $2010$

with Microsoft Live, a free "cloud" version of Office that, unlike Open Office, cannot be

downloaded to and operated from an individual computer.

Based on high switching costs along with concerns about file incompatibility and the lack

of functions in the competing free offerings, Microsoft has been able to retain the vast majority

of its target corporate customers. However, the free offerings are being widely adopted by

college students, small business, and some large educational institutions. To illustrate, a recent

survey indicates that $20$ percent of college students exclusively use free alternatives. Available

evidence also suggests that Google Docs have been adopted by over $3$ million small business

users as well as some large educational institutions, including the University of Minnesota, the

University of Virginia, the California State University System, and a host of others.

Discussion Questions

Adopting a cautious stance, Microsoft strategists have not aggressively promoted its free$-$

product offering. Some experts argue that Microsoft should be taking the defection among

price$-$sensitive customers more seriously. Agree or disagree? Support your position.

What steps should Microsoft take to retain its most valuable customers and prevent rivals

from expanding their foothold in the market?