The revelation that the Microsoft (NASDAQ:MSFT) Office products recently released for the Apple (NASDAQ:AAPL) iPad were topping the charts smacked of an interesting sign considering the current sell-off of the high flying tech stocks. In a time of cloud software and mobile device demand, it's still the old software products of Word, Excel, and PowerPoint that are in high demand when offered via new computing devices such as the most popular tablets. See the App Annie data below:
Of course, it could just be pent up demand from offering the products after a large install base exists. Maybe demand will wane after the initial surge dissipates. The real question is whether this demand creates any value for either Microsoft or Apple.
While the Office products are free to download from the Apple app store on an iPad, the products require a subscription in order to actually utilize the majority of the functions. With an Office 365 subscription, existing users can simply add the new tablet as a device and quickly access the benefits of the product suite. Users without a subscription can try the products with a 30 day free trial and pay $9.99 a month afterwards.
With a lot of existing productivity suites for iOS devices, it appears logical that the majority of the 12 million downloads by April 3 were existing subscribers. This suggests limited revenue growth for Microsoft in the short term from this product launch. Long-term, it might help increase the stickiness of the products and make it more likely for consumers to move towards the suite that can be used seamlessly between a desktop computer and an iPad.
In fact, the technology guy from The New York Times provides a glowing review for the iPad version of the Office suite to only suggest that the user base will only be existing desktop customers that want to integrate the iPad. He suggests the $9.99 monthly fee is steep for users that have already found an alternative word processor or spreadsheet product. Farhad Manjoo does suggest the product worked excellent so at least that is a step in the right direction even if very late.
If customers don't sign up for new subscriptions via the iPad, it isn't clear if Apple will have any direct financial benefits. The real benefit comes from a corporate world already tied into the Office suite no longer having any restrictions from adopting the most popular tablet. This move could add a spike to demand for a slowing market for tablets.
Apple tablet sales reached $11.4 billion during the year-end quarter, but it still amounts to a fraction of the $32.5 billion iPhone sales and the $57.6 billion company wide. See table below:
PC/Tablet Market Shipments
According to Gartner, the tablet market is only expected to reach 89.3 million units in 2014 compared to 278 million units of traditional PCs. The gap suggests that plenty of room exists for tablets to gain more market share from PCs and possibly the Office suite increases that opportunity. Gartner does forecast that ultramobiles included in the tablet segment will surge in 2014. The tablet (including ultramobiles) segment is expected match PC sales at around 270 million units.
Unfortunately for Apple and Microsoft, these won't be devices targeted at the iPad price point and the size to likely support Office product use. The majority of those devices fall into smaller, low-cost devices for the emerging market consumers. Also, these ultramobile consumers are very unlikely to be ones paying $9.99 a month for a subscription.
It's difficult to forecast any situation where the Office products on the iPad provides an increase in revenue for Microsoft. Theoretically, the move adds a compelling reason for iPads to continue closing the gap on traditional PC sales, as users convert to the mobile device. Apple is the clear winner in this move while Microsoft investors are left again wondering what would've been if the company had stuck to operating system and software development for mobile devices instead of hocking its own mobile phones and tablets.
With Apple continuing to trade at a cheaper valuation than the market and Microsoft, it remains the more attractive investment especially with the high flying market segment selling off this past week. The huge cash cushion provides a nice cushion for this volatile market.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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