Microsoft splits Teams from Office Suite; who benefits?

• Microsoft separates Teams from Office Suite to meet EU regulations and reshape competition.
• Unbundling Teams may not significantly alter global enterprise purchasing outside the EU.
• Microsoft’s move could slightly benefit Zoom and Slack, though market dynamics are expected to remain steady.

Last year, the European Commission took a significant step by launching a comprehensive investigation into Microsoft’s practice of integrating its Teams application with the Microsoft 365 and Office 365 suites, targeting the business sector specifically. Microsoft, recognizing the importance of this inquiry, committed to fully cooperating with the Commission and expressed its determination to find solutions that would mitigate any regulatory concerns.

In a notable development reported by Reuters, Microsoft announced its decision to offer its Teams application globally—a chat and video conferencing tool—separately from its Office suite. This strategic move, coming six months after these products were decoupled in Europe, was designed to preemptively address potential EU antitrust penalties.

The strategic response from Microsoft to offer Teams separately

The investigation by the European Commission was triggered by a 2020 complaint from Slack, a Salesforce-owned workspace messaging application. Since its integration into Office 365 in 2017 at no extra cost, and its replacement of Skype for Business, Teams experienced a rapid rise in popularity. This was particularly true for its video conferencing features during the pandemic. Competitors have contended that this bundling strategy unfairly advantages Microsoft. In response to these concerns, Microsoft initiated the separate sale of these products in the EU and Switzerland on October 1 of the preceding year.

In detailing the company’s revised strategy through a blog post, Nanna-Louise Linde, Vice President for European Government Affairs at Microsoft, introduced a new pricing model for unbundled products. This adjustment, offering a reduction of US$2.17 monthly or US$26.02 annually, aims at serving the core enterprise clientele in the EEA and Switzerland more effectively.

Furthermore, Linde clarified that Teams would be accessible as a standalone offering, with a pricing set at US$5.42 per month or US$65.04 annually, catering to new enterprise clients. Those who previously integrated Teams into their suite have the flexibility to maintain their existing setup or transition to a Teams-excluded package.

Reiterating the company’s dedication to transparency and customer satisfaction, a Microsoft spokesperson conveyed the decision to extend the unbundling initiative worldwide. This adaptation, inspired by the European Commission’s feedback, is intended to offer multinational corporations enhanced flexibility in their licensing options across various regions.

Reflecting on Microsoft’s historical adjustments in response to antitrust challenges, particularly the lawsuit from the Justice Department in 1998, analysts like Rishi Jaluria from RBC Capital Markets point out that the current separation of Teams from Office marks a significant, though not unprecedented, shift in strategy. Despite these changes, the integration of Teams into business operations suggests that the immediate impact on the market might be limited.

Data from Sensor Tower indicates a consistent user base for the Teams mobile app, with monthly active users remaining steady at around 19 million in both the fourth quarter of 2023 and the first quarter of 2024. This stability suggests that the unbundling in Europe has not adversely affected the platform’s popularity.

Looking ahead: Licensing flexibility and pricing strategies

With the introduction of new commercial Microsoft 365 and Office 365 suites, excluding Teams for areas beyond the EEA and Switzerland, Microsoft is also presenting a standalone option for enterprise customers. Starting April 1, these offerings allow customers to continue their current licensing arrangements or explore the new, unbundled options. The pricing structure for Office suites without Teams ranges from US$7.75 to US$54.75, with the standalone Teams option priced at US$5.25, although variations may occur based on country and currency.

Despite proactive measures, Microsoft could still encounter EU antitrust challenges, with concerns arising over pricing strategies and the interoperability of competing messaging services with Office Web Applications. Analysts like Gil Luria from D.A. Davidson suggest that Microsoft’s forward-thinking approach may somewhat mitigate future regulatory scrutiny. Given Microsoft’s history of incurring 2.2 billion euros in EU antitrust fines over the last decade for similar bundling practices, the company is keenly aware of the stakes involved.

J.P. Gownder, a Forrester VP and Principal Analyst, regards the unbundling of Teams as a strategic maneuver by Microsoft in anticipation of regulatory actions from the EU and possibly other regions. This strategy not only levels the competitive landscape by providing a choice to consumers but also simplifies the licensing landscape for multinational companies, which might face complexities under varying regional agreements.

Gownder also anticipates that pricing will emerge as a critical discussion point, with Microsoft potentially advocating for higher individual pricing for components formerly bundled, citing increased operational costs. This move could necessitate substantial marketing efforts to clearly communicate the value and structure of the unbundled offerings.

While Gownder foresees regulatory bodies potentially viewing any price increases critically, interpreting them as punitive measures against EU companies, he believes that the essential purchasing behaviors of enterprises, particularly outside the EU, are unlikely to be significantly altered. They may continue to favor bundled offerings, which are now enhanced by the addition of an unbundled option.

Gownder further speculates on the potential savings for organizations currently using Zoom, which might find financial benefits in dropping the Teams component for an unbundled SKU, though the exact financial implications will depend on the forthcoming pricing details. Zoom and Slack are poised to capitalize on this market shift, though the fundamental dynamics of the market are expected to remain largely unchanged.

The competitive landscape and potential beneficiaries

This strategic pivot could be an advantage for Zoom, which has faced challenges in competing with Microsoft’s comprehensive suite of communication tools. Slack, having been integrated into Salesforce and having previously lodged an antitrust complaint with the European Commission in 2020, has been particularly vocal about the need for such a separation, viewing the bundling of Teams with Office as competitively unfair.

Despite occasional preferences for Zoom, the integrated offering of Teams with Office 365 has consistently attracted customers. This trend was highlighted by CNBC, which pointed out Zoom’s slowing revenue growth from explosive rates in 2020 and 2021 to single digits in recent quarters. Mizuho analysts suggest that Teams’ unbundling could help mitigate some of Zoom’s challenges in retaining enterprise customers.

Over the past year, Microsoft has reported nearly US$53 billion in revenue from its Office suite, including Teams, marking a 14% increase from 2022. The platform’s impact is undeniable, with Teams now boasting over 320 million active users monthly.

Salesforce’s acquisition of Slack in 2021 for US$27 billion, the company’s largest purchase to date, underscored the high stakes in the communication and collaboration tool market. Slack’s 2020 complaint to the European Commission against Microsoft’s practices highlighted ongoing competitive tensions, reminiscent of the ‘browser wars’ of the 1990s.

However, Slack’s stance towards Teams was more measured in 2019, with then-CEO Stewart Butterfield acknowledging the preference of many top customers for Slack over Teams, despite their use of Microsoft’s Office 365 suite.

Last year’s reports that Microsoft would allow companies to choose whether to include Teams in their productivity software subscriptions signaled a strategic shift intended to preclude further EU competition investigations. Subsequently, Microsoft began offering separate subscriptions for Teams and other productivity software across 31 European countries, aligning with the European Commission’s investigation into the bundling practices.

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