Microsoft (MSFT 0.73%) Office is the dominant productivity software for business. Meanwhile, Apple's (AAPL 1.93%) iPad owns the business tablet space.
This dynamic is leading to a strange, symbiotic relationship between the two products. With the release of free Office apps for iPad, Microsoft finds itself leveraging the popularity of the iPad to protect the company's enterprise business. And if Microsoft's new Office strategy is successful, Apple is likely to sell even more iPads in the enterprise space.
Why does Microsoft need the iPad?
The rapid adoption of tablets by businesses and consumers, combined with the weakness in PC sales, has the folks in Redmond rethinking their software business model. Specifically, Apple's decision to make its iWork suite of productivity software free is pushing down the price Microsoft can charge consumers for its Office software. Meanwhile, Microsoft Office's business customers increasingly need an enterprise solution for their rapidly growing inventory of tablets.
Three bullets points highlight Microsoft's dilemma:
- Microsoft is increasingly dependent on the enterprise market for revenue growth.
- Weak adoption of the Microsoft Surface tablet puts Office enterprise licensing revenues at risk.
- With a 91% share of enterprise, an Office app on the iPad has become Microsoft's best option in protecting its Office enterprise business.
The changing Microsoft Office environment
Microsoft's consumer licensing business, representing 22% of company revenue, languished in the second quarter of 2014, down 6% from last year. Microsoft also indicated in the company's second-quarter earnings report that it expects consumer revenue will remain under pressure as a result of continuing weakness in PC sales.
Weakness in consumer licensing revenue places even more importance on the company's commercial licensing segment, which now accounts for 41% of company revenue. Microsoft was able to grow its enterprise business 8% in the second quarter of this year, despite reduced licensing fees resulting from the migration of businesses to the Office 365 subscription model.
Initially, Microsoft's tablet strategy kept Office exclusive to the company's Surface tablet in the hopes Office popularity would drive business adoption. Recent earnings results show the strategy has had very limited success. While Surface revenue doubled to $893 million in the latest quarter, Microsoft's share of the tablet market remains in the single digits.
Meanwhile, the Surface tablet business continues to lose money for the company. Given the marginal share of the Surface, Redmond needed a way to quickly get its Office software into the tablet space. The solution: making free Office apps available in the Apple app store. Office apps are free to download and can be used to view Word, Excel, and PowerPoint files. However, users need to have a paid subscription to Office 365 to make changes to Office files.
Android tablet adoption is weak in business
Despite high overall tablet market share, Google's (GOOG 1.66%) Android operating system has seen limited adoption in the enterprise market. A significant number of Android tablet manufacturers continue to target the low-end consumer market with low-priced, underpowered machines. IDC analyst Ryan Reith, in an AppleInsider interview, described these tablets as "kids tablets."
The result is a smaller number of Android tablets suitable for business applications than the market share numbers would indicate. Meanwhile, business app development problems resulting from Android fragmentation are holding back business adoption of high-end Android tablets.
Foolish takeaway
The iPad's dominance in business and Microsoft's increasing focus on growing its enterprise business appears to be creating a symbiotic relationship for the two products. At the time of writing, Microsoft's Word, Excel, and PowerPoint apps held the top three spots in the Apple App Store's free iPad app list.
Microsoft's ability to leverage the popularity of its Office iPad apps could provide the edge the company needs to maintain its dominance in the enterprise market. Office success on the iPad could also provide Apple with an advantage in the enterprise space that Android may not be able to overcome.
Investors should keep a close eye on Microsoft's ability to tie commercial Office 365 subscriptions to the "free" iPad Office apps. If the strategy works, it will be good news to both Microsoft and Apple investors.
