Where do Microsoft's profits come from?

It's hard to fathom how much money a company such as Microsoft makes a year. In 2009, Microsoft's net income was 14.569 billion dollars. It is the most profitable software company on planet Earth. But where does all of their money come from?

Microsoft is involved in many different areas of consumer life. They make operating systems, gaming systems, games, productivity suites, and even hardware. The breakdown of Microsoft's profits may surprise some, but in general, it's much of what you'd expect from a company whose success stems from Windows and the fact that 91% of the world's computers accessing the Internet use it.

Below is a chart from Business Insider showing Microsoft's operating profits by division. You'll notice that only recently has Microsoft's entertainment and devices division begun turning higher profits. Xbox 360 was released back in November 2005, yet, nearly a year later, you can see Microsoft still losing money from it. It's also interesting to see how Microsoft's online services operate at a loss. This is probably a result of Microsoft's need to stay competitive with Google and other free, online, cloud based services. Microsoft can probably expect further losses in this area once Web Apps are released (unless they plan on supporting it through ads). As expected, Office and Windows seem to be the core of Microsoft profits.

Microsoft Operating Profit by Divison

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Their profit comes from overpriced software. They have even lost court cases over selling over-priced software.

Microsoft business is Windows, everything they do is nothing but supporting the Windows ecosystem, Office, Servers, Tools, Services, Entertainment... literary everything. So it is a big mistake to split they profit like this, it is an information which tells us nothing.

Without the other stuff Windows wouldn't be so successful, the value of Windows is not in the OS itself, but in the unprecedented software ecosystem around it, and Microsoft build a significant part of that ecosystem, that is the catalyst and the rest of the software industry does the remaining job (all the Windows software out there).

Windows and Office won't go anywhere... not today, not tomorrow not in the next 10 years. Get used to it, it will make Microsoft more and more money. The opportunities in the world of software are bigger not smaller, and Yes Microsoft will lose control... it will be less significant then it was in the past but not because it will fail but because others will also succeed... something like the US vs. the world, it is not that the US is falling back, it is that the rest of the world is rising up.

The future will be a place with enormous opportunities but very little control (or no control at all).

Get used to it too.

The most important thing in this chart is that people realize Microsoft is not scared of Apple, and they are not scared of Linux. Microsoft makes several times more in a month than Apple does in a Quarter.

Also to note is that Microsoft shoves a lot of money into R&D and platform/development technologies that they don't see a direct return of investment on.

Microsoft can 'afford' to compete with Apple if needed, but can also go, wow, nice product Apple, and move on without having to own every aspect of the technology market. Especially when Mac users are some of MS's best customers, they don't mind selling copies of Office to Mac users (and many of them even pick up copies of Windows for BootCamp). So why kill off the Mac market or even try to hurt it?

Microsoft is still big enough that they are plenty of billion dollar company crumbs running around for everyone else.

This is also why it is crazy that when people see Apple or another company do well in a segment of the market, everyone shouts that Microsoft is losing a war and their time is over. Microsoft could lock up shop for a few years and still be a force in the industry, and right now they are just bouncing back into some of the markets with a good reception of Windows7 and Windows 2008 R2 server and getting some momentum behind the Zune/Live services/marketplace. So let the iPhone or iPad even be a great success, MS will just release Office or some other set of technologies for the platform if it does grow to a high level of success and share in the wealth like everyone else is doing on competing and successful platforms.

The key to their future is NOT the profitability by division. There is no other company in the industry that has a presence on the 3 screens - computer, living room and mobile phone. Nor will any of their competition even come close to matching this - unless Sony and Apple merge (unthinkable).

Historically Microsoft have never led from the front - they let other pioneer, take the arrows in their backs, and then muscle in to take away their market share. Look at GUI - Mac introduced in 1984, Windows effectively unworkable until 1997 and now MS has 96% global market share to Apple's 2%.

MSFT already have substantial market share in the living room (X-Box) and they will over the next few years demolish Apple in mobile devices just like they did with computers (globally, not just in USA).

Having a small operating loss in home systems is definitely a price worth paying for some very serious future dominance.

I wonder if the Bing cash back is part of their online services dept. I just wonder how they give so much back...

Commodore Max said,
I'd be more interested in knowing how Twitter or Facebook are making a profit.
haha, same! :D

Commodore Max said,
I'd be more interested in knowing how Twitter or Facebook are making a profit.

I doubt Twitter has made anything so far. Facebook on the other hand makes a load of cash through their advertising. Because it is one of the most visited websites now, advertisers are willing to pay a lot also. They don't depend on Google or Microsoft or anyone else for their advertisements, so everything goes into their pockets.

Edited by Jebadiah, Feb 14 2010, 11:44pm :

Is MSFT's E&D also making stuff like mouse, keyboard, and Webcam? it sounds low-tech, but by licensing MSFT's name out on these small things, MSFT actually makes a lot out of it with stable cash flow. XBOX probably has never take any green in yet.

joysleeper said,
Is MSFT's E&D also making stuff like mouse, keyboard, and Webcam? it sounds low-tech, but by licensing MSFT's name out on these small things, MSFT actually makes a lot out of it with stable cash flow. XBOX probably has never take any green in yet.

We don't know what the initial R&D costs for the 360 were, so to say it's not making money for them yet, we don't know that. At this point I don't think they're making a loss on the hardware anymore, and game sales have been solid from the get go. We just don't know all the information so we can only guess.

Edited by George P, Feb 14 2010, 8:41pm :

joysleeper said,
Is MSFT's E&D also making stuff like mouse, keyboard, and Webcam? it sounds low-tech, but by licensing MSFT's name out on these small things, MSFT actually makes a lot out of it with stable cash flow. XBOX probably has never take any green in yet.

Not to mention the Build quality on most of the Microsoft branded keyboard and Mice is usually pretty good.

Xbox controllers are also pretty durable.

Kirkburn said,
How do you mean?

Im not sure what he means by fisher price... but these graphs are difficult to read as the baseline for everything apart from the bottom value shifts... making it difficult to read across the graph on one item. Ideally two graphs should be used to show overall profits and where these profits come from. Or even an interactive graph where you can set one item to be on the bottom.

GP007 said,

Zune is part of the E&D group, which made a profit last quarter.

However, how much of E&D's revenue comes from outside of either Zune or XB360 (from mice, keyboards, Webcams, and other more plebian devices)? While Logitech gets more buzz in that area, Microsoft hasn't exactly lost any ground (I have a Logitech mouse and Webcam, but a Microsoft keyboard; the mouse and keyboard have no cord). Further, Microsoft's LifeCams are actually picking UP ground (and notice) because of their surprising support in the latest distributions of Linux (something that a large number of Logitech's Webcams have issues with).

DaveGreen said,
Office more than Windows? This chart seems very inaccurate to me...

is been widely known that most of microsofts profits come from corporation renewing its office license. remember that most of windows installs are OEM computers which pay a rather small license fee.

Ivand said,

is been widely known that most of microsofts profits come from corporation renewing its office license. remember that most of windows installs are OEM computers which pay a rather small license fee.

A Corporatios will update Office 2-3 times before its updates Windows.

An example is that in 2002 if you company moved to Windows XP it got Office 2000 or XP, by now most are on Office 2007 but still Windows XP. That's 3 or 4 Office upgrades for ONE purchase of Windows, and if they stay on XP, they might be using Office 2010 on it too unless they move to Vista or 7.

DaveGreen said,
Office more than Windows? This chart seems very inaccurate to me...

Actually, it's quite accurate, as Office has historically been on a faster refresh cycle than Windows (further, Office actually costs more per license (especially among enterprises) than Windows). Look at the per-seat costs for Office Enterprise/Ultimate vs. 7 Ultimate and Enterprise/Vista Ultimate and Enterprise; even if you compare apples to apples (leaving out cost differences due to Software Assurance), businesses pay more for Office than they do for Windows.

One thing that doubtless surprises folks is looking at sales of Office vs. sales of Microsoft Exchange. While Outlook has historically been the *preferred* client for Exchange, there is far more to Outlook than being an Exchange client. In fact, except for two years (2000 and 2001) I didn't really use Outlook in an Exchange environment (despite Outlook being my mail client of choice since I moved fully to Internet-based mail in 1996).

Segue to now - Outlook 2010 x64 remains my primary mail cient of choice (not just for POP3, but even for IMAP; I have my GMail account connecting via the IMAP protocol). I thought I'd try IMAP with Outlook 2010 for grins; however, Outlook 2010 has easily the best IMAP support I have ever seen (especially in terms of performance).

DaveGreen said,
Office more than Windows? This chart seems very inaccurate to me...

"Office" also includes Exchange Server which is a $2billion a year industry by itself.

Not surprised to see online services taking a hit to be honest. Microsoft needs to get on the ball and provide features that can be found in other competing products for free instead of trying to force people into a subscription for some basic things (like requiring a user to subscribe to Hotmail Plus to forward email to another email account outside of Hotmail).

Kristan K said,
Not surprised to see online services taking a hit to be honest. Microsoft needs to get on the ball and provide features that can be found in other competing products for free instead of trying to force people into a subscription for some basic things (like requiring a user to subscribe to Hotmail Plus to forward email to another email account outside of Hotmail).

Most of that is also from Azure I think, that should fall into that area iirc.

It's not just hotmail costs and Bing imo.

GP007 said,

Most of that is also from Azure I think, that should fall into that area iirc.

It's not just hotmail costs and Bing imo.

Azure is part of the server division, it got reshuffled a few months ago. So MS can't use that as an excuse for Windows Live making a loss. So much for Ballmer wanting online search wanting to make up 10% of company profits within a few years, at the moment it's pulling them down.

Not surprised to see the gaming devision taking the loss in '07, I think that was around when Microsoft decided to spend a $1 on fixing peoples consoles.

Tony. said,
Not surprised to see the gaming devision taking the loss in '07, I think that was around when Microsoft decided to spend a $1 on fixing peoples consoles.

You're right, it's when they started the 3 year RRoD thing and put $1billion in on it. But the E&D devision is slowly trading up, the dips in sales are always in June of the year, I guess it's a slow month or something.