About Those Office 365 Adoption Numbers

Microsoft corporate vice president Yusuf Mehdi mentioned during his appearance at the Ignite keynote that there are now over 70 million active users of the commercial versions of Office 365. But that number isn’t new. What’s going on with Office 365 adoption?

While I often praise Microsoft for its transparency, the firm has made it difficult to ascertain the success of many of its products using traditional methods. With Windows 10, for example, Microsoft has moved from marketshare-type numbers (licenses sold) to usage share (active devices). But it is quite opaque about other products and services. Skype, for example, has apparently never moved past its 350 million user milestone, and Microsoft measure Xbox success on engagement—time spent online, perhaps—rather than boxes sold.

Office 365 sits somewhere in the middle of these two extremes. Microsoft does report the number of Office 365 subscribers from time-to-time, but not at the rate at which it does for Windows. And it does separate its consumer subscribers from its commercial subscribers, the latter of which includes businesses, education, and governmental customers.

Today’s 70 million figure is for commercial subscribers, not consumers. And as noted, it’s not new. Microsoft revealed this figure as part of its quarterly earnings announcement in May 2016. So that number is over three months old.

The latest figure I can find for Office 365 consumer customers is 23.1 million. That number is from the previous Microsoft quarterly/annual earnings announcement in July.

Taken together, we see roughly 100 million people actively using Office 365, or at least paying for it, which one might argue is the more important metric. But this number is problematic on a number of levels.

First, there are 1.2 billion active Office users in the world. So Microsoft has only been able to convert about 8 percent of the Office user base to Office 365. This is a tiny figure for a business that was for several years Microsoft’s biggest source of revenues. The digital transformation at Office, at least for now, is more dream than reality.

Second, there are real concerns about the percentage of Office 365 subscribers that will re-up for the service, especially on the consumer side. It’s not unreasonable to believe that a huge number of those 20 million-ish Office 365 consumer users received the service for free with a new PC. And when that subscription runs out, they may decide to choose a free online option—like Google Docs—instead of actually paying. That kind of loss is doubly damaging because switching can be hard, and it’s unlikely that anyone who does make such a switch would ever come back to Office.

And then there’s the simple fact that 100 million is not a big number for a service that has been available in its current incarnation for several years. Office 365 isn’t new, like Windows 10, it first debuted in 2011. And the consumer versions first shipped in early 2013. Granted, it’s not clear what, exactly, Office 365 is comparable to: Windows 10 is something users acquire once; it’s not a subscription service. And most members of the “billion user club” are free services like Facebook.

Finally, there is the ugly truth that Office 365 is much less lucrative for Microsoft than its old Office business. That is, even if Microsoft does successfully convert its entire Office user base to the service, it will earn much lower revenues and profits than before. This is, of course, a long-term concern that impacts much more than just Office. But then that explains Microsoft’s new financial reporting: By “hiding” Office 365 inside of one of its three core businesses and only selectively releasing usage numbers, Microsoft makes it impossible to compare today’s revenues directly with those of the past.

What this all comes back to, I think, is the cost of Microsoft’s transition from a provider of traditional software to a cloud services vendor. If Microsoft didn’t undergo this transition, it’s losses in Office would be even worse, because users—especially new users—would just choose free online solutions in ever-bigger numbers.

With Office, Microsoft is between a rock in a hard place. Its old Office business was more lucrative, but it was going to disappear no matter what Microsoft did. It’s newer Office 365 service is less lucrative, and it competes with free and low-cost services from competitors, like Google and Apple, that are popular with millennials and education. The goal is to offer the best service it can, while stemming the losses, and trying to actually grow this new business in a pretty hostile environment.

On that note, maybe 100 million for a paid subscription service is in fact pretty damned impressive.