Microsoft Offers Free Office 2007 Upgrades, Defers $1.5 Billion In Sales

Although Microsoft's announcement Tuesday that it will give away or discount Windows Vista buyers of Windows XP got the most attention, the company also unveiled a similar program for Office 2007, the next version of its productivity suite.

Customers who buy a PC in the Oct. 26, 2006 - March 15, 2007 time period with Office 2003 pre-installed on the machine will receive a coupon good for a free upgrade to a similar edition of Office 2007, Microsoft said Tuesday during a conference call with reporters and financial analysts. Users who purchase the full retail version of Office 2003 between Oct. 26, 2006 and Feb. 28, 2007 will also receive a coupon.

"Buyers of Office 2003 Standard Edition will get Office 2007 Basic," said Scott Di Valerio, vice president of Microsoft's OEM group. "2003 Small Business will get Small Business 2007, and 2003 Professional will get Professional 2007, all for zero dollars," Di Valerio said. Microsoft will charge shipping and handling to deliver Office 2007, however, as will OEMs participating in the exchange.

An analyst downplayed the upgrade offer.

"This doesn't seem like a big deal," said Paul DeGroot, analyst with Redmond, Wash.-based research firm Directions on Microsoft. "Microsoft doesn't want to stop Office sales, particularly to customers on a calendar year budget. If those customers have money in their budget, Microsoft doesn't want them to spend it on something else."The most likely users to take Microsoft up on the offer, said DeGroot, are those in small and medium-sized businesses running Office 2000. "If they're sitting on Office 2000, this would be an opportunity to buy the license available today [Office 2003] and do an upgrade to Office 2007 next year.

"But I can't see that the coupon will change a lot of buying behavior one way or another," concluded DeGroot.

Also on Tuesday, Microsoft said that the Office and Vista free and discounted upgrade programs would require it to defer more than $1.5 billion in revenue from the first and second quarters of its fiscal year until the third quarter, which ends March 31, 2007.

An estimated $1.5 billion in revenue from sales of Windows XP in the second quarter, which ends Dec. 31, 2006, will be shifted to Q3, said Frank Brod, Microsoft's chief accountant, during the conference call. Eighty percent of that, or approximately $1.2 billion, must be deferred because of the Office and Vista coupon upgrades, while the remainder will account for pre-shipments of the OS and suite to seed the OEM and retail channels. A much smaller amount of $45 million will probably be deferred from the company's first quarter to Q3, Brod added.

"These deferments are not expected to have any impact on the full-year fiscal," said Brod."It's all just accounting," said Matt Roshoff, another analyst with Directions on Microsoft.

Microsoft's estimates Tuesday were considerably higher than those voiced last week by a pair of Wall Street analysts, who pegged the deferred revenue between $500 million and $1 billion.

Another accounting change announced by Brod, said Roshoff, is more interesting. In the past, Roshoff explained, Microsoft would defer between 5 and 25 percent of income from Windows to later quarters to account for money spent on such things as updates and service packs. Brod said that Microsoft was not using the accounting technique for Windows Vista.

"They're saying 'we think Vista is good enough that we don't have to account for future costs,'" said Roshoff. That won't stop Microsoft from issuing security updates and service packs for the soon-to-release OS, of course; instead, the move may be "one of the levers they can pull to show more attractive numbers in a specific quarter," Roshoff said.

Brod also said that the coupon-for-upgrade program will have "no impact on costs." Even for versions of Vista and Office that are provided free of charge to customers, Microsoft will require shipping and handling payment.The company declined to comment on whether it thought the programs would spur PC sales in the final quarter of 2006.