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Why Microsoft Corporation Shouldn't Mind Apple's PC Jab

By Evan Niu, CFA – Mar 24, 2016 at 3:15PM

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Microsoft cares a lot more about Office 365 than Windows 10.

Phil Schiller calls iPad Pro the "ultimate PC replacement." Image source: Apple.

At Apple's (AAPL 0.19%) product unveiling earlier this week, the Mac maker took some characteristic jabs at the Microsoft (MSFT -0.18%) Windows camp.

Marketing chief Phil Schiller positioned the new 9.7-inch iPad Pro as the perfect upgrade from a Windows PC, noting that there are currently over 600 million PCs in the world that are over 5 years old in desperate need of an upgrade. Schiller also noted that the "majority" of customers buying an iPad Pro are coming from Windows. Meanwhile, the 9.7-inch display remains the most popular size among iPad buyers.

Word and Excel on iPad Pro. Image source: Apple.

While the jabs are expected considering the fact that Apple and Microsoft have been competing for decades, the software giant shouldn't mind at all.

"Cloud-first, mobile-first"
During Satya Nadella's short time as CEO, the executive has made absolutely incredible progress diversifying away from the PC market and truly embraced a cross-platform monetization strategy like never before. To be sure, Microsoft is still very much in the business of selling Windows 10 licenses, particularly after the free upgrade window closes on July 29 of this year (on the consumer side).

But Microsoft now has plenty of new ways to build relationships with users on other platforms under its new Windows-as-a-Service model, the most meaningful of which is certainly Office 365. Especially considering the obvious overlap between iPad Pro's targeted enterprise customers, since Office is still by far the gold standard in enterprise productivity.

Word on iPad Pro. Image source: Apple.

Apple still highlights Office 365 as a bundled option when ordering new iPads, and Schiller said that the company has sold over 200 million 9.7-inch iPads to date. Even without knowing how large the current installed base is, there's still undoubtedly plenty of iPads out there in use that Microsoft can target with Office 365, among other services like SkyDrive or Skype.

Microsoft now has 20.6 million Office 365 Consumer subscribers, and Office 365 Commercial seats grew 59% last quarter (some of those iPads are inevitably deployed in the enterprise where the company pays for the subscription).

Keep in mind that monetizing Windows on the consumer level has become more challenging in actual dollar terms over the years as PC upgrade cycles elongate due to modest performance improvements each year. For example, a Windows 10 Home license costs $119. If the user doesn't upgrade for another 5 years, that translates into just $2 per month in revenue. A one-year subscription to Office 365 Personal costs $70, or $5.83 per month. Guess which one is more important.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of 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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Apple Stock Quote
$148.31 (0.19%) $0.28
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$254.69 (-0.18%) $0.45

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