July 21, 2009

Microsoft has long enjoyed Olympian profit margins, using its monopoly power to maintain prices on its software even in tough times. But now, amid a terrible downturn and rising competition, CEO Steven A. Ballmer is shifting to a scrappier approach. He is cutting prices on a variety of fronts, from flagship Windows and Office products to newfangled Internet services.

The idea is to accept lower margins in some businesses but boost overall earnings by going after a grab bag of growth opportunities. These range from expanding its share of big companies' software purchases to lowering the price of Office software so consumers in emerging markets pay for it rather than pirate it. With the outlook so cloudy, "we're focusing on gaining share in those areas that are most critical," says Stephen A. Elop, who heads the business division.

On July 13, Elop demonstrated the new Office 2010 in New Orleans. While Microsoft expects most customers to pay for the program the way they always have, less powerful, ad-supported versions will be available free on the Web. The company is also charging a monthly fee for online applications, such as the e-mail program Exchange, which is about a third as profitable as selling the software on CDs. And on Oct. 22, Microsoft's new Windows 7 PC operating system will go on sale in stores for $40 less than the $240 it charged when it launched its Vista program in 2007—the biggest price cut on a new version of Windows in years.

All of these moves amount to a risky experiment in price elasticity. By lowering prices, the company hopes to increase sales of existing products while making fast headway with new ones. If the company can gain enough market share to cover its massive costs in Web services and Internet search—notably, its vast data centers—every extra dollar will be pure profit. "I'm not saying it will be easy," says Ballmer. "But we have great opportunities to grow total profit dollars."