What Office for iPad Means for Apple, Inc.

Most of the analysis on Office for iPad and its meaning for investors has been focused on what it means for Microsoft (MSFT 0.29%). But what does it mean for Apple (AAPL 0.19%)? With the world's best productivity suite now available for Apple's massive iPad business, there are certainly implications.

Microsoft Excel for iPad, available with an Office 365 subscription. Image source: Microsoft.

iPads are now a better PC alternative
The trend of PC sales and tablet sales are starkly opposing. Global PC sales fell 9.8% in the fourth quarter of 2013 compared to the year-ago quarter, according to data from IDC. The problem? Tablets and smartphones are diverting consumer spending. Meanwhile, tablet sales soared 68% in 2013, Gartner says.

Office for iPad gives Apple one more selling point for the many individuals debating between a PC and a tablet. Further, Office for iPad undoubtedly beefs up the iPad as a choice for big business clients that are contemplating which tablet brand their company should adopt.

What about Apple's 30% cut?
Beyond the incremental tablet sales Apple may incur thanks to the fact its iPads now finally have Office, Apple is taking a 30% cut of all Office 365 subscriptions made within the Office apps. Considering that it's been a week since Microsoft launched its Office apps in the App Store and Microsoft, Excel, and PowerPoint are still ranked 10, 20, and 54, among the top grossing apps (at the time of this writing), it's clear that Apple is cashing in on a considerable number of $100 subscriptions.

Microsoft Word for iPad. Image source: Microsoft.

Exactly how much could Apple take in over the next twelve months from its 30% cut? It's reasonable to assume that Microsoft Office subscriptions could amount to about 10% of new iPad sales in the next twelve months and perhaps 5% of the existing installed base of active iPads. This could mean about 12.5 million Office for iPad subscriptions in the next twelve months and $375 million in high-margin revenue for Apple.

Assuming Apple has about a 90% margin on this $375 million in revenue, Office for iPad could boost Apple's annualized gross profit by about 0.5%. While 0.5% doesn't sound like much, it's important to keep in mind that these subscriptions are reoccurring. So Apple can rake in this benefit every year. Sure, this is just an estimate based on is a hypothetical scenario; but, if anything, this scenario is likely conservative.

Microsoft Office for iPad is great news for Apple investors. Not only does it improve the value proposition for the iPad with big business clients and those debating between a PC and an iPad, but it also adds a meaningful reoccurring stream of gross profit for Apple.