What the Microsoft Office Price Rise Means for Investors

Microsoft (NASDAQ: MSFT) announced the first price increase for its Microsoft 365 and Office 365 subscriptions since launching the subscription offering more than ten years ago. In its announcement, Microsoft highlighted all the added value it has brought to the software suite over the past 10 years, justifying its price hike. Indeed, new services like Microsoft Teams have become invaluable for many workplaces in the age of working from home.

Microsoft’s decision to increase its prices should appear both on the top and on the bottom. Here’s what investors can expect.

Microsoft Teams, a 2017 addition to the Microsoft 365 suite. Image source: Microsoft.

What exactly is changing?

Microsoft is specifically changing the commercial prices for Microsoft 365 and Office 365. The consumer prices don’t change at all, so if you personally subscribe to the service, you won’t see any change in your monthly or annual Microsoft bill. The new commercial pricing will not come into effect until March 1, 2022.

Level of service

Current monthly price per user

Monthly price per user 1/3/2022

Percent increase

Microsoft 365 Basic Enterprise

$ 5

$ 6

20%

Microsoft 365 Enterprise Premium

$ 20

$ 22

ten%

Office 365 E1

$ 8

$ 10

25%

Office 365 E3

$ 20

23 $

15%

Office 365 E5

$ 35

$ 38

8.6%

Microsoft 365 E3

$ 32

$ 36

12.5%

Data source: Microsoft.

The price increases will affect the 300 million paid Office 365 and Microsoft 365 commercial seats. But they won’t all see the price go up at the same time. Microsoft is locking in long-term contracts with companies, so the full impact is unlikely to show until much of fiscal 2023.

What kind of impact can investors expect?

When the price increase is fully rolled out, the existing 300 million subscribers will pay at least $ 1 more per month, but $ 2-3 in most cases. Also take into account that the price increases for lower service levels are more substantial (in percentage) than for higher levels. This could push more companies to switch to higher tier services, leading to further revenue growth.

Subscriber churn rate shouldn’t be a major concern for Microsoft. Not only is this its only price increase in the history of the service, but it also has a divide around its software suite. No company wants to spend hours retraining their workforce on a competing product, and it’s standard across industries to use Microsoft’s Office suite. Thus, the potential for lost income due to attrition is minimal.

An average increase of $ 2 per user would translate to $ 7.2 billion in additional revenue. This is in addition to any organic subscriber growth the business can produce. For reference, Office 365 Commercial revenue grew 25% year over year in the fourth quarter. And during the company’s fourth-quarter earnings call, CEO Satya Nadella said he was seeing double-digit year-over-year seat growth across all segments.

Wedbush analyst Daniel Ives expects the price hike to generate an additional $ 5 billion in revenue in fiscal 2022.

It is important to note that the increase in income is expected to boost profits considerably. Microsoft has no plans to add anything more to the suite than it has already. Operating costs will not increase more substantially compared to the old pricing. As such, the bulk of that revenue increase will go to Microsoft’s bottom line.

Microsoft generated nearly $ 70 billion in operating income in fiscal 2021. Adding $ 4 billion or $ 5 billion in additional operating income with a simple price increase equates to an increase of 6 or 7% of operating profit. And don’t forget that the service continues to increase subscriptions. As such, rising prices are expected to worsen tech stock earnings growth for years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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