Microsoft is considering AI revamp of its 365 software bundle

AI For Business

Microsoft is considering a major overhaul of its suite of key software tools as part of an effort to get more out of its huge investment in artificial intelligence, according to people familiar with the matter.

The plan focuses on Microsoft 365, a popular productivity software suite used by thousands of businesses. One of the people with direct knowledge of the plans said the results could include repackaging AI capabilities into existing licenses or creating new, more expensive bundles that include the Copilot AI capabilities.

CEO Satya Nadella and his senior management team will hold an executive review this summer with head of “AI at Work” Jared Spataro's team to determine how to package AI capabilities.

The aim is to finalize the changes before Microsoft's sales teams return in September from a summer lull and begin touting the upgraded product, said one of the people, who asked not to be identified discussing early, private plans. The company didn't respond to requests for comment.

Finding balance

Microsoft wants to strike a balance between increasing adoption of its AI tools while also generating revenue and recouping some of the significant costs associated with building and running these new features.

The company introduced several new Copilot AI features this year that showed early promise, but the technical work required behind the scenes is prohibitively costly.

While customers are happy to try out the technology, Microsoft officials expect the conversation to change soon as users start analyzing whether they are getting a return on their AI investments.

Wall Street is also wondering how Microsoft will recoup its huge AI spending. The company has amassed 1.8 million GPUs for building and running AI models and related products, and it also has surprising plans to triple its datacenter capacity, primarily to handle AI workloads. Capital expenditures in the most recent quarter were a record $14 billion.

Major changes to the bundle

While nothing has been decided yet, the discussions could lead to fundamental changes for Microsoft 365, which has maintained a similar pricing strategy for almost a decade.

This is a big risk for the company, as Microsoft 365 has been a significant revenue and growth driver even without the new AI capabilities.

The software suite includes popular business applications such as Word, Excel and PowerPoint, and is part of Microsoft's Productivity and Business Process division, which generated about $20 billion in revenue in the most recent quarter.

E3, E5, and the legendary E7 bundle

The 365 package is primarily sold to business customers in bundles called E3 and E5, where the E stands for “Enterprise.” E3 is a more basic offering, while E5 has more features.

When the company first introduced these packages, it initially planned to eventually roll out an even larger, more expensive bundle called E7.

But that didn't happen. The problem was that Microsoft salespeople started to pitch E5 as the last business software suite that customers would ever need to buy, which made it very hard for the company to raise the price to the larger E7 bundle.

“Everything that belongs to Microsoft forever is here” was the selling point, according to one person familiar with the matter, who estimates that E5 now brings in roughly twice the revenue that E3 does.

The E7 bundle has achieved a kind of mythical status within Microsoft, with employees and salespeople discussing and speculating about when it might arrive.

“Spiritual successor”

The boom in generative AI, and Microsoft's early lead in the space, makes it increasingly likely that new 365 bundles could be on the way.

A review meeting among executives this summer could result in an AI-equipped “spiritual successor” to the E7 bundle, according to one of the people familiar with the plans.

Microsoft has a new AI tool that can be integrated with 365 to encourage customers to upgrade their software bundles.

But this isn't just about AI: Over time, Microsoft has added new software products and licenses that customers must pay for, beyond what they're already paying for the existing E5 bundle.

Examples include Microsoft's Viva employee experience platform, as well as premium versions of its Teams chat app and Sharepoint collaboration software.

The copilot is the main pilot

Still, the biggest driver of Microsoft's new bundle negotiations is its Copilot AI assistant tool, which costs $30 per user per month. For comparison, an E5 license listed on Microsoft's website costs $54.75 per user per month.

Customers complain about the additional cost of this additional software, and they also dislike the complexity that comes with managing multiple software licenses – for example, on top of the standard E5 license, they have to manage a Viva license and also a license for SharePoint.

The introduction of Microsoft's Copilot AI assistant and the recent decoupling of the Teams chat app from the 365 bundle have only made this worse.

Team surprise

In 2020, Slack filed a complaint with European antitrust regulators about Microsoft bundling its Teams chat app with its 365 services. Microsoft recently unbundled Teams as a concession to the European Commission.

The move came as a surprise to some within Microsoft: “We wanted to resolve this issue with the EU,” said one of the people familiar with the matter.

Microsoft responded to this change by slightly lowering the prices of its E3 and E5 licenses and offering Teams as a separate paid add-on.

The company has increasingly faced antitrust criticism when it comes to AI, including over its relationship with OpenAI. Because bundling has led to antitrust issues, it's unclear how Microsoft plans to address those concerns when packaging its AI tools with other software products.

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