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Analysts: Microsoft Didn't Cut Office 365 Prices Just to Be Nice

Analysts: Microsoft Didn't Cut Office 365 Prices Just to Be Nice
In announcing price reductions for Office 365 this week, Microsoft said its cost of running the cloud suite has fallen and that it wants to "pass on" those savings to customers, but some analysts believe the primary drivers for the move have little to do with goodwill.

Specifically, Microsoft is trying to slow down the momentum of Google Apps in the market, jump-start Office 365 sales among enterprises and reduce potential churn among this first wave of customers, according to the analysts.

Google Apps is gaining more and more acceptance among CIOs of large companies and is finally cracking that market, after being considered for years a cloud email and collaboration suite better suited for small businesses.

This trend represents a risk not only to Office 365, which comes in most editions with cloud-hosted versions of Exchange, SharePoint, Lync and Office, but also to the on-premise deployments of those products.

"The price cuts reflect Microsoft's fear of Google. Google Apps for Business has increasing momentum in the enterprise sector, and Microsoft is doing everything they can to prevent further incursions. In this case, Microsoft is pulling on the pricing lever to combat Google," said Gartner analyst Matthew Cain, via email.

Michael Osterman, president and founder of Osterman Research, sees the price cuts as an attempt by Microsoft to spur sales of Office 365 among enterprise customers, given that most of the suite's sales have come from small companies since its launch about eight months ago.

"A key reason for the price cuts is likely that Microsoft's enterprise adoption numbers are not quite where the company wants them to be," he wrote in a blog post.

How successful the strategy will be isn't clear, because there is "substantial variation" in how demand increases depending on the size of price reductions, according to Osterman.

His firm's research shows, for example, that cloud-based email services that cost US$20 per seat, per month make 16 percent of midsize and large companies "likely or definite adopters." At $15, the number of likely or definite adopters jumps significantly to 27 percent, and at $10, the percentage increases to 49. Dropping the price below $10 per seat, per month increases demand, but more modestly, Osterman said.

"I suspect that Microsoft has done its own research and come to a similar conclusion -- that the just-announced price cuts may be significant enough to create sufficient demand among its potential enterprise customers to meet the company's enterprise adoption targets," Osterman wrote.

Office 365 comes in a variety of editions, all priced differently on a per-user, per-month subscription basis.

Prices for the four plans for midsize businesses and enterprises, called E1, E2, E3 and E4, fell, in that order, from US$10 to $8; from $16 to $14; from $24 to $20; and from $27 to $22.

Office 365 also has a plan for small businesses, called P1, which has a 50-user limit. An email-only option with just Exchange Online, as well as other alternatives, are also available. The P1 plan price remains the same at $6 per user, per month.

By comparison, Google Apps' standard edition, which is limited to 10 users, is free, while its enterprise edition, called Google Apps for Business, costs $50 per user, per year, which amounts to about $4.16 per month, for customers who sign an annual contract. It costs $5 per user, per month if the contract is renewed monthly.

Microsoft also said that plan A2 of the upcoming Office 365 for Education will be free for students, faculty and staff, and that prices for other education plans for staff and faculty have been reduced aggressively.

Here as well Gartner's Cain sees the shadow of Google Apps, which is free for educational institutions.

"Regarding the drop in fees for the education market, Microsoft dropped fees simply because Google does not charge edu customers at all, and consequently Microsoft was increasingly losing share in the crucial edu market. Microsoft's attempts to monetize the edu market were ill-advised from the start, and this was a much-needed correction," Cain said.

The A2 plan includes hosted Exchange, SharePoint, Lync and Office Web Apps. Office 365 for Education will be launched in the summer.

Microsoft's new prices apply only to new customers and to existing customers when their contracts are up for renewal. This means, for example, that a company in the fifth month of a one-year Office 365 deal will pay the old, higher prices for the remaining seven months and renew the contract at the new, lower prices.

Nucleus Research has analyzed return-on-investment (ROI) in some companies that have implemented Office 365 and found that the Microsoft suite has delivered on lowering costs and increasing efficiency, even at the original prices.

"It's not surprising that Microsoft is trying to accelerate adoption of Office 365. The more customers it has on board, the more cost-effective it is for them," said Rebecca Wettemann, a Nucleus Research analyst.

Being able to entice existing customers to stick with Office 365 by lowering prices is important because churn is high in the first six months of a company's deployment of a cloud-hosted suite in general, Wettemann said.

"Churn drops significantly after six months and doesn't start to spike up again until after three years," she said.

"Better for Microsoft to capture those customers at a lower price point than have Google or someone else compete for them. What Microsoft has done with Office 365 is educate the market that unreliable email or expensive support isn't acceptable for email communications, even for small companies," she added.

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

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