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Microsoft: Competition Weighs on Office License Revenues

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Microsoft's (MSFT - Get Report) average revenue from its Office licenses sold to enterprise and retail customers has been declining due to competition from cloud-based app providers like Google (GOOG), Amazon (AMZN) and Salesforce.com (CRM) and also due to increasing lower priced products sales in emerging markets.

The MS Office suite offers productivity software applications like Word, Excel, PowerPoint, Outlook and Access. The company recently launched Office 365, a Web-based productivity software product that provides an entry into the fast-growing cloud-computing space. With a 94% market share in the desktop productivity software market, Microsoft is looking at other alternatives like cloud-computing for further growth, but tough competition will keep prices suppressed.

We estimate the average annual license revenue that Microsoft earns from its enterprise customers for office productivity software will decline from $47 in 2012 to $40 by the end of our forecast period. Trefis members expect a smaller decrease from around $50 in 2012 to $48 during the same period. The member estimates imply an upside of about 5% to the Trefis price estimate for Microsoft's stock.

We currently have a Trefis price estimate of $28 for Microsoft's stock, which is about 10% above the current market price.

In order to retain its market share in productivity software, Microsoft is offering lower priced products in emerging markets like India and China where business customers are price conscious and can't afford high-priced products. Since emerging markets form a major share of MS-Office sales, the overall pricing is also declining.

Microsoft has offered MS-Office for a measly $29 in China due to the large-scale prevalence of piracy. While this move led to lower margins for the company, its overall profits increased multi-fold. But how effective would an aggressive pricing strategy be in the long run is up for question given that players like Google are offering web-based productivity software almost free.

Microsoft Office is the most valuable business for Microsoft, accounting for more than 30% of the Trefis price estimate for MSFT stock.

While the cloud-computing market is growing rapidly, it has many contenders like Amazon, Google and Salesforce that are offering their own productivity software at competitive rates which will force Microsoft to keep a lid on its prices.
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