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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.

DeGroot, like many licensing gurus, is often called in when a Microsoft customer grows weary of paying Redmond and wants ideas on cutting costs.

"We routinely reduce customers' payments to Microsoft by 40%, and the two most recent engagements were 75% lower," asserted DeGroot. The latter, he said, was accomplished by dropping the SA annuity when the customer had no plans to upgrade in the next three years, the length of SA contracts.

"Customers can drop SA but keep using the latest products in the full Microsoft stack for the next three years with very little downside," DeGroot added. "That's devastating for Microsoft's revenue stream. But if Microsoft can get them into [Office 365] E3, that can't happen. Microsoft will determine what features are available, when they upgrade to new versions, and how much they pay."

Wes Miller, an analyst at Directions on Microsoft who regularly conducts the research firm's licensing "boot camps," agreed that Hood's estimates of revenue increases are in the reasonable ball park, especially when Office 365 E3 is compared to transactional customers.

"They're like people who buy a car and run it until it rusts," said Miller, referring to companies that hold onto a version of Office for five or more years. "They're upgrading every other iteration, or even skipping two," he said. Naturally, getting those customers to pay annual subscription fees results in more money for Microsoft.

But Miller also argued that enterprises that shift to the cloud are saving money elsewhere, particularly in managing on-premises email, which Office 365 E3 assumes responsibility for. But that savings may not happen immediately. "Most don't go full cloud, at least not right away," he said. "They're not able to write off all their on-premises."

There are other benefits companies see in subscriptions, even though the cost may be higher. "We've been seeing more clients moving up to Office 365," Miller said. "They say, 'We're not great at keeping up to date, and we now regret that.'"

That's one of Microsoft's strongest pitches, that a subscription means the customer is always on the latest version, or has the choice of the latest.

In her presentation to Wall Street, Hood also talked about even greater revenue opportunities based on selling more cloud-based services to Office 365 customers. "There is additional 'yield opportunity,' in our language, to add lifetime value here, in addition to adding users," she said. For Hood, "yield" means, in her words, "selling more things on top of an installed unit."

Kevin Turner, the company's COO, hit that same button when talking about the lifetime value of a customer. "When we get a cloud customer completely deployed and get utilization and consumption, it opens up with the first service, it opens up the ability for me to get the other services in there," Turner said. "So it's really a tip of the spear as it relates to the momentum that we get from a customer."


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