Microsoft's Slack Rival Shows How Its Office Franchise Has Been Reborn

It wasn't long ago that conventional wisdom viewed Microsoft's (MSFT)  Office productivity suite as a cash cow due to see little, if any, growth as PC sales fell and Google Apps took share. The best-case scenario, according to this view, was that Microsoft could keep Office sales from declining while using the franchise's profits to invest in software and cloud services that could actually drive future growth.

The story looks a little different today, thanks in large part to the way Microsoft has used its Office 365 platform as a way to expand the breadth and usefulness of its productivity suite for both consumers and business users. This week's launch of a collaboration app that's baked into corporate Office 365 subscriptions continues the trend.

On Wednesday, Microsoft unveiled Teams, an app that provides a common, cloud-based workspace--accessible via web browsers and mobile apps--for employees to chat, share files and collaborate on projects. The product already integrates with over 150 apps from third parties via browser tabs, chatbots and app connectors, with more promised courtesy of a developer program.

Not surprisingly, one of the unique selling points of Teams is its integration with such existing Office apps as Word, Excel and PowerPoint to access files and move between apps. It also integrates with the Skype for Business unified communications service to enable voice and video conferences, and with the Graph platform, which lets developers create services that can pull up and share information from different Microsoft products.

Teams also supports threaded chats, a feature not yet supported by fast-growing collaboration startup and Silicon Valley darling Slack. Slack, which has topped 3 million daily active users, was valued at $3.8 billion in a spring funding round and has created a sizable developer ecosystem, is widely seen as the product Microsoft is targeting first and foremost with Teams.

The company is also squaring off against Atlassian's (TEAM) HipChat and Cisco Systems' (CSCO)  Spark, among other offerings. Slack responded to the Teams launch with a full-page New York Times ad (also published on the company's blog) in which it passive-aggressively argued Slack's "thoughtfulness and craftsmanship," open platform and love for its product set it apart.

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One could go back and forth about how Teams and Slack compare to each other--as others have pointed out, Teams appears to be a credible challenger to Slack at companies where Office is widely used, and less so in places where it isn't. But perhaps the biggest takeaway is how Microsoft is steadily increasing the value-add provided by Office 365 subscriptions, something that in turn makes it easier to sell subscriptions that (over time) produce more revenue than traditional Office licenses did.

Teams follows the bundling of a slew of other apps and services within some or all Office 365 plans. Those include Skype for Business, OneDrive cloud storage, the Yammer enterprise social networking service, the Power BI business intelligence app and Delve, an AI-powered service that surfaces content to users based on their current activity; in the future, Office 365 products will also integrate LinkedIn's (LNKD) data and services. Like Adobe (ADBE) with its Creative Cloud, Microsoft gets that subscriptions allow a software company to roll out new apps and services for users much more easily than one can with standard software licensees, and in doing so help keep customers hooked on the software platform the new offerings tie into.

A look at Microsoft's September quarter results shows how Office 365 and its steadily growing feature set have breathed new life into the Office franchise. Commercial Office revenue rose 5% annually (8% excluding forex swings), with Office 365 monthly active users rising over 40%, to over 85 million. Consumer Office revenue rose 8%, with consumer Office 365 subscribers growing 32%, to 24 million.

It would be unrealistic to expect Microsoft to post significant Office sales growth in the coming years. The business is too large and ancient for that. But with the help of solutions such as Teams, Delve, Yammer and Skype for Business, it can deliver moderate growth by using Office 365 subscriptions to increase the long-term revenue produced by much of its base.

And that's a lot more than what many analysts and pundits expected a few years ago.

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