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The more customers Microsoft adds to Office 365, the less it makes from each subscriber

Gregg Keizer | July 23, 2015
The more consumers that Microsoft puts on its Office 365 subscription rolls, the less it makes from each customer, data the company disclosed Tuesday showed.

The subscribers in June were thus each worth an average of around $49 annually. That number was down 17 percent from the $58-and-change in the second quarter of this year, and off 45 percent from the $89 figure a year ago.

Microsoft's $49 per subscriber is actually lower than the list price of the least expensive consumer plan, the $70 Office 365 Home.

Of course, Microsoft doesn't collect the list amount for each Office 365 subscription sold. Some third-party retailers aggressively discount Office 365, and it's unlikely they're losing money when they do. On, for example, Office 365 Home can be had for as little as $47 in "key card" format -- a registration code that customers use to activate the suite after they've downloaded the applications -- and sells the $100-list-priced Office 365 Home for $79. Another possible contributor: The 30 percent cut that Apple and Google take when consumers subscribe to Office 365 from within an iOS or Android Office app.

But that may be the wrong way to look at it, according to Jan Dawson, principal analyst at Jackdaw Research.

"If they weren't doing [Office 365], the overall impact would have been a [larger] reduction in Office revenue," said Dawson in an earlier interview, referring to total consumer sales of the suite.

Minus Office 365, Dawson argued, and with only the traditional "perpetual" licenses -- those that let the customer run the applications as long as desired after a one-time, upfront payment -- things would be worse for Microsoft.

There was evidence of that in Tuesday's earnings from Microsoft, when the company said sales of perpetual-licensed Office to consumers were down $330 million compared to the same period the year before, representing a 42 percent drop.

As she has before, Chief Financial Officer Amy Hood blamed poor PC sales. "Overall, consumer Office revenue results reflected the decline in the underlying driver of that business, developed market consumer PC sales," Hood said. But she also called out switchers to Office 365 as another reason for the slump in Office. "The transition to Office 365 accounted for 13 points [of the 42 percentage point decline]," she said.

By Hood's calculations, Microsoft would have missed out on another $102 million in revenue if it didn't have Office 365 for consumers.


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