New Microsoft (NASDAQ:MSFT) CEO Satya Nadella is moving his company into the cloud and away from being reliant on customers using its Windows operating system.
He made that transition abundantly clear in a March 27 event where he announced a suite of new cloud services and most importantly a version of Microsoft Office for Apple's (NASDAQ:AAPL) iPad. Office for iPad will be available through the company's Office 365 subscription service, which costs $99 for up to five connected devices or $69.99 annually for individuals using it on a single computer or tablet. Microsoft will also allow people to download the Office apps for iPad for free, which lets users view previously created documents but not edit them or create new ones.
The company also announced a free version of Office for iPhone and Android phone -- Office Mobile -- which lets people view and edit Office documents on their smartphones. Office Mobile was already free for Windows Phone users. The full Office 365 is not available for Android tablets at this time, and Nadella did not say when that might happen
"Microsoft is focused on delivering the cloud for everyone, on every device. It's a unique approach that centers on people — enabling the devices you love, work with the services you love, and in a way that works for IT and developers," said Nadella.
Did Microsoft wait too long?
iPads have been around since April of 2010 and while the lack of Microsoft Office may have been a huge negative in the early days, iPad owners have found solutions. In addition to the countless third-party knock-offs offered in the app store (some for free) Apple itself has made its suite of Office knockoff products free. iPad users can easily edit and create documents that are fully compatible with Office on products that don't cost a dime, so getting people to pay a subscription fee seems like a big hurdle for Microsoft.
By waiting so long Microsoft has ceded some ground to competitors, but the numbers are not as high as you might think. A Forbes survey showed that of the 20% of information workers in North America and Europe that use a tablet for work, 60% of them use some office productivity software on it. Half of those tablets used for work are iPads so only 6% of information workers are using Office alternatives.
A lot of tablet users aren't using any Office alternative and either never will or could be won over by Microsoft. If those users have an Office 365 subscription through work or personally, adding the Office apps to an iPad does not cost extra. Though Microsoft has surely lost some dollars and has opened the door to competitors by waiting this long, the success of Office for iPad likely hinges on the company's ability to sell Office 365 to business for all platforms, not specifically for iPad use.
Businesses still use Office
Over one billion people use Microsoft Office, according to the company -- that's one in seven people on the entire planet. Over the last decade, Office has generated about $180 billion in revenue for Microsoft, The New York Times reported and it remains the standard for business use. "During the holiday quarter Office revenue from businesses rose 10% while consumer revenue fell 24%, partly because the company now sells Office as a subscription, which affects its accounting. While Microsoft no longer reveals how much total revenue it gets from the product, its business division reported nearly $25 billion for the fiscal year that ended June 30; 90% of the division's revenue was from Office," The Times reported.
While products like Google's (NASDAQ:GOOGL) free suite of Office-like apps has made some inroads, many of Google's customers use the service in addition to Office. Office is still the 300-pound gorilla of word processing, spreadsheets, and presentations. The Office products are so standard in business that Word is generic for word processor, Excel is the same for spreadsheets, and Powerpoint basically created its own category for presentations.
Apple benefits from this deal
While Nadella and Apple CEO Tim Cook were making nice on Twitter when Office for iPad was announced, Microsoft can't be too happy that some of the subscription revenue for Office will go to Apple in certain cases. If a customer subscribes to Office 365 online or already has a subscription then Apple gets nothing. But if they dowload the free apps and subscribe on their iPad, Apple gets the standard 30% cut it takes from all publishers, re/code reported.
Realistically the amount of customers who will initiate an Office 365 subscription on an iPad rather than a PC will be small and many of them will be iPad-only users who Microsoft was making nothing on before. I'm sure writing a proverbial check to Apple can't be fun for Microsoft, but the actual dollars are likely to be relatively trivial.
Nadella is making the right moves
Though The Times reported that bringing Office to iPad could mean an extra billion dollars in revenue for Microsoft in 2014, that's a relative drop in the bucket for a company Microsoft's size. The more important move here is the symbolic one with Nadella -- in one of his first moves as CEO -- showing that his company is no longer going to act in an isolated way. Yes, it will attempt to grow Windows but if customers choose to not use the operating system they won't be frozen out of the Microsoft universe.
That's a huge change for Microsoft and it opens up a new customer base for the company. It also gives consumers more choice as part of the previous Microsoft strategy had been to force customers onto Windows devices in order to gain access to Office.
This is a new way of doing business for Microsoft and it's a refreshing change that will likely pay off and keep Office relevant.
Daniel Kline is long Microsoft. He owns a Surface, which came with Office for free. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.