Microsoft's Office 365 "rent-not-buy" consumer software service gained 1.5 million subscribers in the September quarter, ending that month with 7.1 million on the rolls, the company said last week.
But the increase in subscribers was not accompanied by a corresponding increase in revenue, and Microsoft's per-customer revenue has declined. Even as subscriptions increased 27% over the quarter prior, revenue-per-customer fell 18%, implying that the lower-priced Office 365 Personal has been popular among consumers.
"One interesting thing to note is that Office 365 Home and [Office 365] Personal subscribers grew strongly, from ... 5.6 million last quarter to 7.1 million this quarter," said Jan Dawson, principal analyst at Jackdaw Research, in an Oct. 23 post to his blog. "However, revenue from those subscribers seemed to barely budge as far as I can tell. The number seems to have stayed at around $125 million for the quarter from last quarter to this, despite the growth in subscribers."
Dawson estimated the consumer Office 365 plans' revenue by extrapolating data Microsoft has disclosed in its regulatory filings with the U.S. Securities and Exchange Commission (SEC). The extrapolation was necessary because, while Microsoft typically mentions subscriber counts in those documents, it has only once revealed revenue for the line. Instead, Office 365 Consumer -- as Microsoft calls that income in the SEC filings -- is included with other revenue streams in a catch-all category labeled "Devices and Consumer Other."
Computerworld also used the SEC filings to put numbers to Office 365 Consumer's revenue, coming up with slightly different results than Dawson. For the June and September quarters, Microsoft earned $126.9 million and $131.5 million, respectively.
Revenue, then, increased just 3.6% between the June and September quarters, while subscriptions climbed by 26.8%. That, in turn, dropped the revenue-per-subscriber from $22.66 in the June quarter to $18.53 in the September, a decline of 18.3%.
Microsoft defers Office 365 revenue, then recognizes one-fourth of a subscription each quarter rather than immediately recording the full amount when someone signs up. Computerworld's estimates were also for each quarter.
Dawson speculated that the inability of Office 365 Consumer revenue growth to keep pace with subscription growth was due to one of two things.
"[First], they're increasingly bundling in a whole year's subscription into certain device sales, which is why I think some of the subscribers may be non-paying," Dawson said in a Monday email. "That would still be a 'subscriber' in that they'd have an annual subscription, but they wouldn't be paying. [But] it's only a guess."
Dawson also wondered whether the mid-April debut of Office 365 Personal, a one-license subscription that sells for $69.99 annually or $6.99 monthly, might be having an impact on revenue. "The Personal version...went on sale shortly before the quarter began, so that may be starting to drag down the average price users are paying."
The second seems more likely.
In its latest SEC filing, Microsoft used the word "subscribers" to describe the 7.1 million, rather than, say, "users," a word choice that implied the number was paying customers.
Other factors may also be in play.
Even when Microsoft sold only Office 365 Home -- a five-license subscription -- for $99.99 annually and $9.99 monthly, it wasn't recording revenue that matched those numbers. That wasn't surprising, since Office 365 Home and Personal are regularly available for less than Microsoft's list price. On Monday, for example, Amazon.com discounted an Office 365 Home subscription by 37% (to $63.12) and Personal by 36% ($44.95).
Microsoft also offers college students a very generous deal: $79.99 for a four-year subscription, with licensing rights for two personal computers. That edition, Office 365 University, is considered a consumer version.
Perhaps not coincidentally, Microsoft has seen strong Office 365 Consumer subscription growth in the third quarter -- 1 million in 2013, 1.5 million in 2014 -- the back-to-school quarter as college students prepare for the next school year, especially freshmen who often buy a new computer.
At the September quarter's $74-per-subscriber revenue, Microsoft is on an annual run-rate of $526 million for Office 365 Consumer. But according to Dawson, that's still dwarfed by the sales of Office perpetual licenses, which he estimated at almost five times that of subscription revenue.
The continued dominance of traditional licensing behooves Microsoft to carefully consider its subscription strategy, Dawson said. While some analysts have predicted that Microsoft will move Office to a subscription-only business model, Dawson thought that would be foolhardy anytime soon.
"Traditional Office sales have remained surprisingly robust even in what Microsoft calls the Consumer segment," Dawson said via email. "Unless traditional sales start falling off a cliff, it's okay for Microsoft to continue to drive this slow transition, especially since by my calculations overall Consumer Office revenue is actually growing slightly over time.
"[But] it will be problematic if Microsoft attempts to shortcut this process before consumers are ready. Some consumers like the subscription model, others have resisted it with other products (Adobe's Creative Cloud products spring to mind) and so I think it would be dangerous for Microsoft to go subscription-only too soon," Dawson concluded.
Microsoft acknowledged the transition to subscriptions has been slow. In the September quarter's SEC filing, Microsoft said that non-subscription Office revenue slumped 5% on the consumer side, 7% on the commercial side; it cited customers shifting to Office 365 for the declines.