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Pssst! Office 365 customers pay Microsoft up to 80% more over long haul

Gregg Keizer | May 8, 2015
Tells Wall Street that when it turns a customer into a subscriber, it gets 1.2 to 1.8 times the revenue compared to old-school licensing.

Office 365 migration path

Microsoft loves subscriptions.

Moving a corporate customer from "transactional" purchases of Office -- the once-traditional practice of purchasing one-time, perpetual licenses that let workers use the suite as long as their firms want -- to Office 365 rent-not-buy subscriptions results in almost a doubling of revenue for Microsoft.

"Over the lifetime, the increased reach, the increased frequency in this example, as well as some yield, adding some incremental services, results in a 1.8 times lifetime value of that user in the transition," said CFO Amy Hood in a meeting with Wall Street last week.

Transactional customers buy Office once every five to seven years, said Hood. But by convincing businesses to subscribe to Office 365, specifically the E3 plan, Microsoft can realize an 80% increase in revenue over the years-long relationship. Office 365 E3 includes the core Office application suite, as well as cloud-based Exchange, SharePoint and Skype for Business, shifting those services from on-premises systems to Microsoft's servers.

In other words, for every $100 Microsoft earned the old way, it reaps $180 under the newer subscription regime over the long haul.

Hood laid out other scenarios, too, including one where an existing customer paid for Office with an Enterprise Agreement (EA), which by necessity also included Software Assurance (SA), the annuity-like program that for a fee provides rights to upgrades for a multi-year stretch. Before Office 365, that was the closest Microsoft came to a subscription model.

"[That] example, which is pretty frequent, is moving an existing EA customer to the cloud, and that results in a 1.4 times increase in the lifetime value of that same customer," Hood asserted.

Even new customers, who licensed Office but after three years paid only the SA annuity, were worth more to Microsoft if the company nudged the businesses to the cloud: Hood said the revenue multiplier for that category was 1.2x.

One expert scoffed at Microsoft's multiplier, which he said was actually a low-ball estimate. "A 1.8x multiplier? How about a 6x or 20x multiplier?" said Paul DeGroot, principal at Pica Communications, a consulting firm that specializes in deciphering Microsoft's licensing practices.

DeGroot's point was that Microsoft rakes in much, much more than just an additional 20%, 40% or 80% by pulling customers to the cloud. "I think those numbers are conservative," DeGroot said in an email. "I always remind customers that Microsoft's internal rationale for the cloud is not superior technology or a better fit for customers, but that they can switch customers from purely transactional strategies -- where they wait for Microsoft to produce value before buying in -- or from standard EAs, where customers can stop purchasing SA but keep using the product -- to a subscription model where the customer owns nothing and must continually pay Microsoft."

 

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