Microsoft eyes making desktop apps free

Documents show some insiders are questioning whether existing software should be supported by ads, CNET News.com has learned.

Even as Microsoft readies a host of new ad-supported online services to battle rivals, the software maker has been mulling a plan to offer free, ad-supported versions of some of its desktop products, CNET News.com has learned.

Although no specific plans have been made, executives within Microsoft are examining whether it makes sense to release ad-supported versions of products such as Works, Money, or even the Windows operating system itself, according to internal documents seen by CNET News.com.

"As Web advertising grows and consumer revenues shrink, we need to consider creating ad-supported versions of our software," two Microsoft researchers and an MSN employee wrote in a paper presented to company executives earlier this year. The document was prepared for one of Microsoft's twice-yearly Thinkweek exercises, in which Chairman Bill Gates and other top executives gather to consider potential new avenues for the company to follow.

Microsoft officials confirmed the authenticity of the paper, dated Winter 2005, but declined to comment on its contents. However, a Microsoft source characterized the paper as an internal brainstorming exercise.

"It is simply an exploration of different models of delivering software to customers," the source said. "It is not policy, it is not a plan, and no decisions have been made--it's just some thoughts from our research and business units."

In recent weeks, Microsoft has identified a number of ways to increase its online advertising business as it seeks to fend off rivals such as Google. A move to bring ads into its desktop software, though risky, would offer the company an ability to move the battle on to its home turf.

The document also sheds light on Microsoft's concerns over the erosion of revenue from shrink-wrapped software, particularly in the consumer market.

Chief Technical Officer Ray Ozzie and Chairman Bill Gates outlined some of the opportunities and the challenges Microsoft faces in a series of October memos . In the more blunt of the two missives, Ozzie said Microsoft had an obligation to act on the shift to ad-supported software.

"It's clear that if we fail to do so, our business as we know it is at risk," Ozzie wrote. "We must respond quickly and decisively."

Already, the company has announced plans for Office Live and Windows Live , two products that are ad-supported complements to its existing desktop software. But in the internal documents, Microsoft workers maintain that the software maker may be forced to go further if rivals launch ad-supported versions of popular programs such as PowerPoint.

"If our competitors release free, advertising-supported versions of these programs, we may need to do the same," the two researchers and John Skovron, who works in MSN's Money unit, wrote in the winter 2005 paper.

Microsoft has been mulling a shift to ad-supported software for some time. A paper prepared for a summer 2004 Thinkweek gathering noted the decline in consumer software and suggested Microsoft's MSN online business might benefit from moving from a subscription model to one paid for through advertising.

The more recent paper outlines a number of factors for identifying which desktop software could be ripe for moving to an ad-based model. Such factors include whether the software is frequently used online, whether it contains good data for targeting ads and whether it is likely to face ad-supported competition. Among the products it identifies as meeting some of those criteria are Works, Money and OneNote.

But others both inside and outside Microsoft have called on the company to go beyond the types of services offered by MSN. An online version of Office is one of the products most often talked about. The company has in the past mulled such a move . But a commercial product never materialized, due to internal political battles and fears of cannibalizing revenue from Office, which is among the company's most profitable products.

Plan extends to Windows
The company's exploration of ad-supported software extends even to Windows, its most important product. An ad-supported version of the operating system could make some sense, the Microsoft researchers argue in their Thinkweek piece, noting that the product reportedly earns $9 per year per user.

"It seems possible that we could match that revenue via ads, but there are difficult UI (user interface) issues to solve, since the OS does not have a natural way to display ads that does not annoy users," the Microsoft workers said in the paper. One suggestion is a low-end version of the operating system that comes bundled with other ad-supported programs, such as Works, Outlook Express and Windows Media Player. However, the writers point out that "it's not clear how to prevent these elements from being replaced."

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