In my previous blog post “How Microsoft makes money? Where is the future“, I listed Microsoft is currently divided into three major business units: productivity and business productivity, intelligent cloud, and personal computer computing. This article is going to discuss the department of personal computer computing (More Personal Computing). This department mainly includes Windows, Surface devices, Xbox, games, search engine Bing. The fiscal year 2020 revenue accounted for 33.74%, the fiscal year 2020 operating revenue accounted for 30.04%, and the annual growth rate was 6%.
On October 5th, Microsoft offers existing users the Windows 11 operating system free download and update, but it did not cause ripples in the financial world and the stock market. This reminds me that when I was still at Microsoft, as long as Microsoft launches any large-scale product, it will surely trigger discussions for many days in the financial world and the stock market. It was even more popular than today’s Apple product launch. I spent some time yesterday to complete the Windows 11 upgrade (side words, I don’t think most existing Windows users are capable of completing this free upgrade to Windows 11 on their own, and can only buy a new computer with Windows 11 built-in) and the installation of Office 2021, this gave me many ideas on Microsoft’s personal computer computing department.
The latest developments in this department
In recent months, Microsoft’s personal computer computing department has some major activities:
- Announced Windows 11 operating system, and available free download updates will be available on 10/5/2021.
- Microsoft’s cloud gaming Xbox Game Pass subscription service has more than 15 million subscribers, and the number of people has increased by 5 million in the past six months. The related view is that the Xbox Game Pass subscription service will eventually replace the existing Xbox Live Gold service. Microsoft revealed that it will cooperate with more TV brands. Cloud streaming game service allows users to connect to the controller through the TV and log in to their personal account to play.
- The Surface conference launched updated versions of a slate of updated products in one go, but it did not arouse much discussion. Among them, Surface Duo: running on Android, the financial reporter of sarcastically described last year’s version 1.0 as an imcompleted prototype product. It demonstrates Microsoft’s unwillingness to give up on mobile phones.
- On 7/15/2021, Microsoft released the “Windows 365” cloud PC service, which allows you to enjoy Windows 11 streaming experience on any device. Meaning you could open a virtual Windows 11 environment on your iPad, let’s say.
- Windows starts working with Amazon (ticker: AMZN) to allow users to run your Android programs on Windows.
These products (except for the last one, because it’s a brand new product) have the following in common:
- It has not caused much discussion in the market.
- The departmental revenue growth rate of these corresponding products is only single digits, and usually below 5% or less, almost stagnate.
The biggest change is Microsoft’s acquisition of Activision Blizzard (ticker: ATVI). For details, see my other blog post about “Microsoft acquired PC-era game dominator Activision Blizzard“.
A tasteless one?
Of course not. In addition to the Windows operating system directly related to personal computers, this department also has a bunch of non-personal computer profitable businesses, which everyone has forgotten.
Surface, Microsoft’s hardware department, has been targeting Apple (ticker: AAPL) as the only goal from the beginning. This goal has been achieved to some extent, but there is still a long way to go. Microsoft has not announced the details of its products and operations, and the outside world estimates that the profit and loss are even. But at present, to a certain extent, computer devices on the Windows platform have created another product choice for users besides other traditional computer factories like HP (ticker: HPQ), Dell (ticker: DELL) and Lenovo. Moreover, Surface also allows Microsoft to show the market the product concept that Microsoft wants, as well as to collect information on the market and users that Microsoft wants, to give full play to the initiative. This is a priceless and necessary investment, and the importance is not measurable by money.
The main problem of the Surface product line is that the product failure rate is much higher than that of the industry (investors should know that the recovery of hardware device product failures not only damages the corporate image, but also the important thing is that the recovery and repair will almost immediately change the original profitable product. Loss, unless the product can have Apple’s sales), poor durability (especially its target is Apple’s products, but Apple’s products are known for their durability). Another big problem is that the average selling price of the product is not only much higher than that of its peers, but even much higher than that of Apple’s similar products. These two major unfavorable factors make it difficult for the Surface product line to make long-term profitability.
Another game department. Since the Xbox hardware device is sold, Microsoft will lose one hundred US dollars for every one sold. It still can’t make money, but this is a necessary investment. It is impossible for Microsoft to have no its own games device, subject itself to Sony (ticker: SONY) or Nintendo (ticker: NTDOY). The software department is quite rewarding, with many well-known game tiles; and Microsoft continues to make large-scale game studio mergers and acquisitions to expand its own game software products. In fact, Microsoft is among the top five developers in the game industry, as well as Sony, Nintendo, Electronic Arts (ticker: EA), and Activision Blizzard (ticker: ATVI). In addition, in addition to porting existing games to mobile phones, Microsoft has also launched its own cloud gaming platform. Joining this inevitable future gaming trend, you can imagine Microsoft’s ambitions in the gaming field.
Finally, let’s look at the Windows operating system. It still controls 80% of the market for dacads and is synonymous with personal computers. Still one of Microsoft’s cash cows, Windows operating system revenue accounts for 15.59% of Microsoft’s total revenue. Moreover, almost all personal computers must be shipped with unwritten built-in software. Investors can regard it as another type of subscription system. Manufacturers have almost no alternative solutions with the same functions. This is the scary thing — This is a typical moat. This is the main reason why I spent a whole subsection of section 2-2 of my book “The Rules of Super Growth Stocks Investing” to analyze the company of Microsoft, and the main reason why this company is repeatedly mentioned in many places in my book.
Windows still has a strong moat
More than ten years ago, most people began to slander Microsoft’s Windows operating system. Some of them made sense, but most of them were clumsy. My reasons are as follows:
- There is no large-scale software in history that has been as prosperous as Windows for 30 years, and even IBM in the past has never reached such a state. At present, the market share of Windows is still as high as 80%, and the foreseeable future will see no rivals.
- When mobile phones and tablets appeared ten years ago, many people thought that the good days of Windows were over. But the facts have not proved that, the main reason is clear, because large and small companies still have to use computers to go to work. Mobile phones and tablets have opened up new usage scenarios and cannot replace personal computers.
- Even if there is competition between the Alphabetical Chrome OS and Apple’s OSX, the two will take up about 20% of the personal computer operating system market, and it is difficult to shake the position of Windows.
- The current crisis of Intel on personal computers does not mean that Microsoft will also encounter it. These two are quite different. There are too many manufacturers (currently processor manufacturers that can run Windows, excluding Chinese manufacturers, include Intel (ticker: INTC), AMD (ticker: AMD), NVidia (ticker: NVDA), Qualcomm (ticker: QCOM), and VIA, and Samsung (ticker: SSNLF), MediaTek, Microsoft, etc. have been confirmed that processors will soon join the competition) are eating Intel’s lunch, which can replace Intel’s central processing unit (see my other article “Intels current difficult dilemma” ), but those who are rushing to eat Intel’s lunch, all aim to carry Microsoft’s Windows working system.
- Finally, and the most important one, in the past 30 years of Windows, countless software vendors have developed countless applications on it. These programs are still in use today and will not fade out of fashion (I tried the Windows program I wote when I was a student, they are still running on the Windows 10 with no need to modify), this is the largest moat and ecosystem of Windows; it should also be the largest ecosystem in the commercial market ever. Don’t forget that unless there is a rare reason, corporate software must have a “switching cost.” No company will take unknowable risks and ask for trouble to replace a program that has been used for decades. Moreover, the moat of enterprise software is much wider and more valuable than consumer software (mobile apps for smartphone and tablet are typical consumer software).
Reminder to investors
The dynamics of Microsoft Azure high growth almost catch media and investors eyes, or Microsoft’s cloud department has been stealing PC department’s thunder. It has not caused much discussion in the market and is regarded as a tasteless view. This view is completely wrong.
- This does not mean that this department is not important, because these departments have existed for 10-40 years, have a large number of users base, and continue to contribute a lot of cash. For example, the market share of the Windows operating system has never been lower than 80% for decads. Even if there are strong threats from Apple (ticker: AAPL) macOS and Alphabet (ticker:s: GOOGL and GOOG) Chrome OS, the market share of the two is around 8-12% each and targeted users are quite different. Windows is almost synonymous with personal computers. The focus is on the foreseeable future, and there is still no adversary that can threaten it.
- All companies will reach the plateau period of their corporate life. “Most companies will go to the slopes because of this, but the growth of the Microsoft department has only stagnated and has not disappeared.” This is very important. This personal computer computing department is the “starting home” of Microsoft. It has existed for more than 40 years, and to some extent is synonymous with personal computers. Without this department, it would be impossible to cause the popularization of computers.
- Personal computers are not disappear, regardless of the size of enterprises, individuals, and schools; everyone must use personal computers. It has been popularized in our daily life and work, and the importance of TV is no different. This also explains why it hasn’t made its way to the slope, which is why it can continue to contribute to Microsoft’s huge revenue.
- As the technology industry is fully moving towards the cloud, Microsoft itself is the world’s second largest cloud infrastructure provider (around 20%), plus the monopoly of the Windows operating system market for more than 30 years; if Microsoft is willing to invest considerable effort and resources (please note this prerequisite, because it may eat up its own existing Windows market), the potential of “Windows 365” cloud PC services potential is unlimited. I personally think that Microsoft has not thought clearly about this matter at present, which is a pity. This is why when Microsoft opened up the user experience of this service, because it couldn’t stand the popularity, it immediately suspended and closed this service. Today, people can’t figure out the idea. What is Microsoft thinking?
Insight: Only Microsoft has an exclusive monopoly moat
The personal computer has not disappeared, but its growth has stagnated. Personal computers are still a lucrative industry. Except Apple’s unique software and hardware, about 10% of the special market is another form of exclusive monopoly, and no one can take it away. In PC industry semiconductor of CPU, and device manufacturers including Intel (ticker: INTC), Advanced Micro Devices (ticker: AMD), Qualcomm (ticker: QCOM), MediaTek, HP, Dell, and Lenovo have no “exclusivity” moat of “monopoly”, and now it seems that the central processing unit or the personal computer device, the entry barrier has been proved to be lower and lower, the future competition will become more and more fierce. In comparison, Microsoft’s software has a long-proven “exclusive monopoly” moat in the personal computer industry – this is the biggest difference.
This is the insight of investment, which is also the second layer of thinking proposed by Max Howard. Don’t follow the mass.
- “How Microsoft makes money? Where is the future?
- “Microsoft Productivity and Business Processes Office is long term cash cow“
- “PC-era game dominator Activision Blizzard acquired by Microsoft acquired“
- “Microsoft, the dominant overlord of cloud computing“
- “Is Microsoft’s personal computer computing department a tasteless one?“
- “The rebirth and fall of 4 major technology stocks in 10 years“”
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