Microsoft this week started selling a new premium-priced corporate Office 365 plan at $35 per user per month, a 59% increase from its previous top-of-the-line bundle.
Analyst reaction was mixed to the pricing and the contents of Office 365 Enterprise E5, as the new plan is called. Some view it as a good deal that will attract small- and medium-sized businesses off the bat, others think it overpriced and unlikely to become more than a niche player in Microsoft's Office-by-subscription portfolio.
"For a small business, it's an easy way to get business communications that includes everything in one package," said Andrew Snodgrass, an analyst with Directions on Microsoft, in a Monday interview. "And the price point is fine, right in the target that they're going for."
Not so fast, countered Paul DeGroot, the principal of Pica Communications, a consulting firm that specializes in deciphering Microsoft's licensing practices. "That's expensive," he said of the $35 per user per month list price, or $420 annually, of E5. "And the main difference between E4 and E5 is that E5 works -- at least according to Microsoft, but given their track record with telephony in the past, this is by no means certain -- and E4 didn't."
Office 365 Enterprise E4 was, before E5's debut, the highest-priced Office 365 plan, listing for $22 per user per month, or $264 annually. (Volume discounts are common: The list price is essentially what someone pays for a handful of subscriptions. Office 365 Enterprise E4, for example, is typically discounted as low as $19 and change per user per month.)
Microsoft will retire E4 at the end of June 2016. Customers who renew their Office 365 subscriptions after that date will have to pay for the higher-priced E5, or drop down to the less-expansive E3 plan, which costs $20 per user per month, or $240 a year. In the latter instance, they can then pay more to, for example, acquire a Skype for Business Plus CAL (client access license) subscription for X number of users, which will provide calling and conferencing functionality.
E5 is $50B revenue opportunity, says Microsoft's CEO
The difference between the list prices of E4 and E5 is $13 per user per month, or another $156 annually. The higher-priced E5 thus represents a 59% increase over its predecessor. (The prior step-up from E3 to E4, or from the most popular plan, by far, to the top-end deal, has also seen an increase. Previously, it was 10%: from $20 to $22. Now the same move, stepping from E3 to the new top-tier E5, is a 75% increase.)
Microsoft has made no bones about its ambition to generate more revenue from Office 365.
In May, Amy Hood, Microsoft's chief financial officer, told Wall Street that there were significant revenue opportunities for the company when it added more cloud-based services -- of which E5 has plenty -- to Office 365. "There is additional 'yield opportunity,' in our language, to add lifetime value here, in addition to adding users," Hood said, defining "yield" as, in her words, "selling more things on top of an installed unit."
During the past two quarterly earnings calls, and elsewhere, executives have talked about their belief that E5 had the potential for a huge revenue boost to the company's bottom line. "With E5, we have expanded our market opportunity for Office 365 by more than $50 billion," said CEO Satya Nadella during a July call to discuss the second quarter's numbers (emphasis added).
Hood has used the phrase "higher margin" to describe E5, meaning it produces more profit than the lower-cost plans. "If you think about our launch of E5, which is a premium SKU [stock-keeping unit] in Office 365, it continues to give us the opportunity to both get more efficient in the infrastructure and to add higher-margin products especially at the fast end," she said in October on the third-quarter earnings call.
In November, Hood elaborated on how E5 would produce more profit. "When you can take an effective sales force with good relationships and add modules ... to the selling motion, we can do so reasonably efficiently, not a ton of marginal costs, but a ton of marginal revenue opportunity," Hood said of the plan in response to a question at the USB Global Technology Broker Conference.
It's all about the money
All the talk about revenue opportunities rubbed one licensing expert the wrong way. "I really think that Microsoft is just rebranding E4 [as E5] because [E4] wasn't successful," said Daryl Ullman, co-founder and chief consulting officer of Emerset Consulting Group, a firm that specializes in helping companies negotiate software licensing deals. "It just didn't provide additional value."
E5 and its pricing, said Ullman, is all about Microsoft driving revenue. "I've said it before, Microsoft drives revenue through licensing," Ullman continued, repeating a line he has used in previous interviews with Computerworld. "They have difficulty bringing in new technology based on the merits. Instead, they bring it in on the basis of licensing."
DeGroot also characterized the soon-to-be-defunct E4 as a failure in the marketplace. "I haven't seen a lot of E4 uptake. E3 is more common in the field," DeGroot said in an email reply to questions this week.
Microsoft, naturally, wants to change that. And Wes Miller, another Directions on Microsoft analyst, sees a place for E5.
"There's definitely a class of customer who will look at [E5] for enterprise-class voice," said Miller in an interview. "E5 is really about enterprise voice. It's an overall enterprise offering, not that E3 isn't, but E5 is their top-tier offering. There's definitely an opportunity to upset [telephony]."
Typically, said Miller, enterprises have subscribed to Office 365 Enterprise E3 for the Office suite and Microsoft's cloud-based Exchange email, then added a third-party product for corporate calling and conferencing. "So there's a lot of space for E5 to expand into."
Miller's colleague at Directions, Andrew Snodgrass, had a narrower market for E5 in mind, at least over the short term.
"Conferencing is the thing that most people will take up quicker than anything else," Snodgrass said, referring to PSTN (pubic switched telephone network) conferencing, one of the components that separates E5 from the lower-priced E3 and still-available-for-seven-months E4. Previously, companies that wanted the ability for workers to dial into video meetings and conferences required a third-party solution.
"It's just a real convenient tool," Snodgrass added of PSTN conferencing. "Enterprises have been hammering on this for a long time. It's a no brainer for many. They've had the service, but it was composed of multiple components, and no one knew who to yell at if it didn't work."
Small- and mid-sized businesses best bet for E5
E5 and its most-publicized pieces -- the PSTN conferencing, cloud-based PBX (private branch exchange), and the optional PSTN calling -- will be most appealing to small- and medium-sized businesses that don't have a PBX phone and/or conferencing system, Snodgrass argued. Microsoft will find it much harder to convince larger firms that may have spent millions on their PBX system to dump investments and switch to E5's cloud alternative.
"If I'm an enterprise, I'm not going to go half-way in [to a PBX swap]. But if you go all-in on cloud PBX you have to retire the on-premises system," Snodgrass pointed out. "That takes a lot longer, that's a multi-year plan."
And potentially very expensive if, for instance, a company only recently rolled out a new PBX system, meaning that a change would require tossing aside a multi-million-dollar investment. Down the line, when enterprises committed to Office 365 have gotten their money's worth out of their existing telephony platform, they may be more amendable to taking up E5, Snodgrass said.
Some companies might find E5's cloud-based PBX -- and the associated PSTN calling that Microsoft offers as an add-on -- intriguing for deployment in far-flung branch offices. "It might be good for a business with a lot of small sales offices. Now all of a sudden you don't have to set up independent plans [and PBX systems] for each office."
But that approach means the enterprise will be running a hybrid solution, partly composed of a dedicated PBX system at headquarters, and Microsoft's -- via E5 -- elsewhere. "Hybrids can be difficult to deploy," Snodgrass acknowledged. "There are lots of moving parts."
Ullman disagreed on the likelihood that E5 -- because of its PBX and PSTN offerings -- would be a hit. Calling E5 a "niche" SKU in the Office 365 Enterprise line-up, Ullman said E3 would continue to be the dominant plan. "E5 is too expensive currently and Microsoft has gone too high on pricing. It conceivably has a lot of value, but it's too high to capitalize on a large market segment."
DeGroot echoed Ullman, but conceded that Microsoft's sales teams are not to be underestimated. "Given the success of the Microsoft sales force in selling Office 365 E3 in spite of [the] downsides, I would not bet against their success with E5," DeGroot said.
Why are calling plans 71% to 300% higher for corporate workers than for consumers?
DeGroot had a beef with Microsoft's pricing of E5, specifically with the optional PSTN calling plan, an add-on offered to subscribers who use the cloud-based PBX system. (PSTN calling is available only for firms or organizations that have a U.S.-based billing address.) Companies that want to add PSTN calling to E5 must pay $24 per month per user for unlimited domestic and international calls, or $12 per user per month for domestic calls only.
Those prices are considerably higher than the same plans for individual consumers -- who pay $14 per month for unlimited domestic and international calls, and for U.S.-and-Canada calls only, pay just $3 a month.
"I'm struck by how much money customers have to pay for PSTN connectivity. This is on top of $35 for E5?" opined DeGroot. "What's egregious about this is that Microsoft will charge enterprise customers far more for PSTN connectivity than it [does] consumers.
"I presume the additional charge is for all the management and centralized control the companies get with E5, although if I got worldwide long-distance to land lines and mobile, I wouldn't necessarily feel I needed to manage that, since an employee calling their grandma in Kazakhstan shouldn't add a penny to my monthly bill," DeGroot continued. "The customer inputs all the data about their employees and a computer takes about five seconds to generate the total monthly bill for thousands of employees. I'd argue that for that volume, enterprises shouldn't have to pay any more than consumers. It certainly isn't worth a $10 a month premium per employee."
There's no doubt that Microsoft's pricing of E5 was much higher than anticipated, even without the additional fees for the Skype-based PTSN calling. Although experts were not expecting a simple one-for-one swap of E4 for E5 without a concurrent price increase this summer, when Microsoft first talked up the premium plan, at the time sources told Computerworld that E5 would be priced at around $25 per user per month, or about $36 more a year, for a relatively small 14% price increase over E4.
That didn't happen.
And that gives customers the short end of the stick, DeGroot contended. Companies lose significant negotiating power when they shift from the every-so-often purchase of Microsoft's on-premises software, he asserted. "They will be at Microsoft's mercy when it comes along with a price increase, as E4 customers will shortly discover when they get renewed into E5."