Microsoft CEO Nadella partners with his enemy's enemy

John Shinal | Special for USA TODAY

SAN FRANCISCO -- Samsung's decision to start pre-installing Microsoft Office apps on some tablets would seem, at first glance, to be more of a short-term win for shareholders of the U.S. software giant than owners of the Korean mobile device maker.

Given the fatter profit margins in software, any market share growth that may come from the deal would boost the bottom line of Microsoft more than Samsung.

Yet the details of the agreement announced Monday shine a light on the biggest challenge Microsoft CEO Satya Nadella faces as he begins his second year at the helm: Trying to protect a market lead during a major technology transition, as productivity software programs used on workplace PCs are replaced by mobile applications.

These apps are typically sold for no more than a few dollars each or, as in this case, are given away to smartphone and tablet users.

That market reality is why Nadella, a veteran insider of the tech giant, is willing to distribute for free what the company has traditionally charged a hefty price for.

Namely, the Microsoft Word, Excel and PowerPoint applications at the heart of its heretofore-lucrative Office suite.

The news follows Samsung's decision earlier this month to pre-install Microsoft's Skype video-calling software and several Internet-based business applications on the Galaxy S6, its latest smartphone.

Thanks to these agreements, Nadella will have Office apps and so-called cloud services on devices built by the 2014 global smartphone leader within a few months.

Given that Microsoft had no such presence when Nadella took over as CEO more than a year ago, that's a marketing win for the company.

For Samsung, the benefits of the partnership are less clear, unless the company believes consumers will buy more Samsung phones because they come with Microsoft Office.

While that could prove true someday, a more likely benefit in the near term is whatever amount of marketing dollars Microsoft may be willing to pay to get on the home screen of Samsung devices.

Other than the price, Nadella's Office app move is straight out of the Microsoft playbook.

He's partnering with the hardware maker whose biggest enemy in the mobile-device market is also Microsoft's arch-foe, Apple.

The bummer for Microsoft investors, though, is that the company is being forced into a so-called "freemium" model, where basic functions of the software are given away and users pay only for special features.

Nadella did the same thing in November, when Microsoft put a free mobile version of Office into Apple's App Store and Google's online Play store.

In porting Microsoft apps over to the two major smartphone platforms, Nadella has essentially blanketed the market for productivity-software apps sold (or given away) to mobile consumers.

It's a bold grab for the loyalty of business-minded users, yet it comes in a smartphone market where the dominant operating systems are Google's Android and Apple's iOS, not Windows.

That lack of market power – combined with the prevailing belief among mobile consumers that apps should be free or nearly so – helps explain Nadella's pricing strategy.

When a long-term market transition happens in a core market, profit margins are headed south, and the Office franchise has been a major cash cow for Microsoft for more than two decades.

Since its full-bore entry into the mobile apps market in November, investors have soured on Microsoft shares somewhat.

The stock is down 7% since then, while the Nasdaq is up 11%.

Yet they've also bounced off near-term lows, suggesting some Microsoft bulls have kept faith that Nadella can find a way to one day make a profit on software that he's now giving away.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.