Office for iPad: A Billion Dollar Opportunity for Microsoft Corporation?

Most of the analysis of what Office for iPad in Apple's App Store means for Microsoft (NASDAQ: MSFT  ) discusses what the move suggests about the company's shifting strategy. For instance, in a previous post I discussed why Office for iPad is Microsoft's best strategic move in years. But what about the potential implications on Microsoft's financials? How could Office for iPad impact the software giant's bottom line?

The impact
Microsoft Office is the undeniable leader productivity software, so it's likely the suite sill see a boost in sales with its availability on the world's most popular tablet. While it will take time for investors to see exactly how many new Office 365 subscriptions its availability on the iPad could inspire, that doesn't stop us from making estimates.

Microsoft Word for iPad. Available with a Office 365 subscription.

Microsoft can make money from new Office 365 subscriptions as a result of the suite's availability on the iPad in two ways. First, users may subscribe to Office 365 from within the Office apps on the iPad. Microsoft only gets to keep 70% of the $100 recurring fee from these subscriptions. Second, users may be persuaded to subscribe to Office 365 thanks to its newfound availability on an iPad yet choose to subscribe on a PC or another device for either $9.99 per month of $100 per year. Microsoft gets to keep 100% of these subscriptions.

I consider it reasonable to assume that 10% of new iPad buyers in the next twelve months and 5% of Apple's current active installed iPad base will subscribe to Office from within Apple's App Store. It is also fairly conservative to estimate that new subscriptions, inspired by Office's availability on iPad yet completed outside of the iPad app, could amount to a figure equivalent to about 2% of new iPad sales in the next twelve months and 1% of the active installed base of iPads.

This hypothetical scenario could result in about $1.15 billion in incremental recurring revenue for Microsoft. Assuming a 75% gross profit margin on these sales (3.5% higher than Microsoft's corporate average), this could boost Microsoft's annual gross profit by about 2%. And thanks to Microsoft Office 365's lucrative gross profit margin, this 2% boost to gross profit would likely have an outsized impact on the bottom line.

But even this understates the billion-dollar opportunity Office for iPad is for Microsoft. Thanks to a smooth transition to a recurring revenue model with Office 365, Office for iPad gives Microsoft investors a solid new stream of cash they can likely count on for years to come.

While it's a shame it took Microsoft so long to finally bring Office to iPad, the opportunity is still meaningful. Sure, these are just estimates based on a hypothetical scenario. But, if anything, these estimates are likely conservative

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Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

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