Microsoft Productivity and Business Processes Office is a long term cash cow

Table of Contents

Office discussion in my book

In the book “The Rules of Super Growth Stocks Investing“, I mentioned the importance of Office in three places and conducted in-depth analysis:

Section 2-2, page 88, discussion of Microsoft Corporation
Section 2-3, p. 118, Discussion of software switching cost moats
Section 3-3, pp. 193-195, discussion of paid subscriptions

Division profile

I have written several articles previously, each of which is a detailed introduction to Microsoft’s entire company and major divisions (see all article links listed at the end of the article). What I want to introduce today is the Productivity and Business Processes (Office is famous product) division that the average person uses almost every day, but does not know much about it. The most important product in this division is Office, but in fact it was twenty years ago. Well, this division now has many non-Office products that can contribute to revenue. This division is Microsoft’s long-standing cash cow.

Product in this division

Here are all the products included in Microsoft Productivity and Business Processes division:

Product line	Products included
Microsoft 365	It can be regarded as an upgraded version of Office 365 cloud. Basically, it is a product service that packages and cloudizes all Microsoft products for customers to subscribe to.
Office	Office Commercial, Office 365, Skype for Business, Office 365、Skype, Outlook.com
ERP	Dynamics 365 includes CRM, accounting, HR, payroll, and more
Social network	LinkedIn
Cloud products	Office 365, cloud drive OneDrive
Collaborative Computing and Communication	Team, Skype, Skype for Business
Process automation	Power, Graph, Bonsai
Data analysis	Azure Synapse
Other	Employee experience platform Viva

Operating performance

In terms of revenue contribution (Microsoft’s three divisions have a small gap in revenue, almost 1/3 each), Microsoft’s productivity and business process division is its second largest division, accounting for 32.1% of revenue in 2021 . In the first quarter of 2022, its segment revenue grew 17% year over year, while Office 365 revenue grew 17% year over year.

LinkedIn is the product most people ignore, the social networking platform Microsoft bought for $26.2 billion in 2016. Ranked by the number of users, LinkedIn is already one of the top social networks in the world. As of the first quarter of 2022, LinkedIn had 810 million users, including 57 million business users. Since 2017, LinkedIn’s average ARPU (average revenue per user) has grown steadily by 23%.

Merket share

Microsoft’s main competitor in this field is Alphabet (tickers: GOOG and GOOGL); because only Alphabet has a complete product line enough to compete with Microsoft’s production in this division.

In addition to Alphabet, another heavy-weighted competitor is WPS Office suite from Kingsoft (Xiaomi Lei Jun’s company), Kingsoft software packages cover a lot of mountains and seas, basically including most of the software that will be used in the office. In terms of functions, Kingsoft’s WPS office suite can replace Microsoft’s Office software with no problem, it now has 460 million users worldwide.

Corel’s WordPerfect product has a longer history than Microsoft’s Office software. It can be said to be the ancestor of Office software. However, after changing hands several times, Corel is not a listed company at present, and its influence and market share have become insignificant.

In the past, there were some open-source and free Office software, including StarOffice, OpenOffice, and LibreOffice; but none of them were comparable to Microsoft Office, and version updates have been stopped at present.

There are also many software companies in the market, including small, medium, or large enterprises; such as Oracle (ticker: ORCL), Salesforce (ticker: CRM), Twitter (ticker: TWTR), Meta (ticker: META). But they usually only have one or two products, and it’s hard to compete with Microsoft or Alphabet. According to Gartner (ticker: IT), Microsoft dominates the productivity software market with a massive 89.2% market share, well ahead of Alphabet, which lags behind with a 10.3% market share.

Everyone underestimates Office

As long as users in the world have used computers, it is almost impossible for them not to have used Microsoft Office. As long as you use it once, I can assure you that you will never leave it in your life.

China, Germany, and Russia have all thought about breaking the monopoly of Microsoft Office and adopted many strategies, but so far with little success. For this part, please refer to my previous article “The hardware and software gap between China and US, is all China-made software and hardware possible?

The future of Office

In October 2022, Microsoft officially announced that it will officially change the product name of Microsoft Office, which has been used for nearly 30 years, to Microsoft 365.

When I was still at Microsoft (the internet was just sprouting at that time), some media did statistics, and Microsoft Office files were the second largest number of files in the world, second only to the PDF format. I personally think that Microsoft Office is the most widely used, most influential, and most profitable software in history in the world; Its monopoly is difficult to break, now and in the future.

Closing words

When I was working in Microsoft’s server and development tools department (now the cloud computing department), I once chatted with several senior colleagues in the same department and a large group of colleagues in charge of Office. A very senior colleague in our department made fun of the young Office colleagues on the spot and said, when the customer encounters a problem and cannot solve it, you only ask the customer to reinstall it. This does not require any skills, isn’t it a salary thief? Unexpectedly, a young girl who had just graduated from school immediately retorted, “What do you have to show off and be proud of? Seventy to eighty percent of your salary is contributed by us!”

For Microsoft, that statement still holds true.

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