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.

Where does Microsoft make money? (Updated 2012)

THIS INFORMATION IS OUTDATED. Click here to see the updated 2013 report.

As in past years, all information in this report is taken from Microsoft’s publicly available 2012 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 2010 and 2011 values as calculated in the 2012 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 Total Revenue and Operating Income (June 2011 – June 2012)

Total Revenue: $73,723,000,000
Operating Income: $21,763,000,000

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 formal 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. Therefore, it is important to look at not just how much money a certain division brings in – but at how much it costs to operate that division.

Microsoft total revenue and operating income, 2010 - 2012
Long story short: Microsoft’s 2012 revenues were up over 2011, but operating income fell.

Microsoft Revenue and Operating Income by Division (June 2011 – 2012)

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

  • Windows and Windows Live – Windows operating system, Windows Live applications and web services, Microsoft PC hardware products.
  • Microsoft Business – Microsoft Office (including Office Web Apps and Office 365), Microsoft Exchange, Microsoft SharePoint, Microsoft Lync, Microsoft Office Project and Office Visio, and Microsoft Dynamics ERP and CRM.
  • Server and Tools – Windows Server operating system, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, Windows Intune, Windows Embedded, System Center products, Microsoft Consulting Services, and Premier product support services.
  • Entertainment and Devices – Xbox 360 console, games, and accessories (e.g. Kinect), Xbox LIVE, Windows Phone. In 2012, Microsoft also added Skype to this division.
  • Online Services – Bing, Microsoft adCenter, MSN, and Atlas online tools for advertisers.

(Note: these divisions are pretty much identical to 2011, with the exception of Skype being added to Entertainment and Devices.)

Here are the 2011-2012 revenue and operating income values for each division, in USD. Note that the number in parentheses is the percentage change between 2011 and 2012.

Windows and Windows Live
Revenue: $18,373,000,000 (-3%)
Operating Income: $11,460,000,000 (-6%)

Business (Office, Exchange, SharePoint)
Revenue: $23,991,000,000 (+7%)
Operating income: $15,719,000,000 (+7%)

Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $18,686,000,000 (+12%)
Operating Income: $7,431,000,000 (+18%)

Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $9,593,000,000 (+8%)
Operating income: $364,000,000 (-71%)

Online Services (Bing, MSN, Hotmail)
Revenue: $2,867,000,000 (+10%)
Operating income: $-8,121,000,000 (*)

(* – Microsoft marks the large difference between Online Services’ 2011 and 2012 operating income as “not meaningful.” The explanation: “OSD’s fiscal year 2012 operating loss reflects a goodwill impairment charge of $6.2 billion, which we recorded as a result of our annual goodwill impairment test in the fourth quarter. The non-cash, non-tax-deductible charge related mainly to goodwill acquired through our 2007 acquisition of aQuantive, Inc.”)


Total Revenue Charts – 2012

Microsoft revenue by division 2012 (raw values)
Microsoft total revenue by division in 2012. (Amounts in millions USD.)

 

Microsoft revenue by division 2012 (percentages)
Microsoft total revenue by division for 2012, as percentages. Note that in terms of pure revenue, Microsoft Business outperforms every other division. This chart is also nice for showing just how little XBox, Bing and – at present – Windows Phone matter to Microsoft’s current cash flow. That may change in the future, but for now it is all about Office, Windows, and Server/Tools.

Operating Income Chart – 2012

Microsoft operating income by division 2012
Microsoft operating income, by division, for 2012. (Amounts in millions USD.) Note that Online Services represents an $8.1 billion dollar LOSS. Microsoft Business is far and away the most profitable division, while Server and Tools – which brought in as much revenue as the Windows division in 2012 – represents significantly less profit. Again, note how insignificant XBox and Windows Phone are from a profit standpoint.

Year-over-year comparisons (2010-2012)

Microsoft revenue by division (2010-2012)
Microsoft revenue by division for the years 2010, 2011, and 2012. Overall revenue continues to trend upward, despite Windows sales falling for two years straight. It will be very interesting to see how the October launch of Windows 8 affects next year’s numbers.

 

Microsoft operating income by division (2010-2012)
Microsoft operating income by division for the years 2010, 2011, and 2012. Unlike revenue, operating income varies dramatically from year to year. Microsoft Business dominated profits in 2012, while Online Services continued to hemorrhage a frightening amount of money. Entertainment and Devices also took a huge hit from 2011, so don’t be surprised if Microsoft becomes increasingly aggressive about improving profitability of XBox and Windows Phone in 2012.

Where does Microsoft make money? (Updated 2011)

THIS INFORMATION IS OUTDATED. Click here to see the updated 2012 report.

I’ve done this for Microsoft’s 2009 and 2010 fiscal years, so I may as well add 2011’s to the list.  (Microsoft’s fiscal year ends in June, so I’ll be adding 2012’s data when it becomes available.)

As before, all information in this report is taken from Microsoft’s publicly available 2011 10-K filing.  Numbers may vary slightly from past reports; for reasons I don’t fully understand, Microsoft retroactively adjusts their exact earning numbers in subsequent years.  This article uses 2009 and 2010 values as calculated in the 2011 report.  All values are in USD.

If you’ve read my report on past years (2009 or 2010) then 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 Total Revenue and Operating Income (June 2010 – June 2011)

Total Revenue: $69,943,000,000
Operating Income: $27,161,000,000

For those who don’t know, 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 formal 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.  Therefore, it is important to look at not just how much money a certain division brings in – but at how much it costs to operate that division.

Microsoft Revenue and Operating Income by Division (June 2010 – 2011)

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

Windows and Windows Live – Windows operating system, Windows Live applications and web services, Microsoft PC hardware products.

Microsoft Business – Microsoft Office (including Office Web Apps and Office 365), Microsoft Exchange, Microsoft SharePoint, Microsoft Lync, and Microsoft Dynamics ERP and CRM.

Server and Tools – Windows Server operating system, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, Windows Intune, Windows Embedded, System Center products, Microsoft Consulting Services, and Premier product support services.

Entertainment and Devices – Xbox 360 console, games, and accessories (e.g. Kinect), Xbox LIVE, Windows Phone.

Online Services – Bing, Microsoft adCenter, MSN, and Atlas online tools for advertisers.

(Note: these divisions are roughly the same as 2010, with the following two exceptions: in 2011, Microsoft hardware products were moved from Entertainment and Devices to Windows and Windows Live.  Also, Windows Embedded device OS was moved from Entertainment and Devices to Server and Tools.)

The 2010-2011 Revenue and Operating Income for each division, in USD, is as follows:

Windows and Windows Live
Revenue: $19,024,000,000
Operating Income: $12,281,000,000

Business (Office, Exchange, SharePoint)
Revenue: $22,186,000,000
Operating income: $14,124,000,000

Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $17,096,000,000
Operating Income: $6,608,000,000

Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $8,913,000,000
Operating income: $1,324,000,000

Online Services (Bing, MSN, Hotmail)
Revenue: $2,528,000,000
Operating income: $-2,557,000,000


Total Revenue Charts

Microsoft revenue by division (raw values)
Microsoft total revenue by division in 2011. (Amounts in millions USD.)

 

Microsoft revenue by division (percentages)
Microsoft total revenue by division for 2011, as percentages. Note that in terms of pure revenue, Microsoft Business outperformed every other division.

Operating Income Chart

Microsoft operating income by division
Microsoft operating income, by division, for 2011. (Amounts in millions USD.) Note that Online Services represents a $2.5 billion dollar LOSS. Also note that Microsoft Business remained the most profitable division, while Server and Tools - which brought in almost as much revenue as the Windows division in 2011 - represented significantly less profit overall.

Year-over-year comparisons (2009-2011)

Microsoft revenue by division (2009-2011)
Microsoft revenue by division for the years 2009, 2010, and 2011. Overall revenue increased slightly in 2010 and dramatically in 2011, but the overall percentage represented by each division did not change by an appreciable amount.

 

Microsoft operating income by division (2009-2011)
Microsoft operating income by division for the years 2009, 2010, and 2011. Unlike revenue, operating income varies dramatically from year to year. Microsoft Business dominated profits in 2011, while Online Services continued to hemorrhage a frightening amount of money. It's also worth noting that while Entertainment and Devices represents a small amount of Microsoft's total profit, that division doubled in profitability from 2010 to 2011.

Where does Microsoft make money? (Updated 2010)

THIS INFORMATION IS OUTDATED. Click here to see the updated 2012 report.

Since my previous article on this topic has received a lot of attention, I figured I should update the numbers for 2010.

Before I post these numbers (which are publicly available via Microsoft’s 10K filing), let me clearly state that I do not compile this information in order to advocate a pro- or anti-Microsoft agenda. My primary purpose in compiling this information is to help individuals discuss Microsoft with some level of objectivity.

So without further ado, here’s a simplified version of “where does Microsoft make its money (2010).”

Total Revenue and Operating Income (June 2009 – 2010)

Total Revenue: $62,484,000,000
Operating Income: $24,098,000,000

For those who don’t know, Operating Income = Operating Revenue – Operating Expenses. In other words, “Operating Income” is the profit made from normal business operations. (A more formal 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.”)

Revenue and Operating Income by Division (June 2009 – 2010)

Microsoft’s products are divided into five divisions: Windows & Windows Live (formerly “Client”), Server and Tools, Online Services, Microsoft Business, and Entertainment and Devices. The types of products and services provided by each segment are summarized below:

Windows and Windows Live – Windows operating system: Windows 7, including Home Basic, Home Premium, Professional, Ultimate, Enterprise, and Starter Edition; Windows Vista, including Home Basic, Home Premium, Ultimate, Business, Enterprise and Starter Edition; and Windows XP Home. Windows Live suite of applications and web services.

Server and Tools – Windows Server operating system; Windows Azure; Microsoft SQL Server; SQL Azure; Visual Studio; Silverlight; System Center products; Biz Talk Server; Microsoft Consulting Services; Premier product support services; and other products and services.

Online Services Business – Bing; Microsoft adCenter; MSN; and Atlas online tools for advertisers and publishers.

Microsoft Business Division – Microsoft Office; Microsoft SharePoint; and Microsoft Dynamics ERP and CRM, as well as Microsoft Office Web Apps, which are the online companions to Microsoft Word, Excel, PowerPoint and OneNote.

Entertainment and Devices Division – Xbox 360 console and games; Xbox LIVE; Windows Phone; Windows Embedded device operating system; Zune; Mediaroom; and numerous consumer software and hardware products (such as Mac Office, mice, and keyboards); and Windows Automotive.

Microsoft’s previous fiscal year (June 2009-2010) was a particularly interesting one, with major headlines including the Windows 7 launch, Office 2010 launch, a redesigned XBox 360, Windows Phone 7, a new search and advertising agreement with Yahoo!, and the first full year of Bing-branded services. Some of these announcements came late in the fiscal year, which can indicate significant development cost without corresponding sales (keep that in mind).

The 2009-2010 Revenue and Operating Income for each division, in USD, is as follows:

Windows and Windows Live
Revenue: $18,491,000,000
Operating Income: $12,977,000,000

Server and Tools (Windows Server, Windows Azure, Visual Studio, Silverlight)
Revenue: $14,866,000,000
Operating Income: $5,491,000,000

Online Services (Bing, MSN, Hotmail)
Revenue: $2,199,000,000
Operating income: $-2,355,000,000

Business (Office, SharePoint, Dynamics ERP/CRM)
Revenue: $18,642,000,000
Operating income: $11,776,000,000

Entertainment and Devices (XBox 360/LIVE, Zune, Windows Phone, hardware)
Revenue: $8,058,000,000
Operating income: $679,000,000

Where does Microsoft make its money?

THIS INFORMATION IS OUTDATED. Click here to see the updated 2012 report.

Ever wondered which of Microsoft’s product divisions are most profitable?  I have, so today I did some research. Here’s what I found.

What follows are some graphs and explanations of Microsoft’s 2008 revenue.  All information is provided courtesy of Microsoft’s annual 10-K filing (available for download here).

Total Revenue and Operating Income (2008)

Microsoft’s 2008 Total Revenue: $60,420,000,000
Microsoft’s 2008 Operating Income: $22,492,000,000

For those who don’t know, Operating Income = Operating Revenue – Operating Expenses.  In other words, “Operating Income” is the profit made from normal business operations. (A more formal 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.”)

It is important to note both revenue and operating income, because certain Microsoft divisions make a great deal of money but are not nearly as profitable/lucrative as other divisions.

Revenue and Operating Income by Division (2008)

Microsoft’s products are divided into five divisions: Client, Server and Tools, Online Services, Microsoft Business, and Entertainment and Devices.  The types of products and services provided by each segment are summarized below:

Client – Windows Vista, including Home, Home Premium, Ultimate, Business, Enterprise and Starter Edition; Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other standard Windows operating systems.

Server and Tools – Windows Server operating system; Microsoft SQL Server; Microsoft Enterprise Services; product support services; Visual Studio; System Center products; Forefront security products; Biz Talk Server; MSDN; and other products and services.

Online Services Business – Live Search; MSN; MapPoint; MSN Internet Access; MSN Premium Web Services (consisting of MSN Internet Software Subscription, MSN Hotmail Plus, and MSN Software Services); Windows Live; MSN Mobile Services; AvenueA Razorfish media agency services; Atlas online tools for advertisers; and the Drive PM ad network for publishers.

Microsoft Business Division – Microsoft Office; Microsoft Project; Microsoft Visio; Microsoft Office SharePoint Server; Microsoft PerformancePoint; Microsoft Office Live; FAST ESP; Microsoft Exchange Server; Microsoft Exchange Hosted Services; Microsoft Office Live Meeting; Microsoft Office Communication Server; Microsoft Office Communicator; Microsoft Tellme Service, Microsoft Dynamics AX; Microsoft Dynamics CRM; Microsoft Dynamics CRM Online; Microsoft Dynamics GP; Microsoft Dynamics NAV; Microsoft Dynamics SL; Microsoft Dynamics Retail Management System; Microsoft Partner Program; and Microsoft Office Accounting.

Entertainment and Devices Division – Xbox 360 console and games; Xbox Live; Zune; Mediaroom; numerous consumer software and hardware products (such as mice and keyboards); Windows Mobile software and services platform; Windows Embedded device operating system; Windows Automotive; and Surface computing platform.

The 2008 Revenue and Operating Income for each division, in USD, is as follows:

Client (Windows Operating System)
Revenue: $16,865,000,000
Operating Income: $13,052,000,000

Server and Tools (Windows Server, Microsoft SQL Server, Visual Studio)
Revenue: $13,170,000,000
Operating Income: $4,593,000,000

Online Services (Live Search, MSN, Hotmail)
Revenue: $3,214,000,000
Operating income: $-1,233,000,000

Business Division (Office, Project, Visio, Exchange Server, Dynamics)
Revenue: $18,932,000,000
Operating income: $12,358,000,000

Entertainment and Devices (XBox, Zune, Windows Mobile)
Revenue: $8,140,000,000
Operating income: $426,000,000

microsoft-2008-revenue-usd
ms-2008-revenue-percent
microsoft-2008-operating-income

Interesting, isn’t it? Office generates more money than Windows, but Windows is slightly more profitable.