The real secret to Microsoft’s success

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For people with a certain belief it’s fun to joke about Microsoft (MSFT). It is outdated and sometimes bloated software. A version of the operating system so despised that most users refused to upgrade from its predecessor and instead waited for its replacement. A browser that once held 95% of the global market share, no longer leads in any country. And mobile phones that barely register in a universe dominated by iPhone and Android.

Key learning points

  • Microsoft is a household name with widely known product lines such as Windows, Office and Xbox.
  • Founded more than 30 years ago, Microsoft has gone well beyond software and devices to cloud computing and services
  • Microsoft is the most held stock in index funds and ETFs in 2019.

Microsoft is maturing its business

Many (okay, some) of us are old enough to remember that Microsoft was the definition of novel, the youthful founders and their unorthodox culture flying in the face of a formal, understated business world that had limited use of, or knowledge of from, computers. Today, Microsoft is a gray flannel pillar of the Dow, and that’s a welcome event. The alternative would have been that the rash software upstart today had no effect whatsoever.

Still, sometimes the consensus sentiment about Microsoft seems to raise questions like “How on earth do they make so much money?” After all, Microsoft is not the most innovative company in the world, nor is it the most agile. Critics, however, seem to be forgetting something: a) Microsoft is the world’s largest software maker, b) people have a great use for software, and c) Microsoft is no longer just a software maker.

Microsoft under CEO Satya Nadella

Led by CEO Satya Nadella, who took charge in 2014, Microsoft has aggressively moved towards services and cloud computing. The Azure cloud computing system now has a solid percentage of global market share, second only to Amazon Web Services, and accounts for nearly a third of the company’s total revenue.

Microsoft’s revenue last year reached $125 billion in revenue and $42 billion in operating income. With a profit margin of 29%, which is significantly greater than both Apple (Nasdaq:AAPL) or Alphabet (Nasdaq:GOOG), two companies that popular opinion assumes have caught up with Microsoft.

Tough and ubiquitous

That popular opinion stems from a mistaken assumption: that a new product line with frequent updates is the surest path to success in the technology sector. Not true. Take Surface, Redmond’s answer to Apple’s iPad. It’s not the kind of product that makes or breaks a company with the strength and scope of Microsoft. Rather, it’s a way of staying relevant in the consumer electronics market — the idea, of course, is that Surface makes enough profit to justify the cost behind it, but a few million satisfied Surface owners have only minimal effect on Microsoft’s net profit figures. The same goes for the formidable Xbox, whose sexiness as a gaming console far outweighs its contributions to Microsoft’s overall financial picture.


Microsoft versus the S&P500 since 2010.

The truth is a little more pedestrian. Perhaps because Microsoft is so ubiquitous, it is a constant reminder in the daily lives of those who use its products. Every time you turn on your computer, Microsoft’s logo is staring at you, even if you’re a Mac or Linux user who uses Microsoft’s Office suite anyway. Shouldn’t a company with such a broad and deep footprint continue to surprise and fascinate us endlessly, with a youthful exuberance and a penchant for self-promotion? You know, like Google does?

The fact is that more than four decades after its founding, Microsoft is as steadfast and disciplined as… IBM (NYSE:IBM), ITT (NYSE:ITT), Litton Industries and the other companies that rounded out the top of the Fortune 500 in 1975. The software giant is mainly concerned with making money, which at first glance sounds tautological, but in reality it is not. . Microsoft is no longer in the raw experimentation phase common to young and growing companies. It is rather mode of operation is to create, then maintain and expand profitability streams.

Software as a service

The name of Microsoft’s “Productivity and Business Processes Division” may sound uselessly generic, but it refers to the portion of operations responsible for creating the staggeringly profitable Office. The suite started out as a supplement, a method of demonstrating Microsoft’s revolutionary operating system. But since Office’s debut in 1990, the applications that make up it have become almost mandatory for anyone wanting to do business. More than a billion people now use Office, to the point where Word and Excel are practically synonymous with word processing and spreadsheets, respectively. Multiply that user base by $150 per license for the stripped-down Home & Student version of Office, a product whose marginal cost is close to zero, and it’s easy to see why Microsoft is doing everything it can to maintain Office’s profitability (and why competitors from OpenOffice to Google Docs want nothing more than to shrink Office’s market share) .

The Business Division’s only serious competitor for dominance at Microsoft is the company’s Windows division, whose latest contribution to the market is Windows 10. Windows share of the global operating system market is over 35%.

It comes down to

All-in-one entertainment systems (Xbox One) and free audio and video conferencing around the world (Skype) may be exciting, the kind of things that make life more enjoyable in the 21st century, but their impact on Microsoft’s revenue is minimal. . Instead, the company’s secret lies behind staggering riches in the day-to-day business of enabling users to create and manipulate documents; and providing the software that performs a computer’s most important function – allowing data to move from your computer’s hardware components to the display. It’s not attractive, but it pays the bills…to an extent few companies in history can match.

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