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Office 365 consumer revenue lags behind subscription growth

Gregg Keizer | Oct. 28, 2014
Its increase in subscribers was not accompanied by a corresponding increase in revenue, and Microsoft's per-customer revenue has declined.

Microsoft's Office 365 "rent-not-buy" consumer software service gained 1.5 million subscribers in the September quarter, ending that month with 7.1 million on the rolls, the company said last week.

But the increase in subscribers was not accompanied by a corresponding increase in revenue, and Microsoft's per-customer revenue has declined. Even as subscriptions increased 27% over the quarter prior, revenue-per-customer fell 18%, implying that the lower-priced Office 365 Personal has been popular among consumers.

"One interesting thing to note is that Office 365 Home and [Office 365] Personal subscribers grew strongly, from ... 5.6 million last quarter to 7.1 million this quarter," said Jan Dawson, principal analyst at Jackdaw Research, in an Oct. 23 post to his blog. "However, revenue from those subscribers seemed to barely budge as far as I can tell. The number seems to have stayed at around $125 million for the quarter from last quarter to this, despite the growth in subscribers."

Dawson estimated the consumer Office 365 plans' revenue by extrapolating data Microsoft has disclosed in its regulatory filings with the U.S. Securities and Exchange Commission (SEC). The extrapolation was necessary because, while Microsoft typically mentions subscriber counts in those documents, it has only once revealed revenue for the line. Instead, Office 365 Consumer — as Microsoft calls that income in the SEC filings — is included with other revenue streams in a catch-all category labeled "Devices and Consumer Other."

Computerworld also used the SEC filings to put numbers to Office 365 Consumer's revenue, coming up with slightly different results than Dawson. For the June and September quarters, Microsoft earned $126.9 million and $131.5 million, respectively.

Revenue, then, increased just 3.6% between the June and September quarters, while subscriptions climbed by 26.8%. That, in turn, dropped the XXXXXXXrevenue-per-user from $22.66 in the June quarter to $18.53 in the September, a decline of 18.3%.

Microsoft defers Office 365 revenue, then recognizes one-fourth of a subscription each quarter rather than immediately recording the full amount when someone signs up. Computerworld's estimates were also for each quarter.

Dawson speculated that the inability of Office 365 Consumer revenue growth to keep pace with subscription growth was due to one of two things.

"[First], they're increasingly bundling in a whole year's subscription into certain device sales, which is why I think some of the subscribers may be non-paying," Dawson said in a Monday email. "That would still be a 'subscriber' in that they'd have an annual subscription, but they wouldn't be paying. [But] it's only a guess."

Dawson also wondered whether the mid-April debut of Office 365 Personal, a one-license subscription that sells for $69.99 annually or $6.99 monthly, might be having an impact on revenue. "The Personal version...went on sale shortly before the quarter began, so that may be starting to drag down the average price users are paying."


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