Why Microsoft’s Price Increase Is a “Shell Game” | ISG

In the first quarter of 2022, there was no more successful and profitable software company than the Microsoft Corporation.

Microsoft provides ample financial disclosure through numerous publicly filed documents. One of the most relevant financial performance metrics is the cumulative return on its stock. Published in its most recent 2021 Annual Report, a performance graph depicts how $100 invested in Microsoft in 2016 is now valued at $600 at the end of 2021.

In this same 2021 Annual Report, another financial performance metric called Earnings Before Interest & Taxes (EBIT) shows greater than 100% growth for the company from 2017 through 2021. Microsoft is the number one performing software company in terms of this financial metric, exceeding Google, Oracle, Salesforce, SAP, VMware, IBM and Adobe.

Why is this point relevant?

In August of 2021, Microsoft announced a major price increase across several of its Microsoft 365-hosted services effective March 1, 2022. These price increases deliberately target the lower cost, or lesser-edition, versions of its popular User Productivity services with the clear intention of reducing the gap between the price of these services with the more costly higher-edition alternatives.

This price increase – and the subsequent limited savings advantage of these lesser-edition options – provide added leverage for Microsoft to drive many of its enterprise clients toward more costly, higher-edition services and to ensure predictable revenue growth.

Microsoft’s August 2021 announcement cited several factors behind its decision to selectively raise prices, including:

1. It’s been 10 years since the company had a price increase
2. Over the past 10 years, the company has added substantial capabilities to the effected services
3. The company is adding audio conference services to support remote meetings

Here’s the counterpoint to consider for each of these Microsoft justifications:

1. In the 10 years the company cites as keeping prices flat, there have been numerous repackaging of services that have required many of its clients to add additional subscriptions and spend to their enrollments simply to maintain service levels.
2. While Microsoft has added capabilities to some of these services, few, if any, have changed the way organizations use them. In the August 2021 announcement, Microsoft described these capabilities as justification for the price increase; the functions and capabilities include: Access, Bookings, Delve, Forms, GroupMe, Kaizala, Lens, Lists, OneDrive, OneNote Class Notebook, Planner, Power Apps, Power Automate, Power BI, Publisher, SharePoint, Staff Hub, Stream, Sway, Teams, To-Do, Visio, Whiteboard and Yammer. Our experience with enterprise clients reveals little to no knowledge of these capabilities.
3. Microsoft has provided a service called Audio Conferencing, which has been licensed either a la carte or as part of the Office 365 E5 bundle. This service provides a dial-in option for remote meeting attendees who cannot otherwise participate through an internet-connected device.Sold as an a la carte service, Audio Conferencing was typically priced at a rate of about $3/month per user. The services affected by this announced price increase, to which Audio Conferencing is being added, are increasing by at least $3/month per user.

Ta-da! This is the Microsoft “shell game” in the form of a simple repackaging of audio conference services.

Most enterprises have little to no other commercial alternatives to Microsoft’s Online Productivity services and will have to brace for this price increase and any other future increases that Microsoft’s deems fit. How long Microsoft will continue to dominate this uncompetitive market is uncertain, but it is increasingly being seen as a challenge for enterprises around the world.

Microsoft’s current financial situation does not seem to legitimate the need to raise prices, especially at a time when many of its clients are struggling to bounce back from operational and economic hardships they faced during this 2+ yearlong pandemic. Microsoft has thrived during the pandemic, and this price increase reveals how certain it is that it controls the marketplace for user productivity services.

Organizations need to plan months in advance of their Microsoft Enterprise Agreement renewal for their Basket of Goods, their competitive alternatives, their executive escalations and for any public messaging they might feel is warranted if doing business with Microsoft continues to be the challenge it is today.

Working with a qualified advisor can help you understand how doing business with Microsoft is changing and how you will need to adapt to avoid unexpected surprises and costs. ISG Provider Lens publishes studies to help enterprises navigate the Microsoft ecosystem.

Contact us to find out how we can help.