Microsoft shows revenue hand with Office for iPhone

Ties iPhone app to Office 365 subscription, but analysts unsure whether the carrot is enough to push customers to adopt the rent-not-own concept

Last week's release of Office Mobile for the iPhone nailed down one of the mysteries pundits had pondered -- how Microsoft planned to generate Office revenue from Apple's iPhone and iPad.

The answer: as part of Office 365, the expanded set of rent-not-own subscription plans that debuted earlier this year.

But analysts were split on how effective the strategy would be in generating revenue for Microsoft's Office division. The most optimistic was Bob O'Donnell of IDC, but even he hesitated to call it an unqualified bonus to Microsoft's bottom line.

"It will push some to move to Office 365, but the challenge is that customers are not crazy about [subscriptions]. They're still tough for people to swallow," said O'Donnell.

On Friday, Microsoft released Office Mobile for iPhone, which lets customers run versions of Word, Excel and PowerPoint on Apple's smartphone. The app, Microsoft acknowledged, is primarily intended for document viewing, but users can also create new documents and, with the app's basic tools, edit existing ones.

Microsoft also spelled out the tie to Office 365. While Office Mobile can be downloaded free of charge from the App Store, it only works when linked to an Office 365 account. Subscriptions range from the consumer-grade Office 365 Home Premium -- which costs $100 annually -- to several business plans that start at $150 per user per year and climb to $264 per user per year.

Although rumors of Office on iOS had circulated since the iPad's 2010 introduction, it heated up last November when reports claimed Microsoft would launch a mobile version of the suite this year and tie the software to Office 365. At the time, most analysts agreed that Office 365 was the smart move because it could boost interest in the subscription concept that Microsoft was betting would result in higher and more regular revenue from its Office cash cow. Linking Office on iOS to Office 365 would also let Microsoft avoid the Apple "tax," the 30% cut that Apple takes from all App Store sales.

Apparently, the experts were dialed in to Microsoft's thinking.

"This assigns no revenue to the [Office Mobile] app per se," said Wes Miller, analyst with Directions on Microsoft, in a Friday interview, pointing out that because the app is free, Apple gets nothing.

The approach was not unprecedented in the App Store, as other developers, Intuit for one, give away their iOS apps while requiring that they be linked to a valid software license before they'll work.

But Microsoft has not completely cut Apple out of the revenue loop, as Miller observed. Consumers who haven't yet subscribed to Office 365 Home Premium can purchase a one-year subscription from within the iPhone app.

"That's pretty significant," Miller said of the Office 365 Home Premium offer. Significant because under the App Store rules, that subscription payment is considered an "in-app purchase," thus earning Apple its 30%, or $30 per Home Premium sub.

Most analysts figured Microsoft would circumvent the App Store 30% entirely, but Miller was one of the few last year who thought that the company might pay Apple its split to get Office onto the iPhone and iPad.

In fact, Microsoft is using a hybrid model by keeping the Office Mobile app free, but letting potential customers, at least consumers, buy into Office 365 via the app.

It's possible that the in-app purchase was part of a deal Microsoft and Apple struck during their negotiations, which reportedly were hung up as long ago as late last year over submission and payment issues. Microsoft's handling of its SkyDrive online storage service, which in its iOS app form was stripped of an earlier in-app purchase option, suggests that the offer in Office Mobile wasn't its idea.

Microsoft and its customers can circumvent payments to Apple, however. Because Microsoft also sells Office 365 Home Premium subscriptions directly to consumers -- via its online store as well as at retail -- not all consumers who want Office Mobile will be filling coffers at both Microsoft and Apple.

Business-grade Office 365 accounts will be outside Apple's reach, since they're sold only by Microsoft or its channel partners.

Renewals of subscriptions originally bought from within the app, however, will award Apple 30%, as the in-app purchase results in automatic renewals, also through the App Store. As Miller noted, the only way for a customer to avoid contributing $30 to Apple would be to cancel the subscription in iOS -- Apple has instructions for that in a support document -- then renew using Microsoft's Web-based account management page. "But no one will do that," said Miller.

While analysts saw the Office 365-Office Mobile connection as consistent with Microsoft's strategy to promote the Office-by-subscription model, most were unsure the iPhone app would significantly boost Office 365's sign-up and retention rate.

"I think [additional revenue from Mobile Office sign-ups] will be incidental," said Miller. "Microsoft's mostly back filling a need that's been there for a while."

"I don't see this as a powerful incentive for companies to get to Office 2013," said Frank Gillett, an analyst with Forrester Research, referring to the version of the locally run software suite that Office 365 customers can install on up to five desktop and notebook computers.

Like O'Donnell, Patrick Moorhead, principal analyst at Moor Insights & Strategy, portrayed Office Mobile as an interesting carrot, but not one to tip large numbers onto the sub side. "Office Mobile takes away an objection for enterprises that are looking at Google Apps rather than staying with Microsoft," Moorhead said. "This is more about keeping existing Office customers happy."

Part of their pessimism was triggered by the iPhone-centricity of Mobile Office. While the app can be run on Retina-equipped iPads and the iPad Mini, on those tablets it appears as either shrunken to the actual size of an iPhone display or as a blocky 2X-expanded view, neither of which are satisfactory.

By nature, tablets with their larger screens make a more efficient platform for Office, the analysts said, and would be a bigger draw -- a better carrot -- for Office 365 than the iPhone, even though Apple's smartphone is well-entrenched in business and popular with consumers.

"They're continuing the artificial advantaging of one product over another to change customer behavior," said Gillett of Forrester, criticizing Microsoft's iPhone-only emphasis. "We think that's a major mistake. In their eyes, not providing Office for iPad will motivate people to buy Windows tablets. That's baloney. People have already bought iPads."

If Microsoft does produce an iPad version of Office it will likely use the same Office 365 tie-in to monetize it, the experts said.

Office Mobile for Office 365 Subscribers is available on the App Store. As of Monday, it was the 34th most popular free app on Apple's outlet.

This article, Microsoft shows revenue hand with Office for iPhone, was originally published at

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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Copyright © 2013 IDG Communications, Inc.

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