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Welcome back! Microsoft appears to be betting that its tried-and-true subscription pricing model for software is here to stay, even in the era of AI agents that run 24/7, and that customers will be OK with ever-higher prices. Microsoft on Monday announced a new AI subscription bundle that combines Office 365 and with 365 Copilot, a suite of AI tools for automating tasks in Office apps, for business customers for the first time. We have anticipated this moment for the better part of two years, following the promotion of Takeshi Numoto, the Microsoft executive who perfected its previous bundles, to chief marketing officer. The new E7 bundle, which will be available in May, combines the Copilot tools with Office apps, Outlook email, Teams and security software. Notably, Microsoft is making E7 more expensive than the cost of buying its prior software bundles plus Copilot as an add-on. To sweeten the deal for the new bundle, Microsoft is adding additional security software and Agent 365, a new tool called to help companies track and organize the AI agents they develop using Microsoft software. Microsoft also announced new Copilot features powered by Anthropic models that resemble Anthropic’s Cowork, which aim to handle more complex white collar tasks. (Microsoft has scrambled to catch up to Cowork, as we reported here). Microsoft’s move is notable as AI buyers and sellers debate how AI tools should be priced. Other firms such as OpenAI have benefited from subscription sales of AI, but plenty of software and AI executives elsewhere have said per-seat pricing could be replaced by usage- or outcome-based pricing due to the rising costs of running AI, including agents, as we’ve written about before. In fact, some AI sellers say sticking with subscriptions could make it harder for them to make much of a profit margin. Microsoft, though, doesn’t face the same margin pressures as other AI companies when selling 365 Copilot. Its executives have boasted that because Microsoft owns the cloud hardware being used to run models that power its products, it has improved gross profit margins on Copilot. CEO Satya Nadella said at a Morgan Stanley investor event last week that a key focus of the company’s research and development spending is going to “reducing the [cost of goods sold] on a continuous basis” for AI tools like Copilot. In contrast, AI coding startup Cursor, which doesn’t own its own hardware, increased prices for heavy users last year because it was spending too much money on Anthropic models to power its coding products, relative to the subscription price it was charging. Microsoft has several other reasons to double down on per-seat pricing as it pushes its new bundle, not the least of which is that it runs the world’s biggest subscription business. For one, the new pricing gives it a path to keep growing revenue from Office without necessarily adding more subscribers. As a reminder, part of the “SaaSpocalypse” narrative comes from the idea that subscription software firms will struggle to add corporate subscribers if corporations use AI to operate more efficiently and don’t need as many employees. Microsoft Executive Vice President Rajesh Jha, who leads the business unit that includes Office 365, said during a UBS conference in December that Microsoft was still seeing “healthy seat growth” for the productivity apps business, but that even more growth recently has come by increasing the average revenue per user, including by upselling customers to the E5 bundle (which includes Office 365 and some security software) and on 365 Copilot, which costs corporate customers $30 per person per seat on its own. The flat price per seat makes Copilot revenue more consistent, including at companies whose employees don't use the Copilot tools much—a key point of concern for Jha, as we’ve reported. (Microsoft prices certain AI features like its Security Copilot, which automates cybersecurity tasks, and other AI agents based on how much customers use them, but 365 Copilot is only available in subscription form.) Whether customers are willing to stomach a $99 per user per month bundle remains to be seen, and other firms like Salesforce and ServiceNow, which offer their own AI tools to automate tasks within their software, will be watching the results closely. It’s possible some customers will find the new Agent 365 product enticing, but that doesn’t necessarily mean they’ll sign on for the full E7 bundle, said Adam Mansfield, a consultant at UpperEdge who negotiates deals with Microsoft and other software firms on behalf of large customers. “Just because the [E7] bundle is $15 or so dollars cheaper than buying every product a la carte doesn’t mean it’ll convince customers to pay for the whole thing,” Mansfield said. “Bundles can be problematic for customers because, by design, you might be buying your employees tools that they don’t necessarily need.”
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