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Microsoft: A Business Perspective

Microsoft used to be known as the top dog of the tech industry, but this is no longer the case.  With Apple surpassing Microsoft in market capital earlier this year, there has been a great deal of talk lately about Microsoft’s ability to compete in the consumer marketplace. Tim O’Reilly was recently quoted as saying “Microsoft is totally off the radar of the cool, hip, cutting-edge software developers”, although he has since said he never made such a statement.  It is widely believed that mobile computing is the future of the consumer tech sector; with the demise of the Kin, many have wondered if Microsoft can take on the likes of Apple and Google in this space.  Microsoft has heard these rumblings and responded at first with a blog post entitled, “Microsoft by the numbers” and, more recently, via an interview with Todd Bishop

Both responses from Microsoft have tried to set a single unified tone, that Microsoft is not out for the count.  We all know that these behemoth tech companies aren’t bringing products to market just for bragging rights or so that they can thumb their noses at their competitors.  These are large businesses, with millions of shareholders a piece and they, as with any other business, are in it for the money.  Because some of you will inevitably disagree, and argue that some businesses, the great ones, aren’t driven by greed, I invite you to define a successful business without any mention of financial performance; it’s just not possible.  We have the Fortune 500 instead of the Mr. Nice Company 500 for that very reason.  With that in the forefront of our minds, we can see why Microsoft chose to respond the way it did to the recent criticism.  In the aftermath of the Kin debacle, Microsoft didn’t focus solely on shifting attention to Windows Phone 7 (although they did bring it up).  Instead, Microsoft did what any responsible public company would do, reassured the people who matter most, it’s shareholders.  So lets take a look at the business side of Microsoft and see how they’re really doing. 

In “Microsoft by the numbers”, Microsoft tries to steer the discussion back to the business side of things, and rightly so.  Microsoft has done very well as a company and the numbers do show it.  Microsoft’s successes are highlighted with Windows 7, general PC sales, Xbox Live, and Hotmail.  The post is wrapped up with a net income comparison between Microsoft, Google, and Apple.  This was most likely done to remind people that Apple is far from overtaking Microsoft, despite conventional wisdom since Apple overtook Microsoft in market capital.  While market capital is relevant, it’s not nearly as important as revenue or income, and Microsoft seems to have taken note of this.  Microsoft’s net income($14.5Billion) is significantly higher than Apple ($8.2Billion) or Google’s ($6.5Billion), despite their being the only companies in that sector large enough to compete with Microsoft directly.  Microsoft’s profit margin also outpaces Apple at 24.9% and 19.2% respectively. What does that mean?  It means that Microsoft is in a much better position to capitalize on its investments and generate income.  Even though Apple has been expanding at an unprecedented rate these past few years, they still have a long way to go before they can top Microsoft in net income.  So why does all this gibberish matter?  It matters because everyone is so busy looking at headlines that we don’t take the time to look at the whole picture.  The real picture of Microsoft is more than just Windows 7, Office, Xbox, Zune, Windows Mobile, and Kin.  The real Microsoft includes stuff like SharePoint, SQL Server, Online Advertising, System Center, Exchange, and Visual Studio as well.  All of these products generate revenue for Microsoft and the main-stream media outlets gloss over these because their average readers don’t use them or just don’t care about them.  But they exist nonetheless, and they clearly are successful enough to generate over $1B in revenue each.

It’s not all rainbows and butterflies for Microsoft though.  Don’t get me wrong, they are doing quite well, but Apple’s overtaking of Microsoft in market capital was am important milestone, and something to take note of, so long as you understand why that is.  The reason it’s important isn’t because Apple is now “bigger” than Microsoft; it isn’t (not by revenue, net income, number of employees, or profit margin at least).  It’s important because of the financial trend Apple has created to facilitate this new development while Microsoft has failed to do much of anything.  If we examine Microsoft’s net income and compare it with Apple’s we can see why people are wondering if Microsoft is struggling.  In 2007, Microsoft and Apple had net incomes of $14Billion and $3.4Billion, respectively.  However just two years later, Apple has brought their net income up to $8.2Billion, that’s a 141% increase in two years.  Microsoft brought it up to $14.5Billion in the same time frame.  That’s a wimpy 3.5% increase.  See where this is going?  Microsoft isn’t dying or going down the drain by any means or stretch of the imagination.  They are just on the precipice of a possible stagnation, while Apple continues to boom.  This is why Apple’s market capital is higher than Microsoft’s.  Investors think Apple has a better opportunity to grow and thus the valuation of Apple’s stock rises.  Microsoft’s investors look at the numbers and see stagnation, not declination.  For investors, especially ones looking for growth stocks, that’s a bad sign.  But for consumers, it’s pretty irrelevant at this point.  If anything, it means Microsoft is going to try extra hard to make more money in the coming years.  And it’s going to try harder than Apple or Google.  Why?  Because Microsoft needs to make more money than either of those companies to show the same percentage of increase.  Not to mention, Microsoft has more money to throw behind its products as well.

Microsoft is going to put up a huge fight in the mobile space.  The Kin was a big deal only because it was Microsoft dropped the ball.  But this will not happen with Windows Phone.  How do I know? I know because Microsoft has made it a point to show commitment here.  They have stated that it will take five years to finish polishing Windows Phone 7.  Couple this with their inclusion of projected global smartphone sales data of 439M in 2014 compared to 55M for Q1 2010.  You should take note that Microsoft cites a Q1 2010 sales and not yearly sales like it’s 2014 projection citation.  The same source reports that 173.5M were sold in 2009 and projects that 226.8M will be sold in 2010.  This puts into perspective that the smartphone market is only expected to double in the next 4 years.  This is nothing to sneeze at, but it is a far cry from the 8X increase the blog data appears to suggest to a careless reader.  The fact that Microsoft would allow such a discrepancy in their response suggests that they want to reassure investors and developers that there is a place for Windows Phone to grow into.  With the resources of Microsoft behind Windows Phone, I would seriously doubt anyone who suggests that Microsoft is too late to the game to make an impact.  They might not blow away the competition, but they are here to stay, and they definitely aren’t going to go quietly into the night.

Sources of financial information for Microsoft, Apple, and Google.