Consumer Office 365 tops a half-billion dollars in annual revenue run-rate

Quarter-over-quarter growth rate slows as subscriber rolls get larger; 5.6M consumers now rent Office

Microsoft's Office 365 "rent-not-buy" subscription service is at an annual revenue run-rate of more than half a billion dollars, Microsoft signaled last week.

According to CFO Amy Hood, Microsoft ended the June quarter with more than 5.6 million Office 365 subscribers to its consumer-grade plans, labeled "Home" and "Personal." The former sells for $100 annually, while the latter -- which was introduced in mid-April -- lists for $70 a year.

Microsoft does not disclose the mix of Home and Personal in its Office 365 subscriber base, but if most consumers have Home -- likely because it's been available for more than a year longer -- the annual revenue would be north of $500 million. A 70%-30% mix in Home's favor, for instance, would still mean annual revenue of $509 million.

In the June quarter, Microsoft added approximately 1.2 million subscribers to its consumer Office 365 rolls, a quarter-over-quarter growth rate of 27%, but a year-over-year increase of 460%.

Sequential gains have slowed significantly since an early explosion of subscriptions from a very small base: In the third quarter of 2013, with 2 million subscribers to Office 365 for consumers, Microsoft's quarter-over-quarter gain was 100%, for example. As the subscriber base gets larger, Microsoft will naturally face a tougher time maintaining sky-high growth rates.

That's exactly what one Wall Street research firm expects. In a note last week published on Barron's website (subscription required), Portland, Ore.-based Pacific Crest Securities said it anticipated 1 million new consumer subscribers per quarter. If Pacific Crest's forecast is accurate, the quarter-over-quarter gain for the three months ending Sept. 30 would be about 18%, but would represent year-on-year growth of 230%.

Other consumer Office revenue was also up during the June quarter, Microsoft said, citing a 21% increase in income for the period. Booked in the Devices & Consumer (D&C) Licensing group's financials, that revenue -- which Microsoft did not put a figure to -- was from traditional single-license copies of Office sold at retail or as downloads.

But except for those few glimpses into the consumer Office business, Microsoft has been notably close-mouthed about other aspects of its subscription model, such as the percentage of all consumer Office revenue attributed to Office 365; the "churn rate," the percentage of customers who do not renew when their annual plans come due; or the effectiveness of its trial program in converting users to paying customers.

Most new Windows 8.1 PCs, for example, come with a 30-day trial to Office 365; the trial can also be acquired from Microsoft's website.

Nor would Microsoft assign credit for Office 365's gains -- whether on the consumer or commercial side -- to any specific move it has made, including the release of Office for iPad in March.

When a Wall Street analyst asked Hood about the source of a large gain in cloud revenue -- which includes Office 365 for businesses -- and if Office for iPad played a part, the CFO declined to name any one factor. "I wouldn't point to one product area," Hood answered.

Office 365 consumer subscription growth
Microsoft has added an average of more than 1 million subscribers to the consumer-grade Office 365 plans each quarter since it rolled out the 'rent-not-buy' concept in early 2013. (Data: Microsoft.)

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is

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