The concept of the Tech Bench, the in-store service arm for major retailers, appears to have reached a plateau in terms of its awareness, usage, and ability to influence in-store software purchases. While retailer service offerings have clearly expanded over the past couple of years, as have ones offered by hardware brands and independent 3rd parties, the focus of this expansion has been away from the computer and towards more lifestyle service opportunities, hardware training and CE services. Consumers are still highly aware of the tech bench, with 46 percent awareness and 13 percent usage, but those numbers have barely budged from 2008, when usage was 11 percent and awareness was 45 percent. Although this may appear negative, at least some of this plateauing is the result of the demise of Circuit City and its Firedog brand, which stood as the major retail competitor to Best Buy’s Geek Squad. This leveling-off of the computer service opportunity has likely led the in-store service industry to seek opportunities elsewhere, as we mentioned above. But, this shift away from the PC has come with consequences for the software market, especially the security product segment, as share of tech bench interactions that involved a software purchase or installation fell from 2009 levels.

Traditionally security software has used the retail channel as a way to encourage brand switching. By using the box on the shelf and aggressive initial pricing targeted at potential switchers, many brands have been successful at stealing market share from competitors through off-the-shelf selling. With the advent of the tech bench, retailers became more of the partner for brands looking to move consumers away from their current security provider and into a new one and began to control that process more, making it increasingly difficult to use the box and the price to steal competitors’ customers or get them to upgrade to a more comprehensive, and expensive solution.

As we mentioned in our press release brands like Trend Micro, Webroot, and Kaspersky have seen strong growth in awareness through this type of partnership focused on basic security needs, although they remain challenged in turning trials and awareness into long-term installed base gains. And while installed base can take time to shift it can’t be a good sign that even consumers who use or are aware of tech benches are rapidly moving towards suite level protection, something that is not likely facilitated by the aggressive trial offers currently available through tech benches at retail.

Overall the real takeaways from this report show a continuing shift in how software publishers and retailers interact, how the value of the retail storefront continues to evolve for the software market, and how in-store services deliver a mixed set of results to the software market. While confusion and uncertainty are never good, undoubtedly the turmoil at retail and in the economy over the last 18 months has caused at least some of this dislocation. Tech benches remain a key way for software publishers to create demand for their products, and retail remains the best place to implement programs designed to take share from rivals. However, it is likely that the value of these opportunities has begun to diminish over its peak just a couple of years ago and both retailers and publishers continue to search for the best way to deliver profitable sales growth that satisfies the needs of both sides.

Microsoft has a very different battle to fight in this release than in either the Office 2003 or 2007 version. Microsoft was very successful with sales of those products and its successful program to eliminate the “free” versions of Office floating around consumers’ homes and replace those with legitimate, upgradeable products that produced incremental revenue for Microsoft. Lifetime sales for Office 2007 at retail exceeded $1.5 billion for the 3.5 years it was on the shelf. A sales level that equated to approximately 10 million new copies of Office into the market in addition to the sales of PCs with Office pre-installed and the existing versions. Office 2007 was a radical new design that certainly helped deliver a lot of curious buyers and it was launched nearly parallel with Vista, adding a good deal of promotional activity in the software aisle, both of which likely helped drive initial sales of Office 2007. This time Office was launched during a seasonally slow period for PC purchases which have, over time, proven to be a have a strong impact on Office sales. The combination of these factors, plus the increasingly saturated installed base likely explains most of the initial weakness in sales of Office 2010.

With the release of 2010 Microsoft has to confront the success of its retail strategy head-on. Selling such a heavily used product into a base that has already been upgrading at a very high rate is an enormous challenge. While Office 2010 has many compelling new features, it is always an uphill battle to sell a high installed base product based on new features alone. Microsoft has been much quieter about selling Office 2010, choosing to release the boxed version at standard everyday pricing with a traditional mix of retail circular and end cap advertising, but without a lot of hoopla and fanfare (although some of this is likely to come during the upcoming back-to-school season). The key card product, designed to facilitate upgrading for PC buyers, has gotten off to a solid start accounting for about one-third of the unit volume. This is important because we do believe that the success of 2007 and 2003 at retail will make it very difficult for the boxed version of 2010 to generate much incremental retail sales volume above the trend line of the past 18 months or so.

However, the one strong opportunity for Microsoft and its retail partners is to add installations onto PCs where once the productivity software choice was Works or nothing. Last summer’s Next Class PCs from Best Buy that came with Office pre-installed were a first for retail and were very successful. The key card program can, as more PCs are shipped with the code enabling key card upgrades, potentially add some incremental revenue opportunities to the retailers that were not available to them previously.

Finally, a word needs to be said about the potential impact of free productivity products on the sales of Office 2010 to consumers. While products like Google Docs are certainly playing a part in the overall productivity software ecosystem, it is a virtual certainty that the slower than expected initial sales of Office 2010 have nothing to do with free alternatives, be they Google Docs or Office 2010’s own online version. These products have little awareness among the mainstream consumer who is the retail boxed version’s primary customer. Over time it is certainly likely that we will see some slowdown in retail sales as consumers alter their productivity software habits, but that time is not now. Mainstream consumers have not embraced the concept of the cloud, nor are they likely in the short to mid-term, making most of the questions around free software moot. The real short-term question is how Microsoft is able to match promotional fervor, pricing, and sales to the long-term opportunity to sell incremental versions of Office into a saturated consumer marketplace.

In our 2010 online survey, we saw no change in the share of online software buyers who still wanted a disc even after they had digitally downloaded their chosen application. With the vast majority of online downloading coming from subscription renewals for products like security, there feels like an opportunity is being missed here. Two-thirds of all online software buyers are downloading what they bought (or renewed), but one-in-three online downloaders still want a disc. And with so many folks still looking for that physical product to hold it makes perfect sense that one of consumers biggest choices about where to shop online revolves around the availability of free shipping. Free shipping on bits and bytes!!!

With the upcoming release of Office 2010 offering many consumers an opportunity to download an upgrade to their current Office suite, the ability to buy a key card to unlock what sits virtually inside their PC, we may see a growth in awareness in the ease and accessibility that virtual software purchasing can offer consumers. As more and more applications offer cloud based options (as Office 2010 and Google Docs do) it is vitally important for retailers and publishers alike to message this ease of use and convenience to the mainstream consumer to keep them buying retail. Otherwise we could see the consumer lose interest in the benefits of ownership of software in the face of the no cost alternative, which would be a real tragedy when the alternative of virtual purchasing already exists.

1. Inventory prep has been spectacular. This past weekend I happened by a Best Buy store (as you can imagine I do this pretty often) and there was not one single PC for sale with Vista on it.  Lots of Windows 7 machines, however, all of which were marked “not for sale until October 22.”  Someone did a great job in the supply chain making this happen. This will give Win 7 a tremendous boost out of the gate.

 

2. First ad deals have been well-thought out and innovative.  At their initial introduction I was very critical of MS pricing for Win7 upgrades.  Over $100 is far too much to move the population rapidly off of Vista (and according to NPD’s 2009 Household Penetration Study – 25 percent of households have a desktop running Vista and 40 percent  have a notebook with Vista  - so there are a lot of folks to move).  But, I think the initial offer in some of last Sunday’s circulars, which offered a Win7 upgrade for just $50 ($70 off) with the purchase of a Win7 PC, is brilliant.  It gives incentive to some of that huge XP installed base to do the right thing and upgrade into a new PC while offering them a way to cost-effectively upgrade that companion notebook they have bought in the last two and one-half years which is running Vista.   We hope to see lots more innovative offers focused on those multi-PC households as they represent the biggest opportunity for new sales and upgrades as well.

 

3. The work done with PC OEMs to align product cycles with Win 7 has also been spectacular.  Never before has the industry launched such a variety of new form factors, price points, technology upgrades, and design innovations at one time. With Win7 delivering improved capabilities in power management, networking, media, and touch the variety of systems available appeal to a wider range of buyers than ever before. This selection ought to help drive PC sales through the holiday season, not just as replacements, but to get consumers to begin rethinking what the right level (i.e. much higher) of PC ownership and usage should be in their home and entice them to reconnect more strongly with the PC experience.

As PC sales and boxed copy sales begin today we will keep our eye on the sales trends in our retail tracking service to get confirmation that consumers also see the change Win 7 has brought to the PC industry.  We expect to see increased marketing and merchandising focused on the upgrade buyer and the multi-PC household opportunity that dovetails with the Win 7 story.  And of course we will be waiting with bated breath for the opening of the new Microsoft stores and how Microsoft tries to interpret the retail interaction between consumer and PC and the buying experience.

No discussion about Microsoft ever leaves everyone happy. In this case I am mightily disappointed in a couple of aspects of Microsoft’s upgrade plans for non-PC buyers. First, is the pricing on the Windows 7 Home Premium upgrade. Besides the fact that $119 is a price point that fits nowhere in these economic times, it is still way too much for the software. While I acknowledge that this is down from Vista pricing, that is damning with faint praise. It is in Microsoft’s best interests to erase all vestiges of Vista from consumers’ homes, and by making the upgrade expensive (and a bit painful, more on that in a moment) Microsoft is creating a large disincentive for consumers to move to a far superior platform with a better user experience. Doubling down on the disappointment is the fact that this is only a one user license. In a world (at least in the U.S.) where most homes are moving into a multiple PC environment it would enhance the consumer home experience if they could upgrade all their home PCs at a single low price with a single boxed purchase. Although I don’t think it is exactly equivalent, Apple’s Snow Leopard pricing model ($29 for a one user license and $49 for a five user license) is much more appropriate to driving adoption and raising customer satisfaction levels. This is a direction I would have much preferred to see Microsoft head into.

Finally, what was interesting? The intention of a limited availability sale on Windows 7 (at $49 per copy) fulfilled only through the channel is a boon to the channel and the industry. It certainly addresses at least some of our pricing concerns and adds a few benefits to the marketplace. A program like this will deliver incremental customer traffic at retail, early customer excitement about a new product to the industry, and should prove to be a great early indicator as to customer demand and interest. Maybe some of the learning here could lead to some revisions in the go-to market planning down the road.

 
No one is going to claim that PC software is a retail growth segment (according to NPD’s retail tracking service sales dollars from PC software have been essentially flat, at around $3.4 billion over the last four years). And although our online channel tracking has grown from 11.5% of sales to 17%, there is still an appetite from the consumer for the physical manifestation of the product. As my colleague Russ Crupnick pointed out a few months ago in discussing music, there remains tremendous value in the disc, and I would add, in the store it was bought in. So, although online sales are gaining share consumers are still treating those purchases much like they would a purchase in the store, and seeking the safety and comfort of the physical media. There is no denying that content like PC software, movies, and music are losing space in the brick and mortar world, but we are far away from an industry where either the shopping or the content is delivered digitally. If one-third of all buyers who actually downloaded their software then asked for the disc too, then I would posit that the day of the virtual store (and virtual content) is still pretty far away.

The web enthusiasts would have us believe that everything will be in the cloud and exclusively online and they are eagerly singing that song. But at least for a solid majority of consumers the canary is still in full voice.