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Microsoft's New Innovation Is Worth Your Money

By Spencer Knight – Mar 21, 2014 at 10:00PM

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Microsoft may be presenting Office 365 for the iPad. This is a huge opportunity for Apple and Microsoft, as both are the bellwethers in the tech industry. Once their specialties are combined, it may be difficult for Android to compete.

Innovation probably isn't the word that comes to mind when talking about Microsoft's (MSFT 1.97%) recent history. However, this might change on March 27 when Microsoft's CEO, Satya Nadella, will give a "briefing and news focused on the intersection of cloud and mobile computing." This has led to rumors that Microsoft will be unveiling an Office suite for Apple's (AAPL 0.70%) iPad. On the rumor, Microsoft's share price ended March 18's trading day about 4% higher.

There are several topics to discuss regarding this rumor. The first is whether this deal favors Apple, Microsoft, or both. Also, will consumers take to the Office suite with other non-subscription-based competitors on the market? Lastly, what if Nadella does not present Office 365 for the iPad, or what if the details are not as impressive as many are hoping?

Apple adds another arrow in its quiver
Based on the stock prices, it would appear that Microsoft is the big winner in this deal. However, it's possible that Apple will benefit as well. While some Apple followers may not want to admit it, the majority of consumers are accustomed to the Office suite in one way or another. Bringing the Office suite to the iPad -- as opposed to the plethora of Office apps already available -- gives Apple a huge competitive advantage over the competition.

For instance, one of the biggest issues with the iPad is its inability to use PowerPoint and Word. With these two features likely available soon, users will be able to use streamlined, cloud-friendly Office programs. While the Office apps are good, a majority of consumers would probably prefer to have the real thing. This will lead Apple's iPad sales to pick up, and Microsoft's Office 365 subscriptions to increase as well.

Great news for Microsoft's main revenue source
To nobody's surprise, Microsoft's main revenue source has been Office. It is important to note that a mobile Office will likely require an Office 365 subscription. This poses a problem because Google and Apple offer similar office programs without a monthly subscription. However, this does not mean it will be the end of the road for Microsoft. First, the Office 365 subscription will likely be $10 or less per month, and the mobile Office service is well worth that price. Second, most consumers grew up with, and are more familiar with, Office, as opposed to Google's Quickoffice or Apple's iWork.

Microsoft has stated that the run rate for Office 365 subscriptions is over $1.5 billion per year. This indicates that Office users are willing to pay the small monthly fee to use the service. More importantly, according to pages 26 and 28 of Microsoft's June 30, 2013 10-K, Office products provide the company with 44% and 62.3% of total revenue and operating income, respectively. This amounts to nearly $34.71 billion in revenue and $20.75 in operating income from the Office suite and other Office-related products. 

This also proves that the Office suite has continued to succeed during the shift away from stationary PCs. This is important to note because, when the Office suite becomes available on the iPad, it will balloon Office 365 subscriptions considering that over 180 million iPads have been sold. This presents a colossal market opportunity for Microsoft, from college students up to tech savvy executives.

Keep an eye on the 27th
As March 27 approaches, expect to see Microsoft's share price become more volatile. This week, the share price is up 6% compared to the Nasdaq's 1.5%. However, it is important to keep in mind that one negative rumor could deflate Microsoft's share price, and all 6% could be given back.

This probably isn't one of those "buy the rumor, sell the news" situations, unless the news is not as fruitful as expected. Expect Apple's share price to move higher as well over the next 5-7 trading days. Keep in mind that Apple is still the No. 1 tablet vendor, despite Samsung closing in quickly. However, an iOS tablet with the Office suite will enable Apple to distance itself from its Android competitors.

Spencer Knight has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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.

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