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What's a consumer Office 365 subscription worth to Microsoft?

Gregg Keizer | Feb. 25, 2015
Declines in per-subscriber revenue hints at shift to lower-priced plans.

Still, the general trend was clear: Average per-subscriber revenue declined in the second half of 2014.

That's no surprise.

Microsoft launched Office 365 Personal in April. By the numbers, many consumers opted for the cheaper plan, as the quarter-over-quarter declines in the third and fourth quarters were 24% and 11%, respectively, implying a mix that increasingly skewed toward Personal.

The precipitous drop in the third quarter may also have been driven by the March launch of Office for iPad. Throughout Q3, and into part of Q4, the least expensive way for iPad owners to get editing functionality for those apps was Office 365 Personal. (Microsoft freed more features in Office for iPad in November.)

Other possible explanations for the decline in per-subscriber revenue include increased sales of Office 365 University -- the for-college-students-only plan that costs just $79.99 for four years -- which Microsoft includes in the "consumer" group; customers signing up for Office 365 on the monthly plan but not sticking with the subscription for a full year; and more aggressive discounting by Microsoft. All would impact revenue.

On the latter, Microsoft does discount Office 365; it doesn't collect the list amount for each Office 365 subscription., for instance, sells a "key card" -- the retail offer, which includes a registration code customers use after they've downloaded the applications -- for $56 (Personal) and $70 (Home), discounts of 20% and 30% from the all-online deals.

Interestingly, Q4's average per-subscriber revenue of $68.04 was actually lower than the list price of the cheapest plan, the $69.99 Office 365 Personal, a strong indication of discounting, a preponderance of one-license subscriptions, large sales of Office 365 University, or a combination of the three.

It may also be a hint of a high Office 365 Home "churn rate" -- the number of customers who drop a subscription -- since those paying $99.99 annually would probably pay the same for their second, third and following years.

How much lower can Microsoft's per-subscriber revenue fall? Good question.

The slowing of the decline in Q4 -- at 11%, less than half the sequential drop of 24% in Q3 -- may mean the bottom is within sight. Failing a major price cut or extreme discounting, the largest downturns should be behind Microsoft.

The company has taken steps to, if not slow the decline in per-subscriber revenue, then to retain those customers so that it can collect more over the lifetime of a subscription. In June, it upped the OneDrive storage space for Office 365 subscribers to one terabyte (1TB), then three months later removed all restrictions, offering unlimited storage.

Whether moves like unlimited OneDrive can boost retention, whether Microsoft can even make money from consumer subscriptions, is still unknown. Most analysts are convinced that Microsoft has a hard row to hoe when the competition, including Google Docs and Apple's iWork, is free. Of the major productivity application providers, only Microsoft charges consumers for its wares.

"Microsoft is feeling pressure from the bottom end of the productivity market," said Wes Miller of Directions on Microsoft in an interview last year.


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