This week we started hearing rumors that Microsoft Corporation (NASDAQ:MSFT) is about to reveal Office for the iPad. Now analysts are debating the implications of such a launch, if the rumors are true. Analysts from multiple firms estimate that Microsoft could see an extra $1 billion or more in annual revenue from it.
Microsoft Corporation (NASDAQ:MSFT) has already revealed that it is planning an event for March 27, and the event is expected to focus on Office for the iPad. Estimates for how much annual revenue Microsoft could see from this range from $1.1 billion up to $2 billion, depending on which analyst you ask.
Estimating new Microsoft customers
Morgan Stanley analysts Keith Weiss and Melissa Gorham are estimating that Microsoft Corporation (NASDAQ:MSFT) will see at least $1.2 billion in annual revenue from Office on the iPad. They note that the installed base for iPads is expected to be around 202 million by the end of the 2015 calendar year. They’re assuming a two-and-a-half year replacement cycle, which suggests an installed iPad base of around 190 million by the end of the current calendar year.
Bernstein analysts Mark Moerdler and Zhe Shen estimate that Microsoft Corporation (NASDAQ:MSFT) could see between $1.1 billion and $1.5 billion in annual subscription revenue by putting Office on the iPad. Stifel analyst Brad Reback and his team estimate that the number could go as high as $2 billion.
Why Office on the iPad is a positive for Microsoft
Of course the massive installed base Apple Inc. (NASDAQ:AAPL) has on the iPad means Microsoft Corporation (NASDAQ:MSFT) will suddenly have access to hundreds of millions of new tablet users. However, the decision to put Office on the iPad means more than just more revenue and users.
The Stifel team believes launching Office on the iPad is the first step toward solving a number of problems at Microsoft Corporation (NASDAQ:MSFT). For example, they think the company’s decision to keep its software off competing products hurts its pace of innovation while also keeping it from “potentially monetizing several billions of incremental revenue.”
What Office for iPad could do to Windows
Analysts are also debating about what might happen to Windows if Office comes out on the iPad. The Stifel team thinks it will expedite average selling price compression for the operating system. However, Bernstein analysts aren’t so sure. That don’t think this will have any kind of “significant” impact on the Windows franchise. After all, Microsoft Corporation (NASDAQ:MSFT) has said that while it would put Office on other platforms, the most feature-rich version will always be on its own operating system because it can more tightly integrate it with the O/S.
In addition Corporate users are already on Windows because most of their other software runs on Windows and isn’t available on other operating systems. They say Office is “simply one of a long list of applications.” On the consumer side, they say Office could be an even bigger differentiator for Windows over other operating systems.
They note that some consumers might find the experience of using Office on the iPad to be sufficient for most of their content creation purchases and could delay even longer their purchase of a new PC or laptop. However, these same consumers may have delayed a PC or laptop purchase anyway but used an alternative productivity software suite instead of Windows. Thus, Microsoft Corporation (NASDAQ:MSFT) gives them the option to use Office even if they don’t want to buy another computer.
Microsoft keeps moving to the cloud
The Bernstein team also notes that if Microsoft Corporation (NASDAQ:MSFT) limits the full-featured version of office to Office 365 subscriptions, it would be good for its shift to Cloud. Also they believe the shift toward subscription revenue “will drive significant revenue and EPS, stabilize revenue and disengage revenue streams (e.g. consumer office) from the Windows PC refresh cycle.”
Bernstein remains bullish on Microsoft Corporation (NASDAQ:MSFT), saying they believe the market “embeds an unrealistically bad scenario of no to negative perpetual growth, billions of dollars of annual cash drain from Search and Mobile into perpetuity, and tens of billions of dollars of additional value destruction through ill-fated acquisitions and investments.” They have an Outperform rating and a $47 per share price target on Microsoft.
Stifel, on the other hand, thinks upside from Office on the iPad is already more than priced in. They don’t think the upside will be as big as some investors expect and suspect that 2015 fiscal year estimates for Microsoft Corporation (NASDAQ:MSFT) are too high.
