Virtual PC and the Value of Free
Other recent pricing low-balls or giveaways include Office Accounting Express and Visual Studio Express. Microsoft can so blatantly undercut competitors, because its larger objective is to make gains for other products, typically Office and Windows and more recently Windows Server. The tactic doesn't always succeed, and Microsoft must build a supporting network, typically with partners. But Microsoft's notches in the win column far exceed those in the loss column.
Give It Away to Take It Away
Many factors account for Microsoft's success, but two longstanding business practices stand out: release of software that achieves a "good enough" standard and offer of lower-cost, or free software that enhances the value of its platform products like Windows. When, in the early 1990s, WordPerfect was the dominate word processor, Microsoft responded by bundling together Word, Excel and PowerPoint as "Office." The three products together sold for about the same price as WordPerfect. The lower-cost tactic is most effective when the software is "good enough"—meaning covers the 70 to 80 percent of features most end users would use most of the time.
Microsoft has repeated this pattern over the years. I remember when in the later 1990s, computer stores sold Microsoft's FoxPro for about $100; meanwhile, competing products from companies like Borland sold for many hundreds of dollars more. "Microsoft is quite willing to go after competitors as a defensive strategy," said Paul DeGroot, an analyst with Directions on Microsoft. WordPerfect and Sony PlayStation are two examples DeGroot cited. "Microsoft takes the long view and bets that it can lose money longer than the other guy."