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Microsoft's money machine revealed

Analysis Financial results examined
Sun Nov 16 2003, 08:15
alt='spec2' LAST THURSDAY'S release by Microsoft of the performance of each business unit in its last financial quarter may well have a few regulators reviewing the financial penalties that have been applied to the company. On 23 October Microsoft announced the company's performance for the three months ending 30 September. It stated a total revenue of $8.22 billion and an operating income of $3.15 billion for that quarter, both up slightly on the previous year.*

What is most interesting is how this revenue and income break down by business unit and those recent figures give us that picture.

Three business units lost money. Its home and entertainment unit had revenues of $581 million but with costs of $854 million this unit had a net loss of $273 million. The unit dealing with mobile and embedded devices had revenue of $53 million but a net loss of $32 million. Finally its "Business Solutions" reported a loss of $79 million on revenue of $128 million.

Together these loss-making units generated $762 million in revenue but costs of $1164 million show a shortfall in revenue of about 35%. In particular the "home and entertainment" market is proving a tough nut for Microsoft to crack.

The business units that did not make a loss are far more interesting.

The smallest profit maker, its MSN unit, generated $58 million income on total revenue of $491 million. The server and tools unit made $370 million income and had revenues of $1866 million.

The two major units, together accounting for about 60% of revenue, were the "Information Worker" unit that deals with Office and other applications, and the "Client" unit that deals with the Windows operating system. These had revenue of $2287 million and $2809 million respectively and generated $1591 million and $2264 million.

Let's have a closer look at these profit-making units, especially at the operating costs of each unit and the profit generated as a percentage of the cost, the costs being easy to calculate by subtracting the income from the revenue.

The MSN unit had costs of $433 million and generated a profit of $58 million, which is a 12.2% profit on their outlay.

The Server and Tools unit had costs of $1496 million and generated $370 million, a 24.7% profit.

The Information Worker units, responsible for application software, had costs of just $696 million and that generated $1591 million, a profit of 228.6% of the money they spent.

The grand-daddy of them all was the unit responsible for Windows. It had costs of just $545 million but generated a profit of $2264 million, a staggering 415.4% profit on the money they put into it.

Client (Win)

Let's put this in context. Dell's recent quarterly statement shows its margin at about 9%, which is a lower margin than even the least productive of Microsoft's profit-making groups. IBM's margin is similar to Dell's but HP's is about 6% in total, thanks mainly to printers, and Sun Microsystems is even lower.

Microsoft's near-monopoly in PC operating systems has basically given it a licence to print money.

The cynics are probably wondering how much of the profit margin with Windows and associated applications was generated by bug-ridden software and business practices -- challenged on numerous occasions.

With profit margins of this magnitude maybe it may be appropriate for the various regulators to reconsider the effectiveness of the penalties that have been imposed on Microsoft. Those penalties are certainly looking pretty trivial in the light of these profit margins - especially where the settlements have included discounted Microsoft software.

Maybe also the European Union should take a good hard look at the severity of any fines that might arise from the recent investigation. The complaint giving rise to the investigations was made in 1998 and judgement is unlikely before June 2004. In the intervening period it appears that Microsoft has been doing very nicely and the EU may consider that these huge margins were partially at the expense of competitors for Microsoft's media player. µ

* NOTE TO readers. We replaced the four paragraphs above the table very slightly re-worded as the meaning of margin and profit appears to differ between territories. It's the word "margin" which seems to offend... Ed.


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