Competition Weighs on Microsoft’s Office License Revenues
Microsoft’s (NASDAQ:MSFT) average revenue for its Office licenses sold to enterprise and retail customers has been declining due to competition from cloud-based app providers like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Salesforce.com (NYSE:CRM) and also due to increasing lower priced products sales in emerging markets. The MS Office suite entails productivity software applications like Word, Excel, PowerPoint, Outlook and Access. The company recently launched Office 365, a web-based productivity software product, to mark an entry into the fast-growing cloud-computing space. With a 94% market share in the desktop productivity software market, Microsoft is looking at other alternatives like cloud-computing for further growth, but competition is abound which will keep its prices suppressed.
We estimate the average annual license revenue that Microsoft earns from its enterprise customers for office productivity software called – the MS Office pricing license revenue per installed base – will decline from $47 in 2012 to $40 by the end of our forecast period. Trefis members expect a smaller decrease from around $50 in 2012 to $48 during the same period. The member estimates imply an upside of about 5% to the Trefis price estimate for Microsoft’s stock.
- Up Nearly 70% Since The Beginning Of 2023, Where Is Microsoft Stock Headed?
- Up 63% Since The Beginning Of 2023, How Will Microsoft Stock Trend After Q2 Earnings?
- Microsoft Stock Is Up 45% YTD And Outperformed The Consensus In Q1
- Microsoft Stock Outperformed The Expectations In Q4
- Microsoft Stock Is Fairly Priced At The Current Levels
- What To Expect From Microsoft Stock In Q3?
We currently have a Trefis price estimate of $28 for Microsoft’s stock, which is about 10% above the current market price.
Emerging Markets Responsible for Lower Office Pricing
In order to retain its market share in productivity software, Microsoft is offering lower priced products in emerging markets like India and China where business customers are price conscious and can’t afford high-priced products. Since emerging markets form a major share of MS-Office sales, the overall pricing is also declining.
Microsoft in the past has offered MS-Office for a measly $29 in China due to the large-scale prevalence of piracy. While this move led to lower margins for the company, its overall profits increased multi-fold. [1] But how effective would an aggressive pricing strategy be in the long run is up for question given that players like Google are offering web-based productivity software almost free.
Can Office 365 Make a Mark in Cloud-Computing?
Microsoft Office is the most valuable business for Microsoft accounting for more than 30% of the Trefis price estimate for MSFT stock.
While the cloud-computing market is growing rapidly, it is has many contenders like Amazon, Google and Salesforce that are offering their own productivity software at competitive rates which will force Microsoft keep a restrain on its prices. But Microsoft has a few core advantages working for it: vast experience in developing productivity applications, a wide user base and a market share of over 90% in desktop productivity software. Early reports comparing Office 365 vs. Google Apps for Business suggest that Office 365 may be slightly better than Google Apps in terms of features, ease-of-use and administration. [2].
Our complete analysis for Microsoft’s stock is here.
Notes:- Microsoft’s Aggressive New Pricing Strategy, BusinessWeek, July 2009 [↩]
- Office 365 vs. Google Apps: The InfoWorld review, June 28, 2011 [↩]