It looks as if Microsoft (NASDAQ:MSFT) has given up on trying to make money off consumers who want to use its Office productivity suite at home ... sort of.
Over the past few weeks, the software giant has made a series of consumer-friendly announcements regarding its Office 365 subscriptions. First, it offered unlimited One Drive storage. Then, it said if people don't want to use One Drive, they can use Dropbox instead. Finally, Microsoft said if you don't want to pay for Office on your iPad, you don't have to anymore ... and you can have it on your iPhone and Android devices, too.
Although all of these announcements appear, at face value, to appeal mostly to consumers, they provide more value to businesses, where Microsoft makes the vast majority of its Office revenue.
This is the freemium model for enterprise software
While Office has a strong customer base among consumers, Microsoft makes the vast majority of its money off enterprises. The company is slowly converting those business customers to Office 365 subscribers, which the company expects to provide a higher lifetime value than the old model of licensing the software at a set price.
Last year, Microsoft generated approximately $3.3 billion off consumer Office users, and enterprises accounted for approximately $21 billion in revenue.
To put it another way, Microsoft is a lot better at extracting money from businesses than consumers. Its success with consumers in the past was largely due to its Windows monopoly. Now that Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) (NASDAQ:GOOG) have disrupted the Windows empire, Microsoft's stranglehold on the consumer productivity suite is slowly slipping away.
Offering Office for free on the iPad, iPhone, and Android devices is a move to prevent consumers from finding other solutions. Keeping the consumer's attention will allow Microsoft to market Office to businesses better, showing them that its employees already use Office every day.
What's at risk here?
Microsoft's consumer Office licensing revenue declined 8% last year, as most consumers switched to Office 365 or found some other alternative. Overall, consumer Office revenue growth was roughly 0% last year.
In the six months since introducing Office for iPad, the apps have been downloaded a total of 40 million times, but only translated into 2.6 million net new Home and Personal subscribers, which is only a slight acceleration of the pace in the previous six months (2.4 million net new subscribers).
So Office for iPad hasn't exactly been the growth driver for Office 365, and Office revenue from consumers is flat. Giving away Office on the iPad to consumers isn't risking much of anything.
The bigger risk is what would happen to Microsoft's business if consumers stopped using Office. Apple gives away its productivity apps with each new iPhone, iPad, and Mac purchase, and Google offers a free online productivity suite. These free alternatives, coupled with a migration away from Windows, open the door for users to experiment with alternatives. That, in turn, opens the door for businesses to experiment with what their employees use.
Investors shouldn't worry about the amount of revenue Microsoft could miss out on by offering Office for free on mobile devices. It's not enough to make that big of an impact. They should instead focus on the potential upside of selling more Office 365 subscriptions to businesses.
Getting businesses on board
Commercial Office is Microsoft's biggest cash cow, bringing in billions of free cash flow for Microsoft. The company is investing a lot of that money in its commercial cloud business, which includes Office 365 for businesses.
Onboarding new businesses to Office 365, instead of selling licenses, opens the door for Microsoft to offer other cloud computing services. It's already bundling unlimited OneDrive storage for free with Office 365 subscriptions, which I believe is aimed more at businesses than at consumers. With enterprises using those two services, it should be easy to convert them to Dynamics CRM customers, a service that integrates nicely with both, or Azure customers.
Satya Nadella's vision for Microsoft when he took over as CEO was to make it a mobile and cloud computing company. He also said the company would experiment more with the freemium model. His strategy with Office, the company's most important product, is exemplary of this strategy.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Google (A and C shares) and owns shares of Apple, Google (A and C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.