How Microsoft makes money? Where is the future?

How Microsoft makes money? Where is the future?

Microsoft

Microsoft is not only Windows and Office

Many people have always stayed at Microsoft (ticker: MSFT), the company that relied on Windows and Office to dominate the world. In fact, this is Microsoft 20 years ago. Strictly speaking, these two products are no longer more than half of Microsoft’s revenue (see Table 2). Microsoft is now a huge technology empire, spanning software and hardware and cloud computing.

Microsoft

Microsoft’s three major departments

Here are the three major departments and revenue sources of Microsoft:

Business unitProducts or services included2020 revenue percentage2020 operating income percentage Annual growth rate
Productivity and business processOffice Commercial, Office 365, Skype for Business, Office 365, Skype, Outlook.com, One drive, Dynamics, LinkedIn, Viva 32.44%35.36%13%
Intelligent cloud Azure cloud platform, Windows Server, SQL Server, Exchange Server, Visual Studio, GitHub, Premier Services, MCS 33.82%34.6%24%
Personal computing Windows, Surface devices, Xbox, game, Bing, advertisement 33.74%30.04%6%

It has strong competitive

Just as I used Microsoft as an example in Section 2-2 of my book “The Rules of Super Growth Stocks Investing” to illustrate a typical company with strong competitiveness, we will analyze in detail why Microsoft can have such a a powerful moat; and it has been continuously widening its moat and strengthening its competitiveness. This is the main reason why it can stand unshakable for more than 40 years and dominate the global software industry.

Cloud’s growing, biz process is still cash cow

In fiscal 2020, Microsoft’s US revenue accounted for 51.16%, and its foreign revenue accounted for 48.84%. In addition, it is easy to see from this table; the intelligent cloud has determined the growth rate of Microsoft’s revenue in recent years. The productivity and business process departments are still the company’s cash cow. The personal computing department does not matter whether it is based on the proportion of operating income or growth rate, all are declining.

Regarding Microsoft’s cloud computing department, I suggest you refer to my other blog post “Microsoft, the real overlord of cloud computing“.

Microsoft’s main products

Product or service2020 revenue percentage2020 revenue growth rate
Azure computing platform, server software 28.93%+26.84%
Office and cloud products24.69%+11.26%
Windows15.59%+9.31%
Game8.09%+1.66%
LinkedIn5.65%+19.59%
Search and advertisement5.41%+1.47%
Surface devices4.51%+5.94%
Premier service and MCS4.48%+4.65%
Others2.63%+22.74%

Intelligent cloud grows fastly

From Table 2 to see Microsoft’s main product and revenue is more clear; recent revenue growth mainly comes from Azure cloud platform, server software, and LinkedIn, and the board of directors even specifically listed LinkedIn as one of the evaluation goals of the CEO. According to the results of Canalys’ market research, the market share of Azure cloud platform and Amazon (ticker: AMZN) AWS has now narrowed to 32% to 24% in 2020. But what I want to make in particular is that Microsoft has never separately listed the revenue and profit details of a single Azure department, so we cannot compare it with the main competitor Amazon’s AWS for inter-departmental operational efficiency.

Smart readers like you can easily be summed up by the development of the technology sector in recent years, such as AWS, Azure, GCP (Google Cloud Platform), Alibaba (ticker: BABA) Alibaba Cloud, these cloud platforms have become a modern monopolized operating system. Microsoft has achieved a favorable leading position in the competition between the old and new generations of operating systems.

Growth of the PC department stagnated

As for the Surface device with Apple (ticker: AAPL) as the only rival from the beginning, it looks promising, but the actual shipment volume has never been announced. The industry estimates that even now, it is only a balance of profits and losses. The hardware of the game department has never made any money, and in the early days it has made a large loss; mainly relying on several well-known game software to make money. As for Microsoft’s logo, Windows has stagnated growth since the emergence of mobile phones and tablets. No doubt, it is destined to have no significant growth in the future.

Search and advertising, because the Bing search engine is under the substantial monopoly of Google, although it is nominally the world’s second-ranked search engine, its market share has never exceeded 3%. In the media department, for more than 20 years, the money is constantly being spent on marketing. We only the big money is spent. MSN or Microsoft News have never heard of making decent money; it is a typical Microsoft halo.

Productivity and business processes are evolving over time

In the office software department, because Microsoft Office has 1.2 billion users, and the number of files in Word format is the second most file in the world (the first is PDF), in the past 30 years, in addition to the Alphabet (ticker:s: GOOGL and GOOG) ‘s cloud Google Workspace slightly surpassing the cloud version of Office 365, there has never been a rival (the cloud version of Office actually accounts for a small proportion of the total Office market, so even if Google Workspace surpasses Office 365, the actual impact on revenue is slight).

On the contrary, LinkedIn, which Microsoft bought, has had a very bright revenue performance in recent years because the board of directors has listed it as the annual performance appraisal project of Microsoft’s CEO. The other Dynamic products are very attractive back-end operating systems for small and medium-sized enterprises, and their performance has always been good.

Get into industry solutions via acquisitions

In April 2021, Microsoft invested $16 billion in the acquisition of Nuance to gain entry into the medical industry. In recent years, efforts have been made to promote alliances and cooperation with the industry, coupled with Microsoft’s long-term advantages in the enterprise market. In addition to continuing to want to acquire social products with market influence; successfully acquired Skype (in 2011 and Skype spent 8.5 billion US dollars, now it seems to be nothing) and LinkedIn, but want to acquire Tiktok, Pinterest (ticker: PINS), and Discord failed to do so.

Regarding Microsoft’s acquisition of Activision Blizzard, I suggest you refer to my other blog article “Microsoft buys the game master of the PC era, Active Vision Blizzard“.

Future direction

It can be seen that one of Microsoft’s key development goals in the future is to combine the oligopolistic advantages of the Azure cloud platform and the core technologies of various industries; in the past few years, Microsoft has continued to cooperate with major industries such as medical, telecommunications, manufacturing, finance, defense, and retail.

Microsoft has cooperated with manufacturers, combining Microsoft’s platform and product advantages and customers’ industrial advantages, and began to launch solutions for various industries, so as to build industry competitiveness, widen the gap with competitors, and broaden its moat. Because in the long run, with the competitiveness of the core technology of the industry, it will have a moat that is more difficult to break through than selling popular products alone.

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