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Microsoft: Office On iOS Could Offer $2.5B In Revenue

This article is more than 10 years old.

Earlier this week, at the Goldman Sachs tech conference in San Francisco, Microsoft CFO Peter Klein was asked (yet again) about the potential launch of a version of Office for iOS, the operating system used for the Apple iPad and iPhone. And as has been Microsoft's wont on this subject, he dodged the question. On the one hand, he noted that Microsoft has a long history of providing cross-platform applications. (You can run Office on the Mac, for instance.) And he also noted that you can run the limited function Web-based version of Office in a browser on basically any device at all, including iPads and iPhones, to read documents and do some light editing. There are also other select applications available for iOS like the company's OneNote note-taking software, he notes.

But that's not what people want. They want full-fledged Office - Word, Excel, Powerpoint - running on their iPads. And for now, they can't have it.

What Microsoft isn't going to say, but which seems obvious to me, is that Microsoft is simply not going to do that at a time when it is trying to get Windows 8 office the ground, attempting to gain traction for its Surface tablet line (which include a version of Office) and watching PC unit sales get cannibalized by tablets in general and the iPad in particular. The fact that Windows 8 tablets can run Office and iPads can't doesn't matter to everyone, but it does make using an iPad a non-starter for many enterprise buyers. So in declining to produce an iOS version of Office, Microsoft would appear to be trying to carve out a distinct role for Windows 8 tablets in the corporate world.

But in the process, Microsoft is leaving a big pile of money on the table.

In a report earlier this week, Morgan Stanley analyst Adam Holt considered the question and concluded that while Office is a differentiator for Windows tablets, Microsoft's decision is denying itself a big slug of high-margin revenue - $2.5 billion or more. And he adds that if Windows tablet sales remain slow, there could be a shift in policy in the June 2014 fiscal year.

"Office on iPad could be a several billion dollar opportunity," Holt writes in his research note. "While MSFT has resisted offering a full version of Office for the iOS, the company may ultimately decide there is more upside with Office on iPads, particularly if Win tablets fall short of expectations. The Surface RT likely sold only 900,000-1 million units in calendar Q4, while OEMs have pulled back on tablet builds and it may be difficult for MSFT to reach much more than 10% tablet share in calendar 2013." He figures that the company could add $1.3 billion in revenue and profits of 8 cents a share in FY 2014 assuming a $60 ASP and 30% attach rate, while sales into the entire iPad base would raise the opportunity to $2.5 billion in revenue and 16 cents a share.

And there is more to be had if they offered an Android version of Office.

Holt notes that Microsoft actually sees a 3-4x higher attach rate for paid Office on Macs - 30%-40% - than on Windows at 10%-15%.

"The math is compelling and may drive MSFT to move Office," he concludes.

One option, he says, would be to move the company's Office 365 subscription service - which combines client-side software with cloud-based data storage and ongoing software updates - to the iOS platform.

"MSFT may open up Office 365 to iOS/Android versus making the application native, which may limit the near-term revenue, but would skirt the payment to Apple [you wouldn't need to sell it through the App Store] and drive greater adoption of Office 365, which has significant long-term benefits," he writes. "Office 365 Home Premium is priced at $100/year (for up to 5 devices), which equates to $500 in revenue over 5 years vs. only ~$180 for an equivalent perpetual license, assuming an upgrade cycle of ~5 years, or almost 3x the value."

And the core of the question is simply that there is considerable demand for Office on tablets, and the free  Web version is not enough.

"MSFT offers Office web apps which can be accessed through a browser, but these apps have more limited functionality than the traditional desktop version and Office 365 apps," he notes. "MSFT’s free Office web apps let users view, create and do some basic editing using Office apps that run in the Safari browser on the iPad (or on a browser in an Android tablet), but it does not offer all features, such as track changes. Consumers can access Office web apps via SkyDrive for free although there is a 25 GB storage limit and 50 MB file size limit for Word, PowerPoint and OneNote files and a 2 MB file size limit for Excel. Office 365, which is MSFT’s subscription-based Office offering, is currently not available for use on iOS or Android-based devices. In our recent survey work, over 60% of respondents suggested Office was the most important feature to consider for a tablet and there is clearly demand for Office on the iPad."

So, no Office for iOS yet...but eventually, Microsoft may find the business opportunity irresistible.