In a story written by Angus Loten, titled “Microsoft’s Focus on Big Customers Propels Cloud Sales”, published on July 23, 2019 by the Wall Street Journal, the writer concludes Microsoft’s pace of signing up tenants for its productivity cloud — formerly known as Office 365 and, now, more commonly referred to as Microsoft 365 — is a reliable indicator of the value of Microsoft as an investment opportunity.
Yes and no:
Traders looking for short term position opportunities in the tech sector should kick the Microsoft tires based, in part, on Loten’s conclusion. Looking out over the next 6 mos/1 year, the pace of signups for Microsoft’s productivity cloud are highly likely to continue at an accelerating pace. Drivers include Microsoft Office Pro Plus (an evergreen draw for the tangible cost savings it delivers vs buying the shrink wrap alternative) and Microsoft Teams (Microsoft is heavily promoting Teams. There are no indicators it plans to back off of the promotion any time soon). So a strong argument can be made for continued rapid growth in sign ups.
The pace of signups for Microsoft’s productivity suite does not directly indicate the extent to which subscribers are engaged with components beyond Office Pro Plus and Teams.
Engagement is important.
Microsoft has a sunk cost in the development of Microsoft 365 components — SharePoint Online, OneDrive, Planner, Flow, Outlook, etc. If subscribers aren’t engaging with these components, the investment amounts to simply a drag on the profitability (think margin) of selling the suite. Subscribers often experience frustration getting value from these other components.
One of these other components, SharePoint Online, or, shall I say its predecessor — SharePoint running on-premises — has attracted a lot of scrutiny on the topic of engagement. Broadly speaking, the story goes like this: a high percentage of SharePoint stakeholders want to get value out of the computing platform (numbers range from 70 – 85%) but a comparatively very small set of these organizations (published number usually 15%) manage to get there. Not very inspiring if an organization’s objective is to stake out a long term territory on a computing platform.
Subscriber frustration with the task of massaging value out of the other components of Office 365 can build to a level where the perceived value of Office Pro Plus and/or teams fails as a palliative. This is especially the case where subscribers have also sunk, themselves, substantial cost into adoption campaigns, custom development, user training, only to come up with something far short of their expectations and objectives. Partners can also be included in this unsuccessful experience since they usually provide the consulting effort required to deliver.
Microsoft is aware of the user engagement challenge and has invested in efforts to improve the odds of subscribers achieving their objectives for the rest of the applications in the productivity suite. They offer adoption programs, user training programs, and marketing communications collateral — success stories and case studies — to inform subscribers about opportunities to capture value. These efforts have a not insignificant cost for Microsoft.
Long term investors should be thinking about why Microsoft doesn’t publish metrics on subscriber engagement. They should also be monitoring the health of competitive offers (today Google Apps, tomorrow ?) to the Office Pro Plus suite to get an early jump on when to move out of the stock. Alphabet’s recent move to install Thomas Kurrian as CEO for its enterprise cloud offer looks like a really smart hire; payoff may happen sooner than later.
Other competitors worth watching include Slack and Salesforce. The former has established a beachhead with Microsoft’s sweet spot – enterprise organizations. The core Slack offer is a direct competitor to Microsoft Teams. Product marketing at Slack has made a noticeable effort to establish the product as a platform, with extensions offered for Slack to equip users with alternatives to components of Microsoft’s Office 365, including word processing, spreadsheet, presentation and more. The latter, Salesforce, is already recognized by its subscribers as a platform supported by an extensive list of third party developers.
Is Microsoft still at the top of the heap? Certainly, however with engagement looming out there as a constant challenge taking a big position in the stock should not be a “do it and forget about it” decision.