Office 2010 belly flops in early retail sales dive

US consumers and small businesses aren't rushing out to buy Office 2010, which doesn't surprise me. "Units and dollars are down from Office 2007's initial two weeks of sales but are in line, and in fact slightly ahead of, sales trends of Office 2007 so far this year," Stephen Baker, NPD's vice president of industry analysis, blogged yesterday. "Even so, sales of Office 2010 in general have to be characterized as a bit disappointing during the first two weeks."

The sales sentiment contrasts starkly with the Office 2007 retail launch, when during the first week "sales jumped 108.6 percent in terms of units and 106.3 percent measured in revenue compared to Office 2003." NPD data reflects US online and brick-and-mortar retail sales.

The difference between launches is chilling and reveals trends Microsoft shouldn't ignore. Baker has one view of the "Why," and I have another. Together they provide a fairly clear picture of what Microsoft can expect from retail Office 2010 sales. Briefly stated: Office 2010 isn't wooing US consumers to upgrade and many consumers simply don't need a productivity suite.

Saturation and Sales Tell a Sobering Story

"Lifetime sales for Office 2007 at retail exceeded $1.5 billion for the 3.5 years it was on the shelf," Baker informs. "A sales level that equated to approximately 10 million new copies of Office into the market in addition to the sales of PCs with Office pre-installed and the existing versions."

By my interpretation, those numbers simply aren't good. They work out to about $150 per retail unit, which, not coincidentally, is the price of consumer edition Office Home and Student. As I previously reported, Home and Student, like predecessor Student and Teacher Edition, accounts for about 85 percent of US Office retail sales. For that 150 bucks, consumers get three licenses, not the one that comes with more expensive Office business editions. So what then is the value of Office to most consumers or small businesses -- as much as $50 per copy.

Baker rightly identifies a problem Microsoft won't easily escape:

With the release of 2010 Microsoft has to confront the success of its retail strategy head-on. Selling such a heavily used product into a base that has already been upgrading at a very high rate is an enormous challenge. While Office 2010 has many compelling new features, it is always an uphill battle to sell a high installed base product based on new features alone.

I agree, and I warned about this problem in January 2008 blog post "Office 2007: One Hit Wonder?" I acknowledged that Office 2007 was unquestionably a sales hit, but warned:

With software, like movies or music, a big hit can be really tough to follow. Office 2007 raises the bar high indeed for Microsoft's productivity suite. There is a long history of technology products reaching sales growth plateaus...Office 2007's new user interface pushes past the good enough barrier, in part because of the new user interface. Office 2007 looks different from its predecessors, and -- in my testing, anyway -- there are some real productivity usage gains over Office 2003 or XP. But I really wonder: Is Office 2007 so good that good enough may be too good? Yes, would be my answer.

That's partly the scenario playing out now, as Baker astutely identifies.

Many Consumers Don't Need a Productivity Suite

However, there are other good reasons for why consumers aren't rushing out to buy Office 2010. In January, I posted the controversial "Microsoft Office is obsolete, or soon will be." The analysis mostly focused on retail sales to consumer and small businesses, for which -- six months later -- slow retail Office 2010 sales are a proof point. I identified several trends indicating that Office was losing its appeal to consumers and small businesses. Among them:

• Commoditization of productivity suite features among other commonly used applications or services.
• Sales saturation, where Microsoft increasingly faced the tough prospect of competing with its own products.
• Microsoft has carefully and methodically lowered the cost to buy Office, either actually or by adding more licenses inside the box.

Baker already explained sales saturation. I'll first tackle commoditization, starting with word processing, which reached commodity status years ago, as most commonly used applications or services incorporated the basic formatting features most people use more than 90 percent of the time. No external wordprocessing program is required to blog, e-mail, instant message, tweet or post to social networks like Facebook. Related: consumers increasingly have less or little need to use a productivity suite for the kinds of content they more commonly create, like the aforementioned status messages, tweets or Wall posts and photos or videos. For many consumers, the days of documents are largely over.

"Office Home and Student is indicative of a longstanding downward pricing trend," I wrote in January. Microsoft extended discounts to other versions, as I explained:

Under the new pricing scheme, PC buyers will have the option of purchasing a license key for the pre-installed Office trial version. Office Home and Student 2010 will cost $119, instead of the $149 box retail price. Office Home and Business: $199, instead of $279. Office Professional: $349, instead of $499. PC buyers electronically purchase Office, which is unlocked using a code key. Significant pricing change: Retail copies of Office 2010 Home and Business, Professional and Professional Academic will now come with two licenses, which is a huge discount over the current one-license approach. However, digital activations for pre-installed Office will come with one license. Either way, whether digital or retail pricing, Microsoft is considerably discounting Office.

From that perspective, Microsoft artificially -- and obviously quite successfully -- boosted lagging consumer sales by the then new and different Office 2007 user interface. But Office 2010 doesn't look that much different from its predecessor. As suggested a few paragraphs back, the one-hit wonder is good enough, or perceived to be good enough, for many retail buyers. Microsoft is trying to compensate by lowering costs to buyers.

Office Trial Conversions are Explanation, Too

All this said, there is a corroborating influence for which I don't have data and Baker doesn't address in his blog post: Office 2010 also brings to market better digital purchasing options -- from preinstalled copies of the productivity suite and downloadable trials. That could impact early retail sales in three meaningful ways:

• Consumers downloading the Office 2010 Trial version and directly digitally purchasing a license
• Consumers buying new PCs with the trial version installed and directly digitally purchasing a license
• In both cases, people running Office 2010 Trial and not yet making a purchase because the trial period hasn't expired

The latter scenario could convert to retail sales after the 60-day trial period ends. Something else: The majority of Office Trial users would have been within the 60 days during NPD's measurement of early sales. So there wouldn't yet be pressure to make a decision to buy or not.

I fully expect this early retail sales trend to persist until Microsoft and its partners offer back-to-school discounts for Office 2010 Home and Student -- and then drop back down and stay in the sales doldrums without any additional discounts. US consumers won't rush out to buy Office 2010 without discounts, I predict. They either don't need the productivity suite, think they don't need it, are satisfied with the Office version they already own or will choose to digitally purchase Office 2010 rather than go to stores.