Microsoft's OneDrive changes: Follow the money

Money bags, full of cash.
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For every 1% of the free user pool Microsoft converts to paid, it could realize $107M additional annual revenue

Microsoft could raise more than $100 million in additional annual revenue for each percentage point of OneDrive users the company prods into paying for storage space under new policies outlined last week.

Although Microsoft has not disclosed what portion of its OneDrive user base pays for storage and what fraction relies on only the free allotment, an analysis of the service's changes using available information shows that the Redmond, Wash. firm could earn nearly $107 million more each year by moving just 1% of its users from the "free" column of the ledger to "paid."

If Microsoft could somehow push, pull or drag 10% of the OneDrive estimated free user base to the lowest-priced paid option, the company would record almost $1.1 billion in extra income annually.

Not surprisingly, Microsoft said nothing about making more money when it announced the OneDrive changes, but instead blamed storage hogs for ruining it for everyone, prompting the company to cut storage across the board.

"A small number of users backed up numerous PCs and stored entire movie collections and DVR recordings. In some instances, this exceeded 75TB per user or 14,000 times the average," Microsoft said on a company blog posted just before midnight a week ago. "Instead of focusing on extreme backup scenarios, we want to remain focused on delivering high-value productivity and collaboration experiences that benefit the majority of OneDrive users."

Among the announced changes, the one that got the most immediate attention was the elimination of unlimited storage for subscribers to Office 365 Home and Office 365 Personal. Those accounts will be rolled back to a maximum of 1TB, the amount to be offered to new subscribers as well.

But Microsoft made other changes to OneDrive, too. It eliminated the 100GB and 200GB plans for new customers, but allowed current customers to keep the $2 per month ($24 annually) and $4 per month ($48 a year) deals. In place of that pair, Microsoft will offer a 50GB plan at the same price as the former 100GB: $2 a month ($24 annually).

Potentially more sweeping, however, was the decision to reduce the free allotment from 15GB to 5GB and to discontinue a widely-used 15GB "camera roll" bonus allowance that the company had given away since September 2014. Those changes will take effect in early 2016, and shrink the free storage space of many OneDrive users by 83%, from 30GB to just 5GB.

Users don't get why Microsoft cut storage

Some customers didn't buy the argument that abuse at the high end justified a reduction in the amount of free space at the low end. "I fail to understand why 'abuse' on the >1TB plan has any relation to the 15GB free offering," wrote a user identified as RenieK in one of the nearly 1,600 comments appended to Microsoft's announcement. "Nothing gets abused there, so why hurt us?"

Others were blunter, and called out Microsoft for not shooting straight.

"I don't think I've seen such a badly-communicated corporate message like this before," said Laz in another comment. "If you want to begin charging for storage, then say it as such. Don't wrap it in layers of frankly ******* excuses like 'a few users abused the service,' and the words 'productivity and collaboration.'

Microsoft did not describe in detail how pervasive the abuse was -- it simply characterized the gluttons as "a small number" -- but perhaps Laz was right, that the unlimited reversal was a red herring.

"Freemium" services like OneDrive always carry massive numbers of users on the free books compared to the paid rolls. And fremium-based firms are always looking for ways to convert free accounts to paid -- that's how the model works.

Clearly, the vast pool of free users is the most likely source of any revenue growth. Thus it should be no surprise that the reduction of the free allotment, which will affect far more people than the ditching of unlimited, or the disappearance of the lower-tier 100GB and 200GB plans, was the key decision Microsoft revealed last week.

Without data from Microsoft, it's futile trying to figure out exactly how the change in the free allowance will affect revenue. But educated estimates that illustrate potential revenue gains are possible.

An estimated 445 million use OneDrive for free

In 2014, 11% of European Union residents who used a cloud storage service paid for the space, according to the EU's statistical department. The remainder relied on a free service for storing and sharing files.

Microsoft does not regularly disclose the number of OneDrive users, whether active or not, but conveniently, CEO Satya Nadella did just that last month. "More than half a billion people manage their documents and photos in OneDrive," Nadella said during an Oct. 22 earnings call with Wall Street.

Taking Nadella at his word, and applying the EU's 11% paid portion to a half billion, or 500 million, results in an estimated 55 million paid users of OneDrive, with the other 445 million on the free service.

It may be impossible to confirm that 55 million OneDrive users pay for storage, but other metrics Microsoft provides make the number seem reasonable. In the same earnings call last month, Nadella said that Microsoft had 18 million consumer-grade Office 365 subscriptions on the its roster. Each of those 18 million accounts represents at least one paying OneDrive customer; depending on how Microsoft tallies, some subscriptions may stand for more than one customer, as Office 365 Home provides a 1TB OneDrive account to up to five people.

Thirty-seven million of the estimated 55 million, then, pay for one of the cheaper, non-Office 365 OneDrive plans. That would represent just 7% of the total of half a billion. That, too, makes sense: In freemium, less expensive plans are generally more popular, with the customer pools shrinking as prices climb.

But it's the 445 million who don't currently pay for OneDrive that Microsoft would want most to tap if it's hoping to boost revenue.

OneDrive conversation chart 1 Data: EU, Microsoft, Computerworld

Microsoft could rake in $107 million in additional revenue for each percentage point of the current OneDrive free-user pool it converts to a paid plan.

Convert 1% from free to paid, collect $107 million

Each percentage point of the 445 million who use OneDrive free of charge represents 4.45 million customers. If 1% of all free users -- again, 4.45 million -- paid for the 50GB plan to get more space, they would generate revenue of $106.8 million annually (4.45 million multiplied by $24 for the 50GBplan).

With the free space slipping to 5GB, those with more than that but less than the former free allotments of 15GB, or with the discontinued camera roll, 30GB, may be willing to pay Microsoft for storage simply because the hassle of moving files to another service can be tedious for those who know how and are motivated, and impenetrable to the average user, who may not be.

If Microsoft were to convert 2% of the current free user base to paid, revenue would total an additional $213.6 million. Five percent? $534 million. Ten percent? A whopping $1.07 billion annually.

It's tough to say how many free users Microsoft might be able to transform into paying customers, but the company's financial team should have an idea. Microsoft has historical data on conversion rates from free to paid, knows exactly how many OneDrive users there are, where the split between free and paid is at, and would certainly have run forecasts and what-if scenarios before making changes of this magnitude.

But this outside-looking-in estimate -- more than $100 million per 1% -- appears to be a significant enough revenue opportunity that Microsoft may have felt it would be worth the pushback from a minority of the millions who store files and photographs on the service.

The company has not addressed the complaints lodged on its one feature-voting UserVoice service, an omission that has some users at the boiling point. If it believes the revenue upside trumps the disgruntlement, it may never respond.

Microsoft has made no secret that it needs to better monetize the Windows user base. Several times over the last 12 months -- and even earlier -- Microsoft has talked about how it must change the Windows business model to fit a time when the OS is no longer predominant. Rather than make money on the front end -- at the sale of the license, whether from a device maker or the end user -- Microsoft expects to earn on the back end, from the sale of apps in the Windows Store, from services like OneDrive and Xbox One Live, from subscriptions such as Office 365, and elsewhere.

More than once, Microsoft executives have referred to such revenue opportunities as "the lifetime value of the user."

In fact, a key part of the strategy underlying the free upgrade to Windows 10 is that by juicing uptake, the company creates more revenue prospects not only for third-party developers who want to sell apps, but also for its own software and services. Microsoft has bet, for example, that Windows 10 users will drive growth of the Bing search engine, and thus the advertising revenue derived from searches. OneDrive, an integral part of Windows 10 and Office 365, has always seemed a natural revenue stream that, if tapped, may be able to make up some of the downturn in Windows licensing sales.

The Office 365 pitch

Microsoft has created other revenue opportunities by ditching the 100GB and 200GB for new customers, even though it's grandfathered in for current customers on the two plans.

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