In last week's Windows 2000 Magazine UPDATE, I discussed Office XP (formerly code-named Office 10), which I regard as a rather tepid upgrade to Office 2000 and Office 97. And, as I concluded at the time, most existing Office customers have precious few reasons to upgrade. Microsoft has made Office XP easier to use, certainly, but it isn't a radical change, especially for corporate users—and some glaring deficiencies remain. I suspect we won't see another must-have Office upgrade unless or until some real competition shows up.

Microsoft knows this of course. The current mix of Office users—individuals and, more importantly, companies—simply aren't upgrading to each subsequent version of the suite. In a general sense, Microsoft is attacking this problem by restructuring its software development process—because monolithic, years-long development periods for major OS and applications projects just aren't paying off anymore. Years of work and billions of dollars invested in a product are useless if no one buys it.

Enter the software subscription model and Microsoft .NET, which is still a few years away from being a reality. In the meantime, we're in a weird transitory period in which we'll see, in some markets, Microsoft offer shrinkwrapped versions of some products—such as Office XP—for yearly subscription. Obviously, the goal is to eventually eliminate the box and CD-ROM. But getting to that point will take a while.

So what to do in the meantime? Microsoft can't make broadband happen any faster, and local processing has progressed to the point where even Microsoft's latest OS releases can't fully tax the capabilities of a modern PC. So the company has turned to licensing to keep its growth on target and increase sales. And it's a sad state of affairs.

We discussed Windows Product Activation (WPA) at length in Windows 2000 Magazine UPDATE, and I've been somewhat amused as I've watched other news and computer industry entities struggle to explain this technology to their viewers and readers. What I presented months ago is still, I believe, the most accurate explanation of what Microsoft is trying to do and why. But I've since thought long and hard about this technology—also present in Office XP—and have concluded that requiring product activation is the single biggest mistake that Microsoft has ever made.

I've debated this point with various Microsoft employees, and—to be honest—they're pretty defensive about it. But when you set aside the rationale about preventing casual piracy, protecting people from themselves, and whatever other excuses they muster about this technology, what it comes down to is a bid to bleed more financial blood from the stone of Microsoft's market dominance. How do you increase revenues when you already have the entire market locked up? You strong-arm your existing customers, apparently.

One could debate the piracy issue forever, but I'll leave it at this: If a piracy-prevention technology prevents only people who would never pay for the product anyway from installing it, then you're wasting your time and risking your relationship with good customers. And that's what Microsoft is doing—making a huge public-relations mistake. And even though Microsoft is legally (and, debatably, morally) correct, I hope that the bad feelings surrounding the product activation approach comes back to haunt the company. Can you imagine what technology Microsoft will enable down the road if this is successful?

Office XP (and related Office family products) also offers a form of product activation technology, although the Office XP license, amazingly, still lets you install the product on two PCs—a desktop machine and a laptop—using the same product key. Product activation might keep people from casually copying Office XP onto each computer they own, but it won't make Joe Consumer run out to Best Buy and slap down $400 per box. That just won't happen. It makes one wonder why Microsoft bothered in the first place.

Typical Office customers, however, don't buy Office in a retail store. Individuals get it with a new PC. Corporations roll out Office across their businesses. Corporations that purchase volume licenses won't need to deal with product activation, which is nice. But Microsoft has another plan to make those people upgrade to Office XP. Under Microsoft's new licensing scheme, corporations that upgrade to Office XP before October 1 qualify for a new Software Assurance plan that guarantees 3 years of upgrades for . . . ta da . . . an annual fee that's considerably less costly than the full price of Office. If you wait until October, sorry, but you pay full price.

So Microsoft can implement a pseudo-subscription plan for Office now, guarantee itself the annual income it so desperately wants, and as a result—the company hopes—hundreds of millions of existing Office seats will upgrade this year. It's an interesting way to test the waters of true subscription licensing, and a great way to get companies to upgrade to a product that isn't a big deal at all.

When Microsoft launched Office XP 2 weeks ago, a strangely calm Bill Gates was fielding questions from the press when someone asked him about Office XP sales goals. Gates smiled and said that he fully expected it to be a best seller, the exact opposite of what the press was reporting, given the lackluster improvements they had seen at the launch. But Gates knew that Microsoft has an ace in the hole, because the company no longer needs to draw customers in with new features and functionality. Instead, Microsoft can simply change the licensing terms and watch the customers line up. That's the kind of power a market leader can wield, especially when its so-called competition has simply given up the game.

The ironic endnote, of course, is that the Software Assurance plan is probably a good deal for many of you. And ultimately, I expect many businesses to upgrade to Office XP soon, in a bid to save money over the next 3 years. Will your business be one of them?