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Office 365: Cash Cow for Microsoft? - Analyst Blog

Sejuti Banerjea

Office 365 is great news for Microsoft MSFT and the company is just beginning to talk up the story. Through the first three quarters of fiscal 2015, Microsoft boasts the rate of growth in home/personal/consumer subscribers: up 25% sequentially in the first quarter, 30% in the second and 35% in the third when they reached 12.4 million. But in the last quarter, it also added the Commercial Office 365 user base was up 10 points from a year ago, supporting commercial cloud revenue growth of 106%.

And this is where it gets interesting. While the consumer side is encouraging, it doesn’t result in bulk purchases or offer the scope for selling an E3 subscription.

The E3 subscription is what Microsoft wants to sell badly, because it includes not only the core Office application suite, but also cloud-based Exchange, SharePoint and Skype for Business.

If you’re wondering what these services are, here’s a brief description: ExchangeServer combines calendaring software, a mail server and contact manager; SharePoint is a web application platform integrating intranet, content management and document management; while Skype for Business, which re-launched just this week, is Microsoft’s unified communications service (previously known as Lync).

The bundle is something only corporate customers would be interested in and it’s very beneficial for Microsoft because it begins the process of moving on premise operations to Microsoft’s cloud.

Microsoft CFO Amy Hood has said that when a transactional customer that typically purchases an Office license once in every 5-7 years is converted to an E3 license, there is a 1.8X increase in Microsoft’s revenue potential over the course of the relationship.

But not all customers are equal; organizations with 250+ users or devices may opt for what is called an Enterprise Agreement (EA) that covers all the devices. The EA offers an option to buy additional cloud-based services or enhancements as part of a single agreement. This kind of agreement usually comes with a Software Assurance (SA) guarantee, for which Microsoft charges separately.

Selling an E3 bundle to EA customers that pay for nothing more than the software assurance after the initial 3 years will generate 1.4X the revenue and selling it to EA customers that purchase regularly as a part of the agreement will generate 1.2X the revenue.

And the best part is this might not be more expensive for the customer considering the additional services becoming part of the deal. But it’s exactly what Microsoft needs as it tries to hang onto every bit of market share it can.

This is particularly important as Google GOOGL and Apple AAPL continue to chip away at its dominant share of the enterprise market. While Google is banking on Chromebooks, Android, Google for Work and other cloud services, Apple has entered into a strategic relationship with IBM IBM to develop enterprise grade custom apps for IBM enterprise customers, thus making it another enterprise eco-system in the making.  

As companies move to the cloud in large numbers, there is plenty of room for all to grow and Office 365 appears to be just the stepping stone Microsoft needs to pull legacy workloads to its cloud.

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