There will always be some people that want to use office but will never pay for it. It’s fairly expensive and so is a massive barrier to users purchasing it. By making a free addition – even if it has embedded ads it means that users will be given the option to legitimately use the software without paying a dime. The corporate users that formerly paid for the software won’t want to put up with the ads and so will still pay the premium price so Microsoft will not lose much sales from this. However, those that formerly priated or used open source alternatives may be tempted to give the ad funded version a run and if the ads aren’t too intrusive keep it.

The 2nd reason is that advertisers will be told the install base and number of downloads for the ad powered version not how many have since ditched it it or applied a hack. This means that even if a large portion apply a ad blocking hack it will not be reflected in the figures presented to potential sponsors and so doesn’t hurt Microsoft’s potential to make revenue from it. Obviously if ad impressions are tracked it will be reduced by blocking but often the ad blockers just make the ads not visible and do not stop the request for the ad being sent and so will possibly count as an impression. We also don’t know how online elements of the app will be intergrated – if there is a lot of cloud or web dependant features embedding the ad into the online component maybe unstoppable.

Also Microsoft can detect/knows a lot of systems are running pirated copies of it’s software but does nothing about it – this keeps up it’s install base even if it doesn’t make a sale from it. With this app being free they could chose to cripple/disable apps that attempt to block ads making it harder to hack and if aggressively blocked with every update like sony/apple firmware does to the iphone/psp it could leave the average user going for an unhacked copy rather than have the hassle of regularly updating hacks and having downtime where they can’t use the app or having a app that becomes a security risk because they can’t get the regular updates.