Microsoft’s Gamble on Free Office Apps for Mobile Devices [Microsoft Corporation(NASDAQ:MSFT), Apple Inc.(NASDAQ:AAPL), Google Inc(NASDAQ:GOOG)]

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December 5, 2014 12:14pm NASDAQ:QQQ NASDAQ:QQQQ

microsoftHave you heard the new app buzzword, “freemium?” Techies spawned it to describe apps that recruit consumers with free basic services. Then, consumers can easily upgrade at a cost. Even Microsoft Office isn’t immune to it, which is why Microsoft Corporation(NASDAQ:MSFT) announced it would make

the software free for the growing pool of mobile device users. However, one-third of Microsoft’s annual revenue still comes from Office.

That amounts to $26 billion of $87 billion, which means the decision could have a huge effect on Microsoft’s bottom line. Here’s what you should know.

The Startup Shakeup

Since 1988, Microsoft’s Office suite of work programs – which include Excel, PowerPoint and Word – has been the king of office productivity. But over time, cheap or free alternatives from tech startups and enterprises like Google Inc(NASDAQ:GOOG) and Apple Inc.(NASDAQ:AAPL) have chipped that away.

Microsoft counts more than 7 million subscribers to its latest suite, Office 365, and more are signing up. Even so, analysts say Office is at a point where it can no longer lead by using the traditional pay-to-play model.

Analysts say the booming personal computer craze of the late ’90s and early 2000s are what made Office a mainstay. Microsoft ruled the consumer computing market back then, with as much as a 95% share until 2004. That’s when competition set in, sending its market share to a mere 20% by 2012.

But since then, traditional PC sales have taken a backseat to mobile devices on the radar of scrappy startups. For example, Evernote allows customers to create Office-esque docs, but for free.

Microsoft execs must have caught on. They announced on November 6 that free versions of Office would be released for Android, iPhone and iPad users. By doing so, Microsoft hopes to connect to more mobile users for a lower price, analysts say.

Free will be better than the $90 the company previously charged for the suite on the iPad, which left a bit to be desired among consumers. While the use of Office by businesses grew 8% over last year, its consumer use went up just 2%.

What’s more, Microsoft has changed that pricing scheme to be more attractive. For the average personal user, access to Office 365 costs just $6.99, compared to what used to be $150

Office’s expansion into the mobile market also makes Microsoft more competitive against Google, analysts say. Google has targeted enterprise Office 365 users with its own suite, Google Apps for Business.

By doing so, Google’s cloud office market share has grown from 10% to 33% to 50% from 2007 to 2012.

But Office’s move to free reinforces the use of the desktop Office suite, which keeps documents under the same software umbrella. And hopefully out of the reach of third-party apps.

But that’s not always the case. Microsoft has also worked to increase Office’s appeal by partnering with other big tech companies.

On November 20, it integrated cloud storage provider Dropbox into its Android mobile app. That allowed consumers to link their Dropbox account to the suite.

The company also integrated Skype to offer a document chat service in Office 365. With it, collaborators can pull up PowerPoint and Word documents and work together remotely.

A Warm Reception

In spite of the move to mobile devices, consumers still connect with Office. Even before the latest free version of Office came out, iPad users had already downloaded it 40 million times.

Just four days after the free version of Microsoft Word was released on iTunes, it became the most popular app in the iOS App Store.

Office Excel and PowerPoint also claimed top spots at eight and 10, respectively. But Apple’s alternative apps – Pages, Numbers and Keynote – remained at 16, 17 and 18.

It’s worked on other platforms, as well. As of November 23, it’s been downloaded more than 10 million times on Android’s Google Play store.

The Path to Profitability

While there’s no doubting Office’s popularity among consumers, making a profit off it is Microsoft’s new challenge. But with the addition of free Office, analysts say it’s already preening the next generation of subscribers.

And it was doing fine before the change, with consumer Office revenue up 7% as of September. This means that if Microsoft succeeds, it will be able to snap up a whole new set of paying subscribers.

The resulting financial windfall, in theory, should offset the loss in licensing revenue. In the coming quarter, look for the number of Office 365 subscribers to jump.

If it rises sharply in relation to previous quarters, Google and its kin may find that taking down the office app king might be that much harder.

by Tom Sandford

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

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