I was struck by the many opinions expressed after I wrote a piece explaining why I do not think on-premises Exchange is dead. Some believed that I am mad and that Microsoft is busily killing one of its larger golden eggs in a rush to convince customers to embrace Office 365 and all things cloud-like. Others thought that my opinion was accurate and that on-premises Exchange would persist for many a long year into the future. Some more commentary seems appropriate, if only to explain why I came to my conclusion.
A well-expressed corporate strategy is a thing of beauty to the marketing profession. Greatest sweetness is obtained from a phrase that captures the strategy, such as “all in the cloud” in the case of Microsoft. The approved catchphrase is repeated ad nausem until no one in their right mind is left unconvinced that Microsoft is indeed serious about getting everything in the cloud. We therefore arrive at the situation where cloud, cloud, and more cloud is what you hear from Microsoft representatives and this is what has thrown doubt on the future of on-premises software.
The emphasis is particularly felt when discussing technology with Microsoft sales representatives. I have nothing against salespeople and have enjoyed many adventures alongside these professionals in the honest pursuit of sales opportunities. However, their behavior does tend to be affected by sales targets and bonuses (otherwise known as “spiffs”). If a salesperson is told to sell cloud, they will sell cloud. If that’s what they are selling, that’s what they will talk about to their customers. Thus, further confirmation is obtained that the cloud is the only topic worth talking about, even if it proves to be so much hot air.
Yet figures do not lie. Instead, they tell the true story to those who care to interpret and analyze the data. In this instance, we have the data provided by Microsoft to the financial analysts and, for Office 365, the data says that the current revenue run-rate is $1.5 billion. This is the figure provided by Microsoft CIO Kevin Turner in September 2013, a substantial improvement over the previously-reported $1 billion run-rate (April 2013) and in line with reports of large numbers of Office 365 subscriptions being taken out by customers. All good news for Microsoft.
So we know how much money flows into Microsoft coffers. However, this is a gross amount and doesn’t tell us how many seats generate this run-rate, nor what percentage is accrued by Exchange Online. To make the exercise easier, we can take an average amount paid per month (per user or per mailbox) and use that to calculate how many paying subscribers Office 365 has right now. The price per user depends on the plan to which they subscribe and varies from anything from $5 to $30 depending on the country where the user resides. Taking some level of discounts into account and the fact that higher-paying enterprises are typically more cautious (and harder to migrate) when adopting new platforms than their SME counterparts, I imagine that the average figure is closer to the lower end than high. Taking $10 per month as the average, $1.5 billion equates to 12.5 million paying users.
Sounds like a lot of seats and indeed it is – a hell of a lot of seats. Microsoft can be proud to have migrated so many users to Office 365 and to have kept the service running so well during this period.
You might dispute the $10 average. Feel free to do so because everyone gets to play the “how many seats has Office 365” game. You might say that the figure is lower to take account of the educational sector, say to $8/month. Adjusting to use that amount gives us 15.625 million users. I admit that even this number might be quite a bit lower than the total number of mailboxes deployed in Exchange Online. Microsoft is a great company at doing deals and the price paid by some customers could be far lower than those used in these calculations. Indeed, some customers, especially in the educational sector, might pay little or nothing in their initial contract period if this is what is necessary to convince them from using the Gmail alternative.
Even accepting that many free or close-to-free mailboxes exist within Exchange Online, to put the data into context and be able to come up with an estimate for how far Office 365 has penetrated into the Exchange on-premises installed base, we have to compare the Office 365 data against what is known for the total Exchange market. Counting Exchange seats is somewhat of an exercise in futility because no one really knows how many people actually use Exchange day-in, day-out. Microsoft can probably compute a figure for sold licenses but not all of these licenses are actually used. So we need to look elsewhere for data.
I've elected to use data from the Radicati Group for this exercise because they have been in the business of measuring the email market for many years and therefore have a sporting chance of coming up with a reasonable estimate. Looking at their executive summary of the Exchange server market for 2010 to 2014, we find the statement:
In 2010, Microsoft Exchange Server will have a worldwide installed base of 301 million mailboxes, and is expected to reach 470 million by 2014
This data is as good as any to use, so if we compare the lower number (301 million) to the higher number computed for Office 365 (15.625 million), we find that only 5.19% of the Exchange market has moved to Office 365. And if you take the bigger figure cited by Radicati, Office 365 is only at 3.32%.
There are lies, vile lies, and then statistics. You can do anything you want with numbers and they provide a find basis to argue a point. Given the public data that’s available for Office 365 and the best guess of the total size of the Exchange market, do you think that Microsoft would kill on-premises Exchange just now? I don’t. Q.E.D.
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