In June, Microsoft Corporation (NASDAQ:MSFT) announced that it’s releasing Office Mobile for iPhone. This is good news for Apple Inc. (NASDAQ:AAPL) because it is likely that Microsoft will eventually have to design Office 365 for the iPad. And that could mean billions in sales.
Office 365 to Apple
The company’s largest segment is the business division, which houses the Microsoft Corporation (NASDAQ:MSFT) office suite.
Source: Microsoft
The company’s business division represents 33% of the company’s revenue. The revenue in the segment grew by 4% in its most recent quarterly earnings release. The lack of growth in the Windows business segment is driven by the 9.6% year-over-year decline in desktop and laptop shipments.
Source: Gartner
Going forward it’s highly likely Microsoft Corporation (NASDAQ:MSFT) will have to sell its Office 365 to both the Android and Apple eco-systems. I believe Office 365 will be rolled out to Apple first because Microsoft already has Office 365 on the iPhone and iMac.
I don’t think Microsoft will be in a rush to release an Office 365 application for Android. This is because Microsoft is aiming to steal market share away from Android more so than Apple Inc. (NASDAQ:AAPL) as consumers are more loyal to Apple than Android. Most companies aim for the low-hanging fruit, and in this instance, Microsoft Corporation (NASDAQ:MSFT) should have a better chance taking market share from Google Inc (NASDAQ:GOOG).
The growth potential
Apple has an 11.6% market share in desktop computing. Canaccord Genuity is projecting 200 million iPhone unit sales and 101.6 million iPad unit sales in 2013. In 2012, Apple Inc. (NASDAQ:AAPL) had 18.15 million in Mac sales, and assuming a 9% growth rate, Apple should sell about 20 million Macs in 2013. Add it all up, and that works out to be 321.4 million device sales for Apple this year.
Now let’s assume Microsoft Corporation (NASDAQ:MSFT) creates Office 365 and it already has a 98% market share according to latest statistics. If so, that means most Mac users will buy Microsoft Office 365 over Google Inc (NASDAQ:GOOG) docs and other competing products. Remember that almost everyone in the world is trained to use Microsoft Office, which gives Microsoft an effective moat.
The iPad is seen as a substitute to desktop computers in emerging markets, and if Apple can get Office 365 onto the iPad, it’s highly probable the iPad will be shipping with detachable keyboards. If so, Office 365 will reach 101.6 million iPad users. Plus we have to factor in the 72 million install base of current Mac users.
Lets do the math. Lets assume 98% of current Mac users adopt Office 365, and are charged a $100 annual rate for up to 5 devices. Well, each Apple user most likely has an iPhone, iPad, and a Mac. Basing it on just the Mac, we can assume, Microsoft would generate $7.1 billion in revenue from the Apple user base.
Lets assume the tablet market will grow at a compounded 23% growth rate until 2017, based on Taiwan Semiconductor’sforecast. So 100 million tablet sales in 2013 will grow to 414.72 million by 2017. Assuming Microsoft can sell Office 365 to 98% of the Apple tablet crowd, Office 365 could generate $40.64 billion in sales. The license works on up to 5 devices, and tablet owners will also own either an Apple smart phone device, or even a Windows desktop.
Currently Microsoft Corporation (NASDAQ:MSFT)’s business division generates $24 billion in revenue. So if we add that to potential tablet sales growth (which translates to Office 365 growth), we’re looking at $64 billion in sales from the business segment by 2017. Assuming its current 23% profit margins, the Windows business segment will generate around $14.72 billion in profits (net profit is around $5 billion). So over the next 5-years, this new development could grow to an added $10 billion per year.
Microsoft’s consolidated profit is $17 billion, so if we can combine the added contribution from selling Office 365 across Apple’s ecosystem, we can guess that Microsoft’s net profit by 2017 should be greater than $31.72 billion. I have not factored in the growth rate of Microsoft’s other businesses, so this is a very conservative estimate of Microsoft’s potential success.
I also kept the current $24 billion made in revenues from the business segment constant because it’s unlikely Microsoft’s computer segment, or mobile segment, will garner any additional growth. And that’s because Microsoft 365 licenses will transfer from pre-existing Windows devices to Windows 8 phones. That means Microsoft 365 sales will not grow from the increasing adoption of Windows 8 mobile.
Therefore Windows 8 should not be factored into any assumed growth rate for Windows 365. The growth for Windows 365 should only include the added demand from Apple’s ecosystem and product substitution of the iPad in emerging market economies. It is likely the average iPad user will be more affluent than the Android user on a worldwide scale, thus by extension, will also be able to afford Office 365.
Google’s strength is waning
Like I mentioned earlier, Microsoft Corporation (NASDAQ:MSFT) isn’t in a rush to release Office 365 for Android. There is a lot of un-tapped market potential in Apple’s ecosystem, and I doubt Microsoft will want to support Google knowing Google Inc (NASDAQ:GOOG) is a direct competitor. Because of this, Microsoft would like to use the Office suite to bring consumers over to both the Windows 8 and Apple ecosystem. Ultimately, Microsoft has to partner up with Apple, as Apple consumers are extremely loyal.
Source: Piper Jaffray
Demand for Android devices could fall over the next 2 years as phone contracts end. Based on the above statistics, Android users should adopt an iPhone. But, Google can off set this decline with growth from international markets.
Still, I think the Android app market can grow at 23% through 2017 and that Google will maintain 40% of its global market share. This implies Google can grow alongside Microsoft Corporation (NASDAQ:MSFT) and Apple in the post-PC era.
Conclusion
Microsoft’s business segment could be its winning ticket to exponential growth. Apple devices will continue to take market share away from traditional handset manufacturers and growth may be supplemented by emerging markets. Google’s search, app store, and ad services will benefit from an ever-expanding worldwide internet user base, which could grow from 3 billion to 5 billion by 2020. So, if you want to get in on big tech, take a look at Microsoft first, Apple second, and Google third.
The article What is Microsoft’s Next Ten Billion Dollar Idea? originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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