The latest thing in software: No one's buying it

SAN FRANCISCO -- Nearly a quarter-century ago, the mantra "information wants to be free" heralded an era in which news, entertainment and personal communications would flow at no charge over the Internet.

Now comes a new rallying cry. Software wants to be free. Or, as the technology insiders say, it wants to be "zero-dollar."

This is the Internet's latest phase: hundreds of companies freely distributing powerful applications -- from e-mail and word processing programs to spreadsheets, games and financial management tools. They run on computers in distant, massive and shared data centers that process and store an individual's information.

Many people are familiar with free services like Google's Gmail. Other companies are using the same model of not asking for money in return, but instead asking consumers to pay attention to advertising. Word processing programs, electronic calendars and digital photo-editing tools are being traded for eyeballs.

Just as free information on the Web threatened the profits of retailing, music, publishing and other industries, these free applications could spell trouble for the mightiest of the software makers, Microsoft. Indeed, technology industry analysts said the changing business model, which has long been discussed in technology circles, is a driver of Microsoft's $44.6 billion hostile takeover bid for Yahoo.

That proposed deal announced last week would give Microsoft access to Yahoo's vast news, information, search and advertising network -- and the ability to compete more squarely with Google.

But a merger would also allow Microsoft to adapt its empire to compete in a world of low-cost, Internet-centric software. Yahoo's huge user base could provide audience and infrastructure for Microsoft to change how it distributes its products and charges for them.

"Microsoft makes its money selling licenses to millions and millions of people who install it on individual hard drives," said Nicholas Carr, a former editor at the Harvard Business Review and author of "The Big Switch," a book about the transition to what the technology industry calls "cloud computing."

"Most of what you need is on the Internet -- and it's free," he said. "There are early warning signs that the traditional Microsoft programs are losing their grip."

Microsoft drops prices

Certainly, analysts said, Microsoft's revenue -- $51 billion last year, most of it from software -- is not yet suffering in any meaningful way.

The company said, to the contrary, that business is booming, and that Microsoft Office, a flagship product, is having a record-breaking year. "Last year was our best year, and this year is better," said Chris Capossela, a Microsoft vice president with Microsoft's Office division.

At the same time, though, the company has lowered prices. Last year it began selling its $120 student-teacher edition to mainstream consumers, who had been asked to pay more than $300 for a similar product.

The bulk of the company's profit comes from selling to corporations, which unlike consumers may be slower to adapt to a system in which proprietary data is not stored in corporate-owned data centers. Microsoft said that corporate customers prefer using software that they are familiar with and that provides more functions and better security.

But the corporate business, too, is coming under increasing assault from lower-cost Internet competitors, including Microsoft's arch-nemesis, Google.

On Thursday, Google took its attack to a new level. It released Google Apps Team Edition -- a version of its productivity software that includes word processing, spreadsheet and calendar programs. In a form of guerrilla marketing, fans of Google Docs can take it into the office, bypassing or perhaps influencing decisions made by corporate executives, who until now have overwhelmingly bought Microsoft software. Google, while it gives such software free to consumers, charges corporations, though a fraction of what Microsoft charges.

Why buy?

The change is coming not from corporations but on the computers of a growing base of individual computer users who increasingly expect their software to be free -- and for it to be processed and managed over the Internet.

Kevin Twohy, 20, a mathematics student at UCLA, uses a free service on Facebook to store and share photos, a program called Picnik to edit the images, and Gmail.

For his English class last semester, he wrote a term paper about William Blake using Google's free word processing software, even though Microsoft Office had come loaded on his personal computer.

The advantage of the Google program, he said, was that it allowed him to keep his information on Google's servers so that it was accessible at any computer, whether he was working at his fraternity, a coffee shop, a campus computer bank or the library. The experience, he said, has convinced him he will not pay money for software.

"I don't ever see myself buying a copy of Office," he said.

Those individual users may be able to do what an army of lawyers and regulators in the United States and Europe were never able to do -- rein in Microsoft's monopoly power.

"If Microsoft had to start over today, it wouldn't even think about charging money for its software," said Yun Kim, an industry analyst with Pacific Growth Equities. "Nobody in their right mind is developing a business in the consumer market to charge" for software.