U.S. Markets open in 7 hrs 20 mins

Office for iPad is a $1 billion opportunity for Microsoft and Apple

Puneet Sikka

Microsoft finally launches its long-awaited Office for the iPad (Part 4 of 4)

(Continued from Part 3)

Microsoft to ride on iPad sales growth

In the previous few articles of this series, we’ve discussed how both Microsoft (MSFT) and Apple (AAPL) will benefit from Office on the iPad and challenge their common rival, Google (GOOG). In this part, we’ll discuss the monetization opportunity that both these companies can access through this collaboration. As the below chart shows, iPad unit sales have increased from 32 million in 2011 to 71 million in 2013.

Calculating the monetization opportunity

The number of iPads in use is even higher, and if we consider that people use an iPad for an average of three years, the iPads in use as of today should be around 190 million. Now, coming up with the subscription pricing, we assume that the company will require an $8-per-month or $80-per-year subscription plan, which is the same pricing that Microsoft currently offers for Office 365. The subscription plan allows the user to read, edit, and write documents, but without a subscription, the user can only have read access to the documents.

Obviously, not all iPad users will use the Microsoft Office app, and even if they download it, not all of them will pay for the subscription. Assuming only 20% of iPad users opt for the subscription plan for Microsoft Office, Microsoft would sell 38 million subscriptions of Office on iPad (considering we have 190 million iPads in use currently). Paying $80 per year each, 38 million subscriptions would fetch Microsoft $3 billion in revenues. However, not all the money earned by selling Office subscriptions will go to Microsoft. Apple has a policy of keeping 30% of revenues earned on all apps itself. So Microsoft should earn $2 billion, while Apple should take away $1 billion from Office’s iPad subscriptions.

The tablet market should grow fast

The above calculated monetization opportunity is for the current period. However, the future growth for Microsoft and Apple through selling Office subscriptions is even more exciting. According to Gartner, the tablet market grew 68% in 2013 compared to 2012, with Samsung (SSNLF) and Lenovo (LNVGY) gaining share in this market. Although Apple lost share in this market, its unit sales still grew from 58 million in 2012 to 71 million in 2013. Given the growth potential for the tablet market, the decision to open up Office to the iPad is a sensible move from both Microsoft and Apple.

Browse this series on Market Realist: