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.

Norway

“Vi er så få her i landet, hver fallen er bror og venn”

– Nordahl Grieg

Terrible news out of Norway today:

Norway came under deadly attack Friday with a massive bombing in the heart of its power center and a shooting at the ruling party’s youth camp on an island outside the capital…

Though I’m born and raised American, my grandparents were first-generation Norwegian immigrants, and I have many friends and family back in beautiful Norge.  Please keep the country in your thoughts (and prayers, if you believe in that sort of thing) as they deal with the aftermath of these terrible attacks.

(If anyone has links to sites where individuals can contribute money or time or anything else to help, please let me know and I’ll repost it here.)

Dear Hulu: You Have a Problem

Dear Hulu:

I’m intervening because I care.  We’ve had some good times together, but if you continue down the road you’re on, you are going to die.

What am I talking about?  I think you know.  I’m talking about your asinine leadership, including such figures as Chase “Diarreah of the Mouth” Carey and Rupert “I Lost $4.3 Billion This Year” Murdoch.

These people are not helping you, Hulu.  These people are hurting you.

Maybe even killing you.

See, people like Carey and Murdoch come from the “old school” approach to media.  They think that consumers should be forced to double- and triple-pay for all media they consume.  It’s not enough that consumers sit through commercials.  They should also pay for a subscription service like cable or satellite (unless they settle for OTA, of course).  On top of that, dedicated fans should pay AGAIN for a copy of these shows on DVD or Blu-Ray.  Murdoch and Carey think that’s still not enough, because they now want to charge you for watching shows online as well.  Last I count, if you really enjoy a show you should pay for it at least four times – and that’s not including if you want the show on a portable device like an iPod or smartphone.

You know what’s so great about you, Hulu?  You haven’t been this way.  You’ve given people the opportunity to enjoy shows over and over and over again by only paying for them ONCE (via advertising).  What a novel concept – allowing people to enjoy shows from almost any internet-connected device, and recouping your cost via advertising.

This concept reminds me of another company you may have heard of.  Its name is Google.  Google’s market cap is currently over $170 billion dollars.  Has Google achieved phenomenal success by shifting its burden of cost to consumers via subscriptions?

Absolutely not.  Google provides consumers with free services (search, Gmail, Google Maps, YouTube, Google Docs, Chrome) then subsidizes those free services with ad revenue.  $170 billion dollars later, consumers possess a plethora of free and useful tools, advertisers have the most targeted ad venue ever created, and Google becomes the most powerful online entity in the world.

Compare this to all the multibillion-dollar online companies that recoup costs through subscription models.

…Oh.  Wait.  How many multibillion-dollar online companies do that successfully?

That’s right.  Zero.

Now this is not to say that premium subscription services cannot work, because they can.  (Although many other companies have tried that and failed.)  If you wanted to offer, say, 1080p streaming for a premium price, that would be okay with me and most of your other users.

But the key with premium services is to actually provide premium offerings.  If you attempt to take something that has been free (e.g. everything up to this point) and suddenly start charging for it, you will lose viewers.  Tons of viewers.  Maybe all of ’em.  Imagine if Google started charging you a monthly fee to use your Gmail account.  Imagine if Facebook started charging every time you checked your “wall.”

It’ll never happen, because these companies aren’t moronic.  But Hulu, your board of directors…

…Let’s just say I’m not as sure about them.

I want this to be more than just an angry rant, so let me share some concrete ideas on how you can increase profitability without alienating your entire userbase.

  1. Improve international offerings. Do you have any idea how popular you could be if you became less U.S.-centric?  Even if your shows remained available only in English, you could easily increase viewership by an entire order of magnitude through an improved international presence.
  2. More stand-alone software clients. Your recent desktop Linux client was a great move.  A PS3 client would be even better.  Clients for mobile OSes?  Pure gold.
  3. Start cross-selling DVD versions of shows, and consider partnering with Amazon or iTunes for downloadable sales. If someone is watching back episodes of “The Office” and loving every minute of it, why not sell them a DVD box set right there?
  4. Convince CBS and other leery networks to sign up. I’d love some online Big Bang Theory, so help CBS realize that they make more money off me watching BBT on your site than they do when I DVR the show and watch it commercial-free over and over and over again.

If you try all four of these ideas and none work, then consider some kind of paid premium offering.  Just don’t jump straight to a subscription model, because it makes no sense.

Sorry for being so bold, but I like you, Hulu.  I want you to succeed.

But facts are facts, and let’s face it – your competitors are only getting stronger.  YouTube is already offering ad-supported movie servicesCrackle is getting better, even if it remains U.S.-only.  Netflix’s Instant Watch offers most of what you do PLUS the ability to get my HD fix via Blu-ray.

So to try and switch to a subscription model amidst all this competition is nothing short of suicide.

I want better for you.

I recently joined many others in canceling my cable service because I have better places to send $75 a month.  First thing I did was buy a $20 antenna that gets me all the major TV stations (in hi-def).  This, combined with Linux’s MythTV and a digital tuner card, gives me a great HD-DVR.  Netflix and you fill in the rest of the gaps, and with all the leftover money I can buy every show I’ve ever enjoyed on DVD or Blu-ray.

Lots of people have left cable and dish behind because of services like yours, Hulu.  With the economy in the state it’s in, you can bet that many more people will take this leap in the near future.

So the question becomes – when these millions of viewers look to online viewing offerings, are they going to pick the free YouTube, the less-shows-but-free Crackle, or the as-good-as-you-plus-physical-media Netflix?

You fill a niche that no other site currently fills, and you are throwing away years of progress if you move to a subscription-only model.  Let NetFlix fill that niche.  It already does it much better than you could because of its pairing with rental services.

I’m here to help, Hulu.  Don’t make me leave you.

Because if you become “subscription only,” I will.

Study Shows Children Ruin Marriage (probably)

Today’s post is a little different from my usual fare, but I think it’s something others will find useful.

I spend all day at work examining clinical studies – really examining them.  The members of my department are responsible for deconstructing medical research in order to justify or negate regulatory claims.  This leaves no room for error, since the tiniest details of medical research can mean the difference between a multibillion-dollar product and a multibillion-dollar lawsuit.

As you can imagine, my job frequently leaves me disappointed with mass media’s portrayal of scientific research.  Many reporters – whether ignorant or malicious, it doesn’t really matter – misrepresent new research by reporting data incorrectly or leaving out key details. As links to these partially correct stories get spread across social media, the details of the research tend to get further and further obscured.

So whenever I get the chance, I like to read new research publications first-hand to see what researchers have REALLY discovered – and that’s what prompted today’s article.

Today’s paper comes from the March 2009 edition of the Journal of Personality and Social Psychology.  The title of the article is “The effect of the transition to parenthood on relationship quality: An 8-year prospective study.”  Popular media has cherry-picked various aspects of this study, and depending on the source (right-wing or left) the implications are all over the map.

So I’m going to give you the actual findings of the study, and if you’d like to examine the paper yourself you can purchase it from this link ($12 USD as of 26 June 2012): http://psycnet.apa.org/index.cfm?fa=buy.optionToBuy&id=2009-02415-008.

First, the study parameters:

  • The research comes out of the University of Denver (with collaboration from Texas A&M)
  • The researchers examined 218 couples in Denver over 8 years.
  • Of those 218 couples, 134 – or 61% – had a child during the course of the study. The other 84 couples did not.

Most of the interesting data was compiled from yearly questionnaires submitted by the study participants. These questionnaires asked each participant to rate their marital satisfaction on a scale of 1 to 7.

Known limitations to the research include:

  • Most participants were well-educated
  • Most participants were white
  • Most participants were married in religious ceremonies
  • Almost all participants were from a metropolitan area

Also, the study only looked at the birth of first children.

Knowing that, here are the highlights.  Take from them what you will.

  • For 90 percent of couples, marital bliss dived in the year following the birth of a first child.  To quote a professor from Texas A&M, “the take-away message is probably that for the average couple, having a child is a strain on the relationship.”
  • While 90 percent seems like a lot, it’s not universal – in fact, 15 percent of fathers and 7 percent of mothers ended up more satisfied with their marriage after the birth of their first child.
  • Couples who were the most romantic before children experienced the sharpest decline in satisfaction after the birth of a first child.
  • Couples who had babies within a year (approximately) of getting married and couples with lower incomes experienced larger drops in marital satisfaction.
  • Couples who did not have children also showed diminished marital satisfaction over time. However, having a baby appeared to accelerate the deterioration.
  • The research also correlated steeper declines in happiness with the mother’s parents being divorced, the couple living together before marriage, and the first baby being a girl.  (As one story correctly reported, a reasonable theory about the girl factor is that couples tend to struggle more when they have a daughter because the father may be less involved in child care.)
  • If you read all that and still want to have a child with your spouse, are you crazy? Maybe. :) Actually, the study did show that among the few couples who reported increased satisfaction after the birth of their first child, the correlating factors were 1) higher incomes 2) being married longer before having the child. So if you want a happy marriage AND children, the takeaway message seems to be: get your finances in order, and don’t rush into child-rearing. As this study (and frankly, many others) indicates, waiting to have a child will NOT decrease your marital satisfaction – in fact, just the opposite appears to be true.

For what it’s worth, I personally found this study to be of high quality, especially when compared to other studies examining the effect of children on marital satisfaction.  Kudos to these researchers, and as always – carefully consider the details of this research, including all its caveats, before rethinking your plans for life.

P.S. If you find these results depressing, perhaps you’ll find comfort in this comment from Scott Stanley, one of the paper’s authors:

“There are different types of happiness in life and that while some luster may be off marital happiness for at least a time during this period of life, there is a whole dimension of family happiness and contentment based on the family that couples are building.  This type of happiness can be powerful and positive but it has not been the focus of research.”

Note: this article was edited on 26 June 2012. I added the price of the research paper per requests from readers, and I also reworded some statements to make them clearer. -Tanner

A Proud Day for Science (and Common Sense)

As this ABC News story reports, today the Texas State Board of Education voted to remove wording from their science standards that allowed teachers to slam evolution in public science classes. The wording – which seems innocuous enough – invited teachers and students to debate “strengths and weaknesses” of scientific theories.  Unfortunately, this phrase was basically a veiled way for teachers to smash evolution whenever they felt like it.  About time it got fixed.

Because if common sense can win out in Texas, it can win out anywhere.

As a bioinformatician (yes, that is an actual word) by both trade and education, I couldn’t be happier about the Texas Board of Education’s decision.  Anyone with any serious training in biology knows that “nothing in biology makes sense except in the light of evolution.”  There is no debate over whether or not evolution happens.  You may have heard the argument that “evolution is just a theory,” but I hope you realize the idiocy of this argument.  Gravity is also a theory.  So is the existence of germs (germ theory).  Einstein’s Theory of Relativity, atomic theory, plate tectonics, number theory – would you like me to go on?  Evolution is in the same class as all of these, so if you don’t believe in “theories” you will need to reconsider most of the foundational constructs of the modern world.

As linked above, one of the great essays on evolution comes from Theodosius Dobzhansky, a man sometimes referred to as “the father of modern biology.”  Dobzhansky was a faithful Christian and a brilliant evolutionary biologist, and a complete copy of his famous essay (“Nothing in Biology Makes Sense Except in the Light of Evolution”) is available here:

http://people.delphiforums.com/lordorman/light.htm

To quote from it:

“Seen in the light of evolution, biology is, perhaps, intellectually the most satisfying and inspiring science. Without that light it becomes a pile of sundry facts some of them interesting or curious but making no meaningful picture as a whole.

This is not to imply that we know everything that can and should be known about biology and about evolution. Any competent biologist is aware of a multitude of problems yet unresolved and of questions yet unanswered. After all, biologic research shows no sign of approaching completion; quite the opposite is true. Disagreements and clashes of opinion are rife among biologists, as they should be in a living and growing science. Anti-evolutionists mistake, or pretend to mistake, these disagreements as indications of dubiousness of the entire doctrine of evolution. Their favorite sport is stringing together quotations, carefully and sometimes expertly taken out of context, to show that nothing is really established or agreed upon among evolutionists. Some of my colleagues and myself have been amused and amazed to read ourselves quoted in a way showing that we are really anti-evolutionists under the skin.

Let me try to make crystal clear what is established beyond reasonable doubt, and what needs further study, about evolution. Evolution as a process that has always gone on in the history of the earth can be doubted only by those who are ignorant of the evidence or are resistant to evidence, owing to emotional blocks or to plain bigotry. By contrast, the mechanisms that bring evolution about certainly need study and clarification. There are no alternatives to evolution as history that can withstand critical examination. Yet we are constantly learning new and important facts about evolutionary mechanisms.

It is remarkable that more than a century ago Darwin was able to discern so much about evolution without having available to him the key facts discovered since. The development of genetics after 1900 especially of molecular genetics, in the last two decades has provided information essential to the understanding of evolutionary mechanisms. But much is in doubt and much remains to be learned. This is heartening and inspiring for any scientist worth his salt. Imagine that everything is completely known and that science has nothing more to discover: what a nightmare!

Does the evolutionary doctrine clash with religious faith? It does not. It is a blunder to mistake the Holy Scriptures for elementary textbooks of astronomy, geology, biology, and anthropology. Only if symbols are construed to mean what they are not intended to mean can there arise imaginary, insoluble conflicts. As pointed out above, the blunder leads to blasphemy: the Creator is accused of systematic deceitfulness.

One of the great thinkers of our age, Pierre Teilhard de Chardin, wrote the following: “Is evolution a theory, a system, or a hypothesis? It is much more[;] it is a general postulate to which all theories, all hypotheses, all systems much henceforward bow and which they must satisfy in order to be thinkable and true. Evolution is a light which illuminates all facts, a trajectory which all lines of though must follow.  [This] is what evolution is.” Of course, some scientists, as well as some philosophers and theologians, disagree with some parts of Teilhard’s teachings; the acceptance of his worldview falls short of universal. But there is no doubt at all that Teilhard was a truly and deeply religious man and that Christianity was the cornerstone of his worldview. Moreover, in his worldview science and faith were not segregated in watertight compartments, as they are with so many people. They were harmoniously fitting parts of his worldview. Teilhard was a creationist, but one who understood that the Creation is realized in this world by means of evolution.”

The World is Not Going to Hell

Today the FBI released its preliminary Semiannual Uniform Crime Report for 2008. The findings?

The world is not going to hell.  In fact, despite what you may have heard from your local street preacher, the United States actually became a safer place to live in 2008.  Some of the report’s highlights include:

  • Violent crime decreased by 3.5% in 2008, including:
    • 4.4% decline in murder
    • 4.1% decline in aggravated assault
    • 3.3% drop in rape
    • 2.2% drop in robbery
  • Property crime decreased by 2.5%, including:
    • 12.6% decrease in motor vehicle theft
    • 5.6% decrease in arson
    • 1.2% decrease in larceny/theft
    • 0.8% decrease in burglary

You might be surprised to discover that both violent crime and property crime (in the U.S.) have steadily decreased since the early 1990’s.  (Graphs are available here: http://en.wikipedia.org/wiki/Crime_in_the_United_States)

I’m certainly not advocating there isn’t a great deal of work left to do, but I’m tired of hearing people say that “the world is worse than it has ever been.”   At least in the United States, crime rates have been dropping for over 15 years.  In fact, current violent crime rates mirror those of the early 1970’s, while property crime rates are similar to those of the late 1960’s.

Obviously, crime rates are still way above where they should be – but let’s not ignore how far we’ve come.