One big flaw in that $2.5 billion estimate for Office on iPad

Former Microsoft CEO Steve Ballmer
Credit: IDGNS

Morgan Stanley analyst Adam Holt muses that Microsoft could be leaving $2.5 billion in annual revenue on the table by not selling Office for iOS. He figures Microsoft would earn around $60 a unit, after paying out the 30 percent that Apple skims off app developers. If Microsoft manages to sell Office to 30 percent of existing iPad users, it would gain $2.5 billion in additional sales per year

However, this seems to ignore Microsoft's move to a subscription model with Office 365. 

For consumers, Microsoft is selling Office 365 for $100 a year, which includes downloads to five machines. If Microsoft allows iPad downloads among the five, some number of people who have already bought Office 365 for a PC could get Office on their iPad for no additional charge. 

So even if the 30% attach rate is reasonable, that could reduce the revenue Microsoft would bring in with Office for iPad.

In the enterprise it’s a bit different. Only the most expensive license for Office 365 includes multiple downloads. So the many people who have Office 365 on their work PCs without that most expensive version would need to buy Office for their iPads. 

Even if the math isn't exact, Holt’s premise could still be sound. “Office exclusivity on Win tablets important, but the iPad opp. may be larger,” he wrote.

Microsoft hasn’t said how many Surface RT devices, with their stripped down versions of Office, sold, but many analysts are guessing in the 1 million range. The Surface Pro, which runs full versions of Office, only just went on sale.

The iPad clearly outsold Windows 8 tablets last quarter, but Microsoft has to consider the long game -- if it made Office available on the iPad, how much would that depress Windows 8 tablet sales over the next year or two,.and what would the follow-on effect be for other Microsoft businesses? If that number is greater than $2.5 billion per year -- or whatever the estimated market for Office on iPad would actually be -- then releasing Office for iPad is a losing game.

Rumors about Office for the iPad have popped up regularly over the past few months. AllThingsD recently reported that Microsoft is arguing with Apple because it doesn’t want to pay the 30 percent to Apple for the app download.

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