Microsoft Can Use Yammer's 'Freemium' Model to Sell Office: Analyst

As Microsoft moves forward with its acquisition of enterprise social networking company Yammer, industry analysts are starting to identify opportunities for the upstart Yammer to help the software giant make a faster transition to cloud computing.

Microsoft€™s $1.2 billion deal to acquire enterprise social media company Yammer still has some people scratching their heads about the synergy the two companies will generate, but Yammer could actually teach Microsoft a thing or two, an industry analyst says.

Microsoft built its fortune by selling software licenses to computer makers, businesses and consumers. Yammer built its business into something worth paying $1.2 billion for by what€™s called the €œfreemium€ model.

Individual employees downloaded Yammer for free and eventually adoption went viral within companies and at many others. Once enough people within a company started using Yammer, their employer went ahead and subscribed to premium services to manage Yammer across the enterprise€”hence, the term €œfreemium.€ Yammer rival's Chatter also follows the freemium model.

Microsoft could adopt the Yammer freemium model to sell flagship products, such as the Office suite of productivity applications, said Hyoun Park, principal analyst at Nucleus Research. Yammer will operate within Microsoft€™s Office division.

Park described a scenario within an enterprise where there is a large installed base of on-premise Microsoft software, perhaps Office 2007. Meanwhile, other employees subscribe to Office 365, the cloud-delivered, subscription-based version of Office. With Office 365, subscribers are always running the latest version of the suite, including Word, Excel, PowerPoint and the rest.

If Office 365 users receive a free demo of an upcoming upgrade and see the potential advantages of the new Office 365 version, adoption will increase. Over time, this will force IT managers to deal with the glitches associated with compatibility issues among multiple versions of Office 365 and the on-premise version of Office. The company eventually has to do what Park calls a €œbully upgrade€ where eventually it adopts the latest version of Office 365 across the enterprise, including for those still using on-premise software.

€œYou have a certain critical mass of end users that are already using the newest version of Office through the cloud and then soon €¦ [the company has] to upgrade to the new version and you have to make that decision more quickly than you had to before,€ he said.

In the case of both Yammer and Office, the strategy helps make the product indispensable.

€œThe Yammer business model is about being too useful to get rid of and Office productivity applications often play a similar role of being too valuable to stop using,€ Park said.

Of course, another strategy might be for the enterprise to adopt Office 365 across the board to make sure everyone is on the latest version of the suite. Nucleus Research provided a case study about an Office 365 project at Carolina Realty Group, a real estate brokerage based in Hilton Head Island, S.C.

Carolina Realty Group chose Office 365 (over Google Apps) to serve its 27 brokers, and according to a case study of this software implementation, the company realized a return on investment (ROI) of 1,213 percent over 2.4 years. It saved on operating expenses and future hardware costs by shutting off its Microsoft Exchange servers and avoided software license subscription fees by switching to the subscription model.

It might even have saved enough money to subscribe to Yammer.

The freemium model is also the basis for Skype, the voice over IP (VOIP) voice and videoconferencing business Microsoft acquired for $8.5 billion last year, noted analyst Park. Skype€™s growth was viral, too, as individuals subscribed one at a time and were able to call other Skype subscribers for free.

€œThis is fundamentally a new way for Microsoft to potentially get customers,€ he said. €œMicrosoft didn€™t just spend $10 billion [combined] on these two companies just for the technologies although the technologies are good, too.€