The handwriting has been on the wall for many years. Microsoft’s business model of Windows and Office is in jeopardy. Windows PC makers are losing ground on both ends of the product spectrum, and that doesn’t bode well for Microsoft. Google’s Chromebook, packed with free software and services that compete with Microsoft, are gaining ground on the low end, while Apple’s Mac holds reign over the premium end. Microsoft, Windows, Windows PC makers, and Office are being squeezed in the middle.
What Microsoft should have done is what Microsoft is doing now and it appears to be working. Once long-time CEO Steve Ballmer was kicked out the company became free to do what has always mattered. Software. Microsoft Office apps for Mac, iPhone, iPad, Android devices, and, of course, Windows, have improved dramatically.
The big change, though, is how the Office cash cow is marketed. Instead of boxes of DVDs or internet downloads and annual-like upgrades, Office can be had as an annual subscription service. Businesses love to pay by the month and Office– for the enterprise– has been attractively priced at around $9 per month, per seat.
Microsoft says it now has about 23-million such subscriptions, so even basic math says Office revenue– from subscriptions only– amounts to more than $200-million per month. That equates to around $2.4-billion per year. Add to that online sales and it’s clear that Office remains a cash cow for Microsoft.
Sidebar: One man’s hamburger is another man’s steak. Most estimates indicate that Apple’s Watch business generates more revenue.
In a few short years Microsoft’s new CEO has managed to improve the company’s software, change how software is sold, and move into the cloud storage and management business to compete with Google and Amazon and make money in the process.
Those rapid changes took place after a couple of decades of miserable failures to diversify Microsoft. Failures? Microsoft wasted many tens of billions of dollars in failed investments. Not the stock market. Products.
- Navision – $1.45-billion
- Rare – $375-million
- Tellme Networks – $800-million
- aQuantive – $6.3-billion
- Skype – $8.5-billion
- Yammer – $1.2-billion
- WebTV – $425-million
- LinkExchange – $265-million
- SendIt – $125-million
- Titus – $940-million
- Greenfield – $486-million
- Nokia – $7.2-billion
- Mojang – $2.5-billion
Those acquisitions have done little to diversify Microsoft’s waning fortunes.
Wait. There’s more.
- Windows Me & Bob
- Microsoft Kin
- MSN Messenger
- Windows Mobile
- Microsoft Zune
Yet, after all those failures and tens of billions of dollars wasted on acquisitions and investments, Microsoft is back to making money, diversifying the revenue list, competing well against Google’s free apps, and embedding itself into Apple’s ecosystem with good products.
The adjustment to a subscription model hasn’t come easy, but Microsoft’s suite of applications work well together and the total value is greater than the sum of the parts. That approach is much like the subscription model at Adobe. High value. Modest monthly rate. Subscriptions are here to stay, folks. Look for them soon at an Apple App Store near you.