Demystifying Microsoft Business- Digital Conglomerate
By: Kaushik Choudhury
Tags: Microsoft, Business, Company, Investing, Cloud

Demystifying Microsoft Business- Digital Conglomerate

Erstwhile Windows and Office maker has transformed its business into a digital conglomerate with a number of growth engines.

Microsoft — Revenue Engines ( Picture by author)

The beauty of Microsoft business is its strong position in both Business to Consumer (B2C) and Business to Business (B2B) marketplace. It has a number of growth engines which are gaining market share and the overall market in most of these areas are growing at a fast pace.

Office 365: Office products are so deeply ingrained in the business and personal user’s mindshare that it is nearly impossible to encroach its market share. Freeware like open office and Apple office bundle is trying to gain over office from many years but still, they have not received any significant traction. The subscription-based model for office products has pumped new life into the age-old Microsoft office business line. The transaction from one-time office buying model to a subscription model was a little painful in the short term but it is paying handsomely now in long term perspective. We can see a similar theme in Adobe which has moved to the subscription based model for most of its products.

Windows: I will not waste your time and my energy to convince that Window owns the lion’s share of Operating System (OS) market share. Windows laptop is ubiquitous in every office and home. Windows original equipment manufactures (OEM) is good steady cash flow revenue. Tablet and other device form factor ( including a smartphone) is user’s choice to perform a lot of tasks which originally was done in a personal laptop but still, there is a long way before these devices fully replace a laptop. It may not grow compared to its other revenue stream but it should be able to hold the current topline figures in near future.

Dynamics 365: It is an Enterprise resource planning (ERP) mainly targeted to small and medium enterprise (SME). The advent of the cloud has helped Dynamics 365 greatly and in FY21 Q1 Dynamics 365 delivered revenue growth of 38%. It is a good alternative for SME who have relatively simpler business processes and do not need complex ERP like SAP to support bespoke processes. Dynamics is also very well integrated with office 365 products and provides rich user experience.

Azure: Intelligent cloud Azure business is growing at neck break business from last few years. The amazing fact is that not only Azure is gaining market share but also the overall cloud total addressable market is growing. It was a bit late in the market but with every quarter is getting a little closer with Amazon Web Service (AWS) which is the market leader in this space. Growing market share in a growing market is like a bumper bonus and in my view, Azure will contribute a big share in Microsoft revenue for the long term.

Xbox: Gaming console market is primarily captured by Sony, Microsoft and Nintendo. Similar to the cloud, gaming market size is also increasing and the advent of augmented reality ( AR) and virtual reality ( VR) will lead to frantic growth in this space. Xbox content and services revenue increased 30% in FY 21 of Q1 and in my view, it will leap forward from here with the recent launch of the new Xbox.

Bing: Alphabet(Google) is the leader in the search advertising business. Although the revenue from search advertising is not a big portion of Microsoft business still it is good sizeable number ~ $1.78 Billion USD in revenue. In comparison business like Twitter and Pinterest posted ~$936 Million and ~$442 million respectively in the third quarter of 2020. It clearly shows that that fringe search advertising business of Microsoft is bigger than the sole business of many social media companies.

Competitor analysis — ( Picture by author)

Surface: Microsoft failed to impress people in mobile business but the various Surface product line is gaining market traction. Surface revenue increased by 37% to ~ $1.62 Billion in FY 21 of Q1. It is not a major revenue stream for the company but it sets benchmark standards and inspiration for other Windows OEM.

Linkedin: Professional networking, talent and learning platform Linkedin is picking up a good share of the job advertising market and revenue increased 16% to ~$ 2.2 Billion. As professional networking and job advertisement are integrated into the Linkedin platform, hence it has a big advantage over the traditional job advertising portals in terms of validating the credibility and authenticity of candidate and employer.

Clearly, we can see that Microsoft future is not hinged upon one or two business model but there are a number of independent business lines which powers its future growth. This will help Microsoft to endure and response better in case of a slump in any one business area. Also, as it is not a dominant player in any particular business area, unlike other technology giants like Alphabet(Google) and Facebook, there are lesser chances of a call to break it up by US congress.

The geographical breakup of the revenue is pretty balance with ~$19.02 billion generating in the USA and ~$18.12 billion from other countries outside the USA.

Conclusion: Microsoft has transformed over the years from Windows and Office maker into a digital conglomerate with a number of different business lines. It has a good mix of consumer and commercial business powered by the subscription-based model embedded in most of the business lines now.

Acknowledgement — I hold Microsoft shares in my portfolio when this article is published.

Disclaimer: The sole purpose of this article is for information and education purpose only. Please do not buy or sell shares of any companies based on the information mentioned in this article. I may already hold shares of the companies discussed or may buy the shares anytime in the future. The views mentioned in this article are my opinion and not professional financial advice in any shape or form. I am not responsible for any loss or profit you may incur due to investing in the companies mentioned in the article. Please do your own research and take professional advice before investing.