What If Apple Kicked Out Microsoft’s Most Profitable Crutch?

by Brad Moon | December 18, 2012 11:18 am

We’ve talked before about the concept of Apple (NASDAQ:AAPL[1]) morphing into Microsoft (NASDAQ:MSFT[2]). For instance, a few days ago, I wrote about NFC payment and how — in some eyes — by snubbing the technology, Apple could be perceived as being the “evil empire”[3] that stifles innovation industry-wide. That’s the role that Microsoft was once commonly accused of playing.

An interesting piece in CultofMac theorizes another way that Apple could complete the transformation and drive a stake in Microsoft: Kill Office[4].

The Office Gorilla

Microsoft has its fingers in a lot of different businesses, including desktop and mobile operating systems, enterprise software, server tools, video game consoles and Bing, the country’s second-biggest search engine. But the biggest revenue generator in the company is its Business Division, and the big gorilla there is Office.

Microsoft’s productivity suite costs $119.99 to $499.99[5] for a single user, and everyone uses it. Office and its major software titles — Word, Excel and PowerPoint — have been the standard for business, home use and education for years.

How important is Office to Microsoft’s bottom line? In the last quarter, the company reported $16 billion in revenue, with $5.5 billion of that coming from the Business Division (the “MS Office System” generated more than 90% of that number). Of MSFT’s $5.3 billion in profit for the quarter, $3.6 billion of that came from the Business Division.

In other words, Office represented more than 60% of Microsoft’s profits[6] — in a quarter when Office sales were down in anticipation of a new version’s launch, no less!

So yeah … what do you think would happen if Apple kneecapped Office?

Never Say Never

While it sounds impossible, one thing I’ve learned in decades in the technology industry is to never say “impossible.”

My first job after graduation involved IT support at a leading Canadian business school where one of my tasks was transitioning staff and faculty from WordPerfect to Microsoft Word. (Prying people away from software they’re familiar with is the kind of unwelcome job you stick the new guy with.) In 1991, WordPerfect was the standard, and business types were dead-set against adopting Word, which originally had been developed and released for the Mac. It seemed inconceivable at that time that Microsoft’s upstart “Mac word processor” would dethrone WordPerfect as the Windows standard.

You still can buy WordPerfect today. The product is distributed by Corel and it has a market share of a few percent — apparently, lawyers still like it[7]. The point is, it’s not impossible for a business tool that is totally dominant for an extended period of time to get blasted into oblivion by a competitor. It has happened, and both Microsoft and Apple know it.

Apple’s answer to Office — iWork — is made up of three programs: Pages (Word), Numbers (Excel) and Keynote (PowerPoint). All are compatible with their Microsoft equivalents but offer far simpler interfaces. While Office is frequently pointed to as being the poster child for “bloatware” (with extra features that few people use and an install that can eat 3GB of hard drive space[8]), iWork does all the basics, and on my computer, the full install uses less than 400 MB of space.

Where there are multiple Office price levels depending on whether you are a student, professional or home user, Apple offers a single price for all users and doesn’t force you to buy software you don’t need. Each program goes for $20 — buy all three, or just the ones you want. The only price difference is in the iOS versions, which go for $10 and extend the iWork functionality to an iPad or iPhone.

The two things preventing widespread iWork adoption are momentum and lack of a Windows version. Apple does do Windows software — it offers Windows versions of iTunes and Safari — and it could easily port iWork if it wanted to. And in terms of momentum, iPad and iPhone adoption in businesses[9] along with growing Mac market share could be the catalyst that triggers a shift.

The lower price is business-friendly (the $440 saved by buying the iWork suite instead of Microsoft Office Professional would buy a new tablet or two or a commodity PC for a worker), and a case could be made for lower support costs with iWork’s simpler interface.

And, as Cult of Mac points out, Apple uses iWork: A company that successful and that profitable using iWork makes a pretty good case for adoption.

Bottom Line

Unlikely as the scenario might be, having Apple’s iWork replace Office as the de facto standard for business productivity suites would have a certain circularity to it.

Apple went from being at the top of the PC business to a niche player as Microsoft maneuvered its way to the top. At one point, the only thing that saved Apple from bankruptcy was a cash infusion from Microsoft along with a commitment to continue offering Office for the Mac.

Today, Apple is the dominant technology company and Microsoft is the fallen giant. The PC market is stagnating, Windows 8 isn’t exactly setting the world on fire, Surface tablet sales aren’t threatening the iPad and Windows Phone 8 is looking shaky. Microsoft still has Office, but if Apple were to knock that support out, Microsoft could be facing an uncertain future.

While the odds of iWork dethroning Office might be long, one thing seems sure: Microsoft’s long-term reliance on its Office cash cow is riskier than you might think.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  3. Apple could be perceived as being the “evil empire”: http://investorplace.com/2012/12/apple-as-evil-empire/
  4. Kill Office: http://www.cultofmac.com/206183/how-apple-could-really-change-the-world-kill-office/
  5. costs $119.99 to $499.99: http://office.microsoft.com/en-us/buy/
  6. Office represented more than 60% of Microsoft’s profits: http://www.microsoft.com/Investor/EarningsAndFinancials/Financials/fy13/q1/SegmentRevenues.aspx
  7. apparently, lawyers still like it: http://www.lawyersmutualnc.com/blog/wordperfect-limping-boldly-forward
  8. an install that can eat 3GB of hard drive space: http://www.pcworld.com/article/257801/how_to_banish_bloatware.html
  9. iPad and iPhone adoption in businesses: http://investorplace.com/2010/06/apple-mac-and-ipad-demand-surging-in-corporate-market/

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