Microsoft's OneDrive changes: Follow the money

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

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Reducing the maximum stand-alone storage plan from 200GB to 50GB, and leaving the latter as the only available, could push more customers at a faster rate to the priciest storage options, the 1TB included with Office 365 Personal and Office 365 Home.

Someone now on either the 100GB or 200GB plan -- and by Computerworld's model, they number approximately 37 million -- will have only one way to buy more space and still stay on OneDrive: Office 365.

Office 365 Personal, which provides not only the 1TB of OneDrive storage, but also rights to install Office 2016 on one Windows PC or Mac, costs $7 per month. That's $5 per month more than the 100GB plan, $3 a month more than the 200GB deal.

Upselling these customers to Office 365 will generate additional revenue at the annual rates of $1.8 million for each 1% composed of 100GB plan subscribers, or $1.1 million for each 1% made up of 200GB plan users.

If, for example, Microsoft was able to convert 10% of the current 100GB and 200GB subscribers to Office 365 Personal, with the ratio divided evenly between the two plans, it would recognize a revenue increase of almost $15 million annually. While that's nowhere close to the amount it could procure by convincing 5% of the much larger group of free users to pay for 50GB of storage, every dollar counts.

And the possible revenue from converting now-free users to those on the Office 365 Personal rolls would be much, much larger.

Convincing just 1% of the estimated 445 million on the free deal to purchase Office 365 Personal would result in a revenue increase of $312 million, or almost three times the amount collected from the same percentage who move up to the 50GB plan. A 3% conversion rate from free to Office 365 Personal would generate an extra $935 million each year. And persuading 5% of the free user base to the $70 per year Office subscription would kick another $1.56 billion into the company's coffers.

Only Microsoft knows why

Only Microsoft knows whether the blanket reductions in OneDrive are intended to stop abuse, motivate more now-free users to become paying customers, or lift Office 365 subscriptions. Or accomplish all with one blow.

A clue that the company is hoping to goose the percentage of paying customers, though, comes from another statistic that Microsoft mentioned last week.

In the Nov. 2 announcement, Microsoft cited abusers using 75TB of space, then added that that amount was 14,000 times the average. Some simple division later, and the average amount of data stored on OneDrive comes to between 5.4GB and 5.5GB. (The exact number depends on whether Microsoft considers a terabyte 1,000 or 1,024 gigabytes.)

Those averages are larger than the future limit for free accounts.

While abusers, and Office 365 subscribers using nearly 1TB, will skew the average to some degree -- and the median data usage would be more informative for outside analysis -- the data available hints that Microsoft believes there are very large numbers already using above the new maximum, and thus in the potential pay-up category.

Another clue that the real purpose of the OneDrive modifications is to increase the numbers in the paid column lies in Microsoft's willingness to defer some of the revenue opportunity for a year in exchange for getting large numbers of customers onto Office 365, the most expensive storage plan.

OneDrive users who will be reduced to 5GB but have more than that stored with the service will be able to claim a free one-year subscription to Office 365 Personal, Microsoft said in a FAQ that went into more detail about the alterations.

The company said that those who accept the offer must provide a credit card, which will be charged only at the end of the one-year stretch.

There were two things notable about the deal. First, Microsoft is ready to defer any additional revenue from free users for a year as long as it can get more onto Office 365, and second, that the offer was for the $7 per month Office 365 Personal, not the $2 a month 50GB storage plan.

Both may be enough to tide over the bulk of those on the free side for a year. But the revenue opportunity for Office 365 is three-and-a-half times larger, assuming the same number stick with it after 12 months as would continue to pay for an extra 50GB.

In other words, Microsoft's playing the long game.

But what will users do?

That is, of course, if customers stick around rather than desert to a rival like Google's Drive or Apple's iCloud, or Amazon or Dropbox or Box, or any number of others.

By the tone of the comments at the end of Microsoft's announcement blog post, some will flee. They may not be in the majority -- millions of free users may well upgrade to a paid plan -- but the loyalists that many called themselves could be influential with scores of others.

And they're not happy.

"How unprofessional of Microsoft to use OneDrive abusers be the excuse for cutting back the service for all," vented Sheeds in one of those comments. "Either target and limit the abusers -- or own up and be transparent about the real reason (presumably $$$) that EVERYONE's service has been cut back."

"People's needs in storage constantly rise. You could've waited a year or two and the users would come to you themselves and buy storage for storing photos from those new [Windows smartphone] flagships with crazy megapixels and 8K video or whatever," said Slawootsky. "What a letdown. This is not the New Microsoft but the old one, at its worst."

"I think the calculation is simple: lose the 'parasitic' free users that cost money while converting some to [Office] 365 customers where they pay for services they would not require (what average user will require 1TB online storage?)," wrote Putsw.

But another commenter, Rich Warren, put it best by tying the OneDrive blowback to some Nadella mantras. "This is the Microsoft that Satya Nadella is carefully crafting? Nothing says 'Mobile-first, cloud first' like an online cloud storage solution that is reducing storage limits," Warren said. "Satya wants people to 'love' Windows, not tolerate it. Nothing makes me want to love a Microsoft service more than knowing I paid for something that Microsoft is outright refusing to deliver. I have canceled my Office 365 subscription."

Onedrive conversion 2 Data: EU, Microsoft, Computerworld

The golden goose is Office 365: Microsoft could realize $312 million in additional revenue for each 1% of the OneDrive free-user pool it converts to Office 365 Personal and its 1TB storage allowance.

Copyright © 2015 IDG Communications, Inc.

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