To The Moon

All three Hyperscalers ( $Amazon.com(AMZN)$ $Alphabet(GOOG)$ $Microsoft(MSFT)$) reported earnings this week.

There was one quote from this earnings cycle that I think will get a lot less attention than it deserves. It came from Satya:

“The basic transformation of any per-user business of ours - whether it is productivity, coding, or security - will become a per-user and usage business. That is the best way to think about it.”

Big statement! The per-seat licensing model is the foundation that the entire modern SaaS industry was built on. It’s how so many IT budgets are structured. It’s how every renewal conversation goes. It’s how every comp plan is designed. Did Microsoft just say the seat is dying? Or at least, being repurposed? This isn't the first time I've written about this topic...Nearly 2 years ago I wrote a similarly titled article, "Is seat based pricing dead"?

Amy Hood went further. She framed the new model as “a licensed business plus a consumption business applied far more broadly than I think people have thought about.” And later, Satya put a really nice frame on it - “the seat-based pricing is just entitlement to some consumption…there are some base usage rights that get bundled in or packaged into seats.” Said another way - the seat remains, but it becomes a packaging mechanism for prepaid consumption. Beyond a certain level, you’re paying per token, per agent action, per outcome.

They also announced a larger pricing change of their own! They moved GitHub Copilot to a usage-based model effective June 1. ~60% of their Dynamics 365 customer service customers are already buying usage-based credits. The Copilot credit-consumption offer was up nearly 2x QoQ. They’re already living in the new model.

There’s actually a tell buried in the bookings line. Hood called out that D365 bookings growth was impacted by weaker renewals “as customers balance spend between the traditional per-seat and the emerging seats-plus-consumption model.” The transition is already showing up as a drag on a legacy bookings metric. Customers are pausing on their old seat renewals because they’re trying to figure out the new pricing. It’s happening right now.

Why does this matter for founders building software companies?

A few reasons. First - if Microsoft is publicly committing to this shift, every other software company gets some air cover to do the same. The market will tolerate the transition pain because the largest player in the world is wearing the same lumps. If you’ve been afraid to introduce a usage-based component to your SaaS pricing, watching Microsoft go first is permission.

Second - the metric set you’ve been using to evaluate your business will need to change. ARR is a clean metric for a per-seat business. It is a much messier metric for a “per-seat + consumption” business. NRR will likely become more volatile (consumption ebbs and flows). Bookings will be lumpier. The “rule of 40” framework, the public market revenue multiple, the way you set sales quotas - all of it gets harder. Investors are going to have to learn a new language, and it’ll probably take some time to work its way through the system.

Third - the agent economy is fundamentally a consumption economy. An agent doesn’t buy a seat. It does a task. It uses tokens. It calls tools. If you’re building a software company today, and your business model assumes you’re going to charge a flat fee per human user, you’re solving for a world that’s about to get smaller. The world that’s growing is “per outcome, per task, per token.” Get there before you have to. Just about every startup I’ve worked with that went through some sort of seat > usage business model transition regretted not doing it sooner…

The thing I keep coming back to is - Microsoft is the least incentivized of any company in the world to do this. They have the largest installed base of seat-based subscriptions on the planet. Office, Windows, Teams, Dynamics. Every dollar they “convert” from seat to consumption introduces volatility into a model their investors have been comfortable with for two decades. The fact that they’re still leaning into it tells you everything about where they think this is going.

Seat-based pricing is becoming more of a wrapper than a product. The product is the work that gets done.

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