A Closer Look at Those Office 365 Adoption Numbers (Premium)

Microsoft often speaks about the “transformation” that it is undergoing in its transition to the cloud. But I sometimes wonder if Office will be left behind in this transition.

Yes, Office is technically better poised for this transition than Windows because it is available cross-platform: Microsoft makes a full desktop version of Office available on the Mac, and there are mobile versions of the big Office apps on Windows 10, Android, and iOS, and on the web. But Office still suffers from the underlying problem of the “mobile first, cloud first” world. Which is that, as people move to ever-more mobile devices, they become used to simpler and more consumer-focused apps and services. And in this world, Microsoft no longer commands the cachet it had in the desktop PC world.

I’ve often held up Office 365 as an interesting example of Microsoft’s transformation in this new world because it is so easily understood. The Office applications and suites of the past were dominant on desktop PCs and Macs, and were sold to end users and businesses in very traditional ways. But the Office mobile apps and services of today are a different animal, and they work better—or, work at all—when one subscribes to Office 365. So the health of Office 365, as a business, is one way we can determine how well this transition is going.

That Office was once Microsoft’s largest single business—it surpassed Windows in the days before “mobile first, cloud first”—makes this doubly important for the software giant. That is, the more of its Office user base it can transition to Office 365 the better. So the size of the Office 365 user base is one of the many metrics I examine each time Microsoft releases a quarterly financial report. Which it just did.

While this isn’t the first time I’ve raised an alarm on this topic, I’m not sure Office 365 is growing at an acceptable rate at all. And this leads me to wonder why that might be the case.

First, the numbers. I noted back in September that Microsoft’s then-most-recent numbers for Office 365 subscribers was 70 million on commercial versions (a number that dates back to May 2016) and 23.1 million for consumers (which is from July 2016).

In the October quarterly results (for Microsoft’s first fiscal year in 2017), the firm reported 85 million commercial subscribers and 25 million consumers.

This past quarter? Microsoft never reported commercial subscriber numbers—which I find troubling—but Petri’s Tony Redmond estimates the number might have hit 96 million given previous trends. And consumers were at 25 million. Again.

UPDATE: Microsoft now tells me there are 85 million Office 365 commercial active users. I’ll keep the math here intact, but that is the correct figure. –Paul

120 million may seem like a big number. And it is. It is, in fact, 20 million bigger than the number I cited last September.

But this number still pales in comparison to the 1.2 billion Office users that Microsoft touted for years. And it represents only a tiny percentage of the estimated 2+ billion smartphone users worldwide. Or the several billion users across phones, tablets, and PCs.

I believe there are a number of factors holding back Office 365 adoption, especially with consumers. And that’s because businesses are already pretty comfortable with the monthly subscription scheme.

But consumers are important. And while one might argue that roughly two-thirds of Microsoft’s revenues come from businesses, I will argue back that that ratio is itself old-fashioned. That is, the PC era—where getting work-based software at home was desirable—is over. And now, the push is coming from the opposite direction. Customers expect to use their software they’re comfortable with as individuals at work. Consumers are driving usage going forward, not businesses.

This is especially true of the younger generation that is entering the workforce now or will in the years ahead. They did not grow up on Microsoft Office for the most part, and even those who did simply don’t care about Microsoft or Office. What they are used to are small mobile apps running on non-Microsoft platforms.

And this is where “good enough” comes in. Microsoft Office is almost unarguably superior or “better” than competing office productivity solutions from companies like Apple or Google. But those solutions—the iWorks apps, Google Apps, whatever—are good enough.

And the reason they’re good enough is that most people don’t have complicated needs when it comes to creating or editing documents. They simply don’t need all the features that Microsoft Office offers, and they are probably confused by the complexity of those solutions.

Microsoft gets this, of course. The Office Mobile apps on Windows 10, Android, and iOS—and on the web, too—are stripped-down compared to the full desktop suites. They are also good enough.

And Microsoft will rightfully point out that its office productivity solutions are better. And it is correct to position itself differently from both Apple and other Silicon Valley darlings. In a recent interview, for example, Microsoft’s Chris Capossela noted that Apple stood for “cool,” Facebook stood for “sharing,” and Microsoft stood for “empowerment.” That is, Microsoft gives people the best tools to do cool things; they don’t have to be cool themselves.

But this can’t change the mentality out there. We’re almost to the point where I could imagine a millennial blurting out something like, “Microsoft makes office apps?” There’s just a gap when it comes to awareness and understanding.

And to bring this full circle, nothing says the transition is going slowly more so than what I see as a slow uptick in those Office 365 subscriber numbers.

125 million Office 365 subscribers compared to 1.2 billion Office users is just 10.4 percent. Over at Windows, we’ve seen that 400 million of 1.5 billion PCs, or about 27 percent of all PCs, are running Windows 10. Few would describe the Windows 10 migration as trouble-free. But it’s happened at over double the rate of the transition from Office to Office 365, and in a much shorter time frame.

See the problem?

There is of course one upside to these numbers for Office: Every Office 365 subscriber represents an ongoing source of revenue. Contrast this to Windows 10, which was free for one year, and is basically supported forever (by which I mean for the lifetime of the PC on which it runs, which is pretty close to forever). So Windows 10 is in some ways a sink hole of support costs, whereas Office 365 is not.

On that note, maybe Office 365 is not so bad from a financial perspective. But I’m still curious that those subscriber numbers aren’t moving more quickly, especially given how long Office 365 has been in-market.