In the grand scheme of things, the full-scale launch of enterprise chat platform Teams in early 2017 wasn’t a head-turner. Its developer, Microsoft (NASDAQ:MSFT), always seems to have something new in the works. Moreover, owners of Microsoft stock were far more interested in how the acquisition of LinkedIn would impact the software giant, and they were far more thrilled with the progress its cloud computing business was logging.
Besides, a rival called Slack had already established itself as the business group chat service of choice. Never even mind that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) had already unveiled a similar solution, and that Facebook (NASDAQ:FB) was creeping into the same space.
A funny thing happened between then and now, though. Microsoft’s Teams, as it turns out, has become a huge hit with businesses. It’s now the most-used chat platform in that market, supplanting Slack.
For some owners of MSFT stock, it’s an irrelevant achievement. Teams doesn’t generate revenue in and of itself, and won’t do so anytime soon. Microsoft’s Skype has more total users, and it does generate some, although not very much, revenue.
Nevertheless, the success of Teams is a development worth noting for owners of Microsoft stock, as it illustrates the potency of the company’s new cloud-computing business model.
It’s All About the Add-Ons
There was a time not that long ago when Microsoft’s business model was simple and straightforward: Make a new operating system or piece of software, sell it once, improve it for a few years, and then exploit new hardware advances by selling it again. Repeat. The approach was rewarding for owners of Microsoft stock.
Remnants of that model still linger, though by and large we’ve become subscription-based consumers. Now it’s actually a bit difficult to make a one-time purchase of Microsoft’s office productivity suite. The company is steering consumers and business users alike to cloud-based Office 365, which is “rented” for a modest monthly fee.
The new business model has two advantages. One of them is obvious: recurring revenue. The other, less obvious one, is that by offering Office online, Microsoft can seamlessly introduce new add-on tools and services to subscribers.
Office 365 subscribers and LinkedIn users are likely to be well-aware of the fact that the two platforms now work as one. The company’s Outlook e-mail software seamlessly connects with LinkedIn’s data, giving LinkedIn’s users quick and easy access to their Outlook contacts. The connection even allows LinkedIn users to collaborate on Office 365 documents.
But that feature doesn’t actually make MSFT any additional money.
However, MSFT wants to add value, real or perceived, to its existing products that do generate recurring revenue.
Microsoft Teams — which is only accessible to certain Office 365 subscribers — adds distinct value, if the numbers are any indication. IT industry information provider Spiceworks asked more than 900 organizations which enterprise chat platform they were using in 2016 and again in 2018.
In 2016, 13% of these enterprises were using Slack to facilitate intragroup chat, whereas Microsoft Teams was only used by 3% of these groups. As of this year’s look, Slack is used by 15% of these entities, but Teams is utilized by 21% of these organizations.
That makes sense. While Slack is a well-respected product, Teams integrates seamlessly with the software most businesses are already using anyway.
The Bottom Line on Microsoft Stock
If it were just Teams that made Office 365 more valuable, Teams’ growth wouldn’t be noteworthy.
But Office 365 has multiple, valuable attributes other than Teams and its integration with LinkedIn. Microsoft’s cloud-based version of Office integrates with a huge number of third-party apps that makes the software suite a more valuable tool. Indeed, even some features of Slack can be built into Office 365, although Teams offers all of the features that Slack has.
These kinds of bolt-on improvements are the key to the company’s growth and the future success of Microsoft stock. The most popular ecosystems are integrated with more outside platforms than their competitors, while the more apps that are made available via software like Office 365, the more popular that software becomes.
And Microsoft’s commitment in this area goes beyond office productivity software. The company’s cloud-computing platform, Azure, now also works well with third-party apps.
There’s good reason to expect Office 365 to generate accelerating revenue and enhanced customer “stickiness” going forward.
According to Spiceworks, “By the end of 2020, 41% of organizations expect to use Microsoft Teams (up from 21% in 2018), and 18% expect to use Slack (up slightly from 15% in 2018).”
So investors have good reason to believe that MSFT will implement more value-adding features in the future, since they apparently create a self-fueling engine and can help boost Microsoft stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.