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Into a new office, profiting from an old one
So far, Nadella has earned high marks since taking the reins in February. Shares are up nearly 10% and have touched levels not seen since 2000. While this might suggest Gates has been taking advantage of the stock's strong performance to unload more of his stake, he has been selling for decades to diversify holdings and fund operations of the Bill and Melinda Gates Foundation. CNN reports that the foundation has spent $28.3 billion since its inception in 1997, making Gates one of history's great philanthropists.
He also was one of the great business leaders when at the helm of Microsoft. And outside of Windows, arguably his greatest legacy was the introduction of Microsoft Office in 1988 at Comdex. In the ensuing quarter century, the software has become so popular it has more than a billion users, according to a 2012 claim by the company. Those billion users including lots of individuals, but also the vast majority of the world's corporations, governments and educational institutions. Together, they helped Microsoft's Business Division bring in nearly $25 billion last fiscal year, close to 1/3 of the company's $78 billion in revenue (Microsoft says 90% of the division's top line is due to Office). On the profit side, the picture was even more stark: Business brought in $16.2 of Microsoft's $26.8 billion in net income -- a whopping 60%.
Under-utilized, over-bought?
If anything could threaten that income stream, the results could be devastating for Nadella's honeymoon and for greater Microsoft. And SoftWatch says there's trouble indeed: Many of those billion users don't really use Office much at all. As TechWorld describes it, SoftWatch conducted a study involving 148,500 employees of 51 global firms and the most critical finding was that 70% of workers in those companies don't use Office except to view documents or lightly edit them. In a typical day only 48 minutes was spent using Office, with 2/3 of that in Outlook for e-mail.
The average worker spent just 15 minutes using Excel (8 minutes), Word (5 minutes) and PowerPoint (2 minutes) daily. That's it. Now, it's important to understand we're talking an average worker on a typical day. About 1 in 5 workers was found to be a "heavy" Excel user while 1 in 20 made extensive use of PowerPoint. Clearly, those folks will use the Microsoft apps for years to come and it would be foolish for a corporation to drive its workers away from those programs to alternatives. The same is true of lawyers who have a decade of documents in Word, for example, which might include revision markings from countless back and forth negotiations.
But for nearly everyone else, it's an open question as to whether paying Microsoft's licensing fees makes sense. The Redmond software giant is currently in the process of trying to move customers over to a subscription model under which no one truly buys software anymore. Instead, through Office 365, they pay Microsoft monthly for the privilege of using it. The marketing is resonating with customers at least somewhat. In the most recent quarter, more than 1 million consumers signed on, bringing the total subscriptions among individuals to 4.4 million. And on the business side, Microsoft says the total has more than doubled in the past year.
What Microsoft didn't break down is who is paying what. While individuals spend between $70 and $120 per year depending on how many computers they own and whether they buy a whole year or get billed monthly, large corporate customers have an array of price plans from $2 to $22 per person each month. That said, it's at least $240 per year to give someone in a big business complete access to Word, Excel and PowerPoint. And that's a lot of money for folks who use those programs for about 5 hours each month.
Objects at rest and in motion
For a long time, customers on volume licensing plans have just assumed its logical to keep paying for each desktop or notebook to get a copy of Office. But SoftWatch has highlighted in great detail what a lot of IT departments probably already suspected: That's an awful lot of expense for not a lot of return. Alternatives like Google Apps and Apple's free Office-like Pages, Numbers and Keynote come in at much lower prices and offer file compatibility along with much of the functionality of Microsoft's suite. While none are perfect substitutes, what IT has come to realize in the past half decade is that often productivity isn't about perfection.
The replacement cycle for PCs has gotten longer in part because older PCs have been "good enough" to get the job done but also because more and more work is being conducted on tablets and smartphones. As workers who only do minimal editing of Office documents find themselves using tablets in lieu of PCs, the need to license Office becomes more questionable for them. It's against that backdrop that Nadella recently announced the availability of Office for iPad, which is the dominant tablet in enterprise. (A recent Good Technology survey suggests the iPad has a 91% market share.)
But while it's now possible to get Office on the iPad, whether businesses should bother is another matter. All iPads come with Apple's free suite and Google has its own standalone apps to allow offline editing now as well. Again, there will remain a role for the full-blown Office for years to come, but with these alternatives costing so much less, belt-tightening IT departments may well consider limiting it to those who actually need it.
As that begins to happen, it will combine with the trend of slowly shrinking PC sales and eventually make Office less profitable for Microsoft. That's not going to threaten the company overnight given Microsoft's rock-solid balance sheet and still impressive earnings power. But a breakdown of last year's numbers shows that of the company's five divisions, only the Business Division and Servers and Tools showed any real growth. Windows is shrinking, Online loses money and Entertainment is just marginally profitable (though will likely head lower on the costs associated with the Xbox One rollout).
Microsoft has changed the way it reports numbers so direct comparisons are going to be a bit tricky looking ahead. That said, it's a safe bet that Office won't be bringing in the dollars it once did; if not this year, certainly sometime soon. And that doesn't even consider the potential impact of upstarts like Quip, which have begun to rethink Office apps for the online age in a way that Apple and Google really haven't yet. Microsoft has milked the Office cash cow for a long time. The expiration date on that milk is getting nearer.
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