Microsoft 365 hits 400m Paid Seats. Business Copilot is now generally available as a product add-on. Morgan Stanley Analyst estimates $10bn in additional revenue by end of year 2025.
The race to sell AI chatbots to businesses will kick off in earnest this year, opening up a new competitive front for ChatGPT outside of the consumer market.
What's the difference between Consumer and Business AI chatbots?
Here is how Microsoft introduced Copilot for Business:
Grounded in your business data. AI-powered LLMs are trained on a large but limited corpus of data. The key to unlocking productivity in business lies in connecting LLMs to your business data — in a secure, compliant, privacy-preserving way.
On the consumer side of the market, the emergence of ChatGPT as a household name presents a conundrum for Google’s Flagship product and search monetization. Microsoft faces no such dilemma with Microsoft 365. In fact, Microsoft has a history of leveraging their ecosystem to win new markets.
The Browser Wars: Microsoft made Internet Explorer default browser in Windows. Netscape went from a marketshare of greater than 80% in 1996 to less than 10% by 2000.
SaaS productivity: Slack was dominant chat app, and Zoom was the dominant video conferencing app. Then, Microsoft Teams was bundled with Microsoft 365 in 2017. Fast forward to 2023: Teams has 320m active users, while Slack is probably hovering near 40m users. Both Zoom and Slack pressured regulators in the EU and US to do something.
And now, Business Copilot may be the next opportunity for Microsoft to extend this pattern. This episode will be slightly different: Business Copilot is being offered as a paid add-on, rather than being included for free in the existing bundle.
Microsoft 365 Bundle reaches 400m Paid Seats#
Microsoft 365 (M365), the descendent of the Office bundle, provides access to Microsoft productivity apps:
Microsoft CEO Satya Nadella revealed that M365 had reached the 400m Paid Seat milestone on the first earnings call of 2024:
M365 has added 140m paid seats since Covid began - almost the size of the American Labor Force (~160m).
Stock analysts wonder when seat expansion will begin to de-accelerate as M365 moves onto the top of the S-curve. By some estimates, there are only one billion knowledge workers on the planet. Plus, Google Workspace competes with M365 for smaller businesses - the market segment Microsoft cites as the current driver of seat growth.
Based on the Google Next conference in August 2023, Google Workspace has over 10 million paying customers (a single customer could represent an organization with multiple paying seats). Google does not report a comparable figure on paid seats. (Note: Google has claimed that Google Workspace has 3bn users, including their free tier; Android Headlines reported several reasons this is likely a vanity metric).
Microsoft began selling Copilot to enterprise customers in November 2023 and made Copilot generally available to businesses of all sizes on January 15th at $30/user for businesses and $20/user for individuals.
Microsoft Copilot General Availability unlocks a $100bn opportunity#
Microsoft Copilot is a user-level product add-on that requires a subscription to Microsoft 365. Assuming an average price of $25/user/month and a Seat Base of 400m, it represents a $100bn+ expansion opportunity. Keith Weiss of Morgan Stanley forecasts Microsoft could add $10bn by end-of-year 2025.
Many SaaS products announced AI add-ons (Notion, Salesforce, ZoomInfo, etc).
Realistically, Google, Microsoft, and ChatGPT look like the three front runners with the most to gain: Google and Microsoft own the primary office productivity suites where most professional “work” happens, and ChatGPT is a contender as the leading brand AI that was first-to-market.
Most businesses are Customers of Google Workspace or Microsoft 365, as the competition between these product lines is over 15 years old. Google will struggle to sell the Duet add-on to M365 customers - and vice versa. Instead, ChatGPT will have to compete head-to-head with Google Workspace customers and M365 customers.
ChatGPT is better positioned to compete with Google Duet. The Google Workspace customer base tilts towards smaller companies, startups, and personal users. More importantly, Google Workspace customers are more likely to incorporate other SaaS apps. This means there is more data leakage outside of the Google Ecosystem, which makes Duet less valuable.
Conversely, Microsoft has an unimpeded path to capture revenue from M365 customers.
Microsoft is the Ideal Purveyor of Business Copilots#
First, from a positioning standpoint, it will be an uphill battle to disambiguate ChatGPT from Microsoft Copilot due to the highly publicized partnership.
Microsoft FAQ portrays Microsoft Copilot as being a version of ChatGPT with even more context:
Microsoft Copilot is an AI-powered digital assistant that aims to provide personalized assistance to users for a range of tasks and activities. Copilot doesn’t just connect ChatGPT with Microsoft 365; it combines the power of large language models (LLMs) with your data in the Microsoft Graph (including your calendar, emails, chats, documents, meetings, and more) and the Microsoft 365 apps to turn your words into the most powerful productivity tool on the planet.
Microsoft already has inroads with the largest companies in the world. More than 80% of Fortune 500 companies use Microsoft 365. No company on the planet is better at extracting money from CIOs - the position within larger companies that will be making the buying decision.
Now, we will see how quickly Microsoft can convince businesses to pay an additional $30 per user - which will represent a 2x increase in Average Revenue Per User. Satya thinks the case is straightforward. He described the Copilot proposition as a “a straight forward value equation” on the earnings call.