Where does Microsoft make money? (Updated 2013)

(Past reports here: 2012, 2011, 2010, 2009)

Introduction

As in past years, all information in this report is taken from Microsoft’s publicly available 2013 10-K filing. Numbers may vary from past reports. When Microsoft moves products between revenue categories, they retroactively adjust the totals for past years so that year-to-year comparisons are accurate. This article uses 2011 and 2012 values as calculated in the 2013 report. All values are in USD.

If you’ve read my past reports, feel free to skip down to the charts. If this is your first time here, let me provide a quick explanation of how Microsoft breaks down its earnings.

Microsoft 2013 earnings tl;dr (“too long, didn’t read”)

  • Microsoft remained highly profitable in 2013, with solid year-over-year growth in both revenue and operating income.
  • The Business (Office) division brings in significantly more money than the Windows division (+30% revenue, +70% profit). In fact, nearly half of Microsoft’s 2013 profits came from the Business division alone.
  • For the first time ever (to my knowledge), the Windows division was actually 3rd in revenue in 2013, behind both Business and Server/Tools. If trends from the past four years continue in 2014, Server and Tools will pass Windows in not just revenue, but profitability as well.
  • Regardless of division, the vast majority of Microsoft’s profits come from business and OEM sales. Consumer-centric divisions (including XBox, Windows Phone, Bing) are largely irrelevant from a profit standpoint.
  • Just for fun: in 2012, Apple pulled in double the revenue of Microsoft ($156 billion USD and $74 billion, respectively). Source 1, Source 2.

Overview

Microsoft is unique among tech companies for reporting detailed information by product line. Their competitors do not provide such a detailed breakdown; Apple, most notably, is organized around “functional” divisions rather than “product” divisions, making direct financial comparisons between Apple product lines and Microsoft product lines difficult.

This year, Microsoft announced a company-wide reorganization plan that would bring them closer to Apple’s structure. Many (myself included) have doubts about this resulting in meaningful changes to Microsoft’s overall structure and performance, but there is one area the reorganization is almost certain to impact: financial reporting. Sadly, this means that 2013 may be the last year I am able to provide detailed earnings charts by product division.

There are many theoretical benefits to organizing a company by “function” instead of “products.” One benefit is reduced infighting between product groups, a known problem for Microsoft. Another benefit is the ability to hide losses due to underperforming products. Microsoft had its share of those in the past year, most notably its billion-dollar loss on the Surface RT line of tablets, the impact of which can be seen in the charts below.

Microsoft Total Revenue and Operating Income (June 2012 – June 2013)

Total Revenue: $77,849,000,000
Operating Income: $26,764,000,000

Long story short: for all their failings, Microsoft remains hugely profitable.
Long story short: despite some big missteps in 2013, Microsoft remains very profitable.

Total Revenue is the total amount of money Microsoft takes in from normal business operations.

Operating Income is calculated as “Operating Revenue – Operating Expenses”. In other words, Operating Income is the profit made from normal business operations. (A more detailed definition is available from Investopedia: “Operating income would not include items such as investments in other firms, taxes or interest expenses. In addition, nonrecurring items such as cash paid for a lawsuit settlement are often not included. Operating income is required to calculate operating margin, which describes a company’s operating efficiency.”)

Operating Income is particularly important when looking at a company like Microsoft. Certain Microsoft divisions take in a great deal of money, but they also require much higher costs to operate. Thus it is relevant to look at not just how much money a certain division brings in, but at how efficiently that division generates its revenue.

Microsoft Revenue and Operating Income by Division (June 2012 – 2013)

Microsoft products (and earnings) are divided into five divisions: Windows, Microsoft Business, Server and Tools, Entertainment and Devices, and Online Services. The types of products and services provided by each segment are as follows.

(Note: these divisions are pretty much identical to 2012, with the exception of Microsoft’s $1.2 billion purchase of Yammer and its corresponding addition to the Microsoft Business division.)

Here are the 2012-2013 revenue and operating income values for each division, in USD. Note that the number in parentheses is the percentage change between 2012 and 2013.

Windows (including Surface tablets and other hardware)
Revenue: $19,239,000,000 (+5%)
Operating Income: $9,504,000,000 (-18%)

Business (Office, Exchange, SharePoint)
Revenue: $24,724,000,000 (+3%)
Operating income: $16,194,000,000 (+2%)

Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $20,281,000,000 (+9%)
Operating Income: $8,164,000,000 (+13%)

Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $10,165,000,000 (+6%)
Operating income: $848,000,000 (+120%)

Online Services (Bing, MSN, Hotmail)
Revenue: $3,201,000,000 (+12%)
Operating income: $-1,281,000,000 (*)

(* – Microsoft had an artificially huge loss in the Online Services division in 2012, due to a one-time goodwill impairment charge of $6.2 billion. This makes year-to-year comparisons meaningless.)


Microsoft Total Revenue – 2013

MS_2013_revbydivision_USD
Microsoft total revenue in 2013, in USD.

 

MS_2013_revbydivision_percent
Same chart as above, but with percentages.

Microsoft Operating Income – 2013

Microsoft operating income, by division, for 2013. (Amounts in millions USD.) Note that Online Services represents a $1.2 billion dollar LOSS.
Microsoft operating income, by division, for 2013. (Amounts in millions USD.) Note that Online Services represents a $1.2 billion dollar LOSS.

Year-over-year comparisons (2010-2013)

Microsoft revenue by division for the years 2010-2013. Overall revenue continues to trend upward, despite flat Windows sales.  Note that as of 2013, both Office and Server/Tools brought in more money than Windows.
Microsoft revenue by division for the years 2010-2013. Overall revenue continues to trend upward, despite flat Windows sales. Note that as of 2013, both Office and Server/Tools brought in more money than Windows.

 

Microsoft operating income by division for the years 2010-2013. Unlike revenue, operating income varies dramatically from year to year. Microsoft Business has now dominated profits for three straight years, and if trends continue, Server and Tools will surpass Windows in profitability next year.  Note also how irrelevant XBox and Windows Phone (E&D) are from a profit standpoint.
Microsoft operating income by division for the years 2010-2013. Microsoft Business has now dominated profits for three straight years, and if trends continue, Server and Tools will surpass Windows in profitability next year. Note also how irrelevant XBox and Windows Phone (E&D) are from a profit standpoint.

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10 thoughts on “Where does Microsoft make money? (Updated 2013)”

  1. Nice article. What I like in recent years in Microsoft is: 1) they don’t censor anything and 2) they don’t advertise. A few people have the courage to recognize that if Microsoft would disappear overnight, the world would be in total chaos, moreover, global security would be at risk. On the other hand, if Facebook or Google disappear overnight, nothing will happen. Thanks for Visual Basic 6 codes, are much appreciated.

  2. how credible is this information? do you have any sources to site? if so send them to my email please. Excellent article.

  3. I saw you mentioned before that “Windows division (+30% revenue, +70% profit)”.Could you tell me how you calculate these ratios??Thank you!

    1. Hi Crystal. Make sure to read that statement in context of the full sentence, e.g. “The Business (Office) division brings in significantly more money than the Windows division (+30% revenue, +70% profit).” Basically, the Office division brings in 30% more revenue and 70% more profit than the Windows division. That number is taken from the basic per-division revenue and profit numbers in the 10-K filing.

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