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Will Microsoft Shift Away from Software Licensing?

By Susan J. Campbell, TMCnet Contributing Editor

In a world where Microsoft (News - Alert) is the dominate player in the software space, it’s hard to believe the company would think about a different approach to the market. While software licensing is where the profit dollars exist, the cloud is where opportunities lie in the future. As such, the software giant is transitioning to the cloud in a big way.

According to ZDNet, Microsoft generated roughly 82 percent of its revenue through the software licensing for Windows, Windows Server and Office in 2004. Now, the company is focusing more on cloud-based services that will run on any device. That doesn’t mean opportunities are not realized in software licensing – Microsoft still had just over 70 percent in 2014. Today, however, the company doesn’t have to limit itself and substantial revenue is being generated through investments in cloud services and hardware.

Traditionally, large companies have been the core driver for Microsoft licensing revenue. But the average price per license is dropping on the company’s core products, which demands a shift in strategy to sustain growth and profitability. Fortunately, Microsoft understands where it needs to be to remain the dominate player in this space. The user’s reliance on Windows for PC and device operation is critical to the company’s success, and one of the reasons why Microsoft eagerly gives away upgrades to current customers.

Yet the traditional user is changing the way they rely on Microsoft products. They’re not only becoming more mobile, they want access to all the capabilities they rely on regularly, whether at home or in the office. We’ve already seen that Microsoft does not play well in the smartphone world and can’t really hold market share against Apple (News - Alert) and Samsung. Instead, the company needs to continue its focus on software licensing for Windows, Office and other capabilities the iPhone user wants while on the go.

At the same time, Microsoft has found a comfortable home in gaming, offering Xbox not only to the traditional player, but also to the one who wants to leverage cloud capabilities and play with others around the world. The fact that the Xbox can also serve as another device in the office gives users an additional argument for purchasing when questioned by those who hold the purse strings, or at least the justification sounds like it should work.

The point is, Microsoft has recognized the opportunities it has in the cloud and is launching full steam ahead to take advantage of its brand, positioning and the users’ reliance on its capabilities. In just one year, its cloud activity is well ahead of 2014, which much of the demand seen in commercial 365 migrations. It’s definitely a great position to be in and one envied by many a player in this space. Given the company’s ability to edge its way into the user’s psyche and become a must-have, expect to see the same in its cloud strategy.