The more consumers that Microsoft puts on its Office 365 subscription rolls, the less it makes from each customer, data the company disclosed Tuesday showed.
Even though Microsoft has increased subscriptions by double digits for six straight quarters, the average per-subscriber revenue has continued to decline, and for the first time fell under $50.
In the June quarter, which Microsoft reported Tuesday, the company had 15.2 million subscribers to the Office 365 Personal and Home plans, a 23% increase over the same period in 2014.
"We now have more than 15 million Office 365 consumer subscribers, and customers are signing up at a pace of nearly 1 million per month," said CEO Satya Nadella during Tuesday's earnings call with Wall Street analysts.
Microsoft added 2.8 million Office 365 consumer subscribers during the quarter.
For the last year and a half, the pace of Office 365's quarter-to-quarter growth has been remarkably consistent, ranging between a high of 35% (Q1 of 2015) and a low of 23% (the most recent quarter), with between 1 million and 3.2 million subscribers added each quarter.
But revenue gains continued to lag behind the increases in customer numbers.
Plotting that is tricky, however, since Microsoft has disclosed consumer revenue just once, leaving outsiders to extrapolate later sales from the revenue increases that the Redmond, Wash., company does reveal. Tuesday, Microsoft said that revenue had climbed $58 million from the second quarter of 2014.
Admittedly, Computerworld's calculations are unpolished: Microsoft's rounding can distort the estimates over time, and because consumers subscribe throughout each three-month stretch, the numbers may fluctuate if, say, more customers sign up near the start or end of a quarter rather than at a steady rate.
Still, it's the best that Microsoft offers.
The small increases in revenue were striking when compared to the much larger increases in subscriber counts. In the June quarter, Microsoft booked an estimated $185 million on the backs of the 15.2 million subscribers, for an annual "run rate" -- how much the company would generate over the course of four such quarters -- of $740 million.
Although both the quarter's revenue and the run rate were records for the consumer side of Office 365, they were not noticeably different than the $181 million and $724 million annual run rate for the quarter prior, even though, as Nadella pointed out, there were nearly 3 million more subscribers.
[Side note: At Microsoft's tempo of revenue gains, consumer Office 365 has a shot at cracking the $1 billion run rate mark in Q4 2015.]
Because revenue hasn't kept pace with subscriber increases, the average revenue per subscriber has fallen as Microsoft has added more people to the rolls. For the June quarter, Microsoft booked a little over $12 per subscriber. Microsoft recognizes revenue over the length of a subscription -- in four allotments over the course of a year -- so to reach the annual revenue per subscriber, the quarterly number must be multiplied by four.
The subscribers in June were thus each worth an average of around $49 annually. That number was down 17% from the $58-and-change in the second quarter of this year, and off 45% from the $89 figure a year ago.
Microsoft's $49 per subscriber is actually lower than the list price of the least expensive consumer plan, the $70 Office 365 Home.
Of course, Microsoft doesn't collect the list amount for each Office 365 subscription sold. Some third-party retailers aggressively discount Office 365, and it's unlikely they're losing money when they do. On Amazon.com, for example, Office 365 Home can be had for as little as $47 in "key card" format -- a registration code that customers use to activate the suite after they've downloaded the applications -- and sells the $100-list-priced Office 365 Home for $79. Another possible contributor: The 30% cut that Apple and Google take when consumers subscribe to Office 365 from within an iOS or Android Office app.
But that may be the wrong way to look at it, according to Jan Dawson, principal analyst at Jackdaw Research.
"If they weren't doing [Office 365], the overall impact would have been a [larger] reduction in Office revenue," said Dawson in an earlier interview, referring to total consumer sales of the suite.
Minus Office 365, Dawson argued, and with only the traditional "perpetual" licenses -- those that let the customer run the applications as long as desired after a one-time, upfront payment -- things would be worse for Microsoft.
There was evidence of that in Tuesday's earnings from Microsoft, when the company said sales of perpetual-licensed Office to consumers were down $330 million compared to the same period the year before, representing a 42% drop.
As she has before, Chief Financial Officer Amy Hood blamed poor PC sales. "Overall, consumer Office revenue results reflected the decline in the underlying driver of that business, developed market consumer PC sales," Hood said. But she also called out switchers to Office 365 as another reason for the slump in Office. "The transition to Office 365 accounted for 13 points [of the 42 percentage point decline]," she said.
By Hood's calculations, Microsoft would have missed out on another $102 million in revenue if it didn't have Office 365 for consumers.
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