The real secret to Microsoft's success

People of certain beliefs are fun to make fun of Microsoft (MSFT). This is outdated and sometimes bloated software. An operating system version so despised that most users refused to upgrade its predecessor and instead waited for its replacement. A browser that once held 95% of the global market share, no longer leads in any country. And cell phones that barely register in a universe dominated by iPhones and Androids.

Key findings

  • Microsoft is a household name with well-known product lines such as Windows, Office and Xbox.
  • Founded more than 30 years ago, Microsoft has expanded far beyond software and devices into cloud computing and services
  • Microsoft is the most traded stock in index funds and ETFs in 2019.

Microsoft is growing its business

Many (okay, some) of us are old enough to remember when Microsoft was the very definition of an innovator, its young founders and their unorthodox culture flying in the face of the formal, underappreciated business world that had limited use or knowledge of computers. Today, Microsoft is a gray flannel pillar of the Dow, and that’s welcome. The alternative would be for the audacious software upstart to be irrelevant today.

Yet sometimes the consensus opinion about Microsoft seems to prompt questions like, “How on earth do they make so much money?” After all, Microsoft isn’t the most innovative company in the world, nor is it the most agile. However, the critics seem to be forgetting something: a) Microsoft is the largest software maker in the world, b) people benefit greatly from software, and c) Microsoft is no longer just a software maker.

Microsoft under CEO Satya Nadella

Under the leadership of CEO Satya Nadella, who took over in 2014. Microsoft has aggressively entered services and cloud computing. It’s the Azure cloud computing system that now has a solid percentage of the market share globally, second only to Amazon Web Services, and accounts for nearly a third of the company’s total revenue.

Microsoft’s revenue topped $125 billion in revenue last year and generated $42 billion in operating income. With a profit margin of 29%, which is significantly higher than both An apple (Nasdaq:AAPL) or Alphabet (Nasdaq:GOOG), two companies that public opinion has overtaken Microsoft.

Stable and ubiquitous

This popular opinion stems from a false assumption: that a new product line with frequent updates is the surest path to success in the technology sector. Not true. Take Surface, Redmond’s answer to Apple’s iPad. It’s not the kind of product that makes or breaks a company of Microsoft’s power and magnitude. Rather, it’s a way to stay relevant in the consumer electronics market—of course, the idea is for the Surface to generate enough profit to justify the costs behind it, but a few million happy Surface owners have only a minimal effect on the company’s bottom line numbers. Microsoft. The same goes for the awesome Xbox, whose sexiness as a gaming console far outweighs its contribution to Microsoft’s overall financial picture.

Microsoft vs. S&P500 since 2010

The truth is a bit more pedestrian. Perhaps it’s because Microsoft is so ubiquitous, a constant reminder in the daily lives of those who use its products. Every time you turn on your computer, the Microsoft logo stares back at you, even if you’re a Mac or Linux user who still uses Microsoft’s Office suite. Shouldn’t a company with such a wide and deep footprint make its business endlessly delight and fascinate us, with youthful exuberance and a penchant for self-promotion? You know, like Google?

The fact is, more than four decades after its founding, Microsoft is as stable and disciplined as IBM (NYSE:IBM), ITT (NYSE:ITT), Litton Industries, and the other companies that rounded out the upper reaches of the Fortune 500 in 1975. The software giant is primarily in the business of making money, which sounds tautological at first glance, but it really isn’t. Microsoft is no longer in the stage of raw experimentation common to young and growing companies. Rather it is way of acting is to create streams of profitability, then maintain and expand them.

Software as a Service

The name Microsoft Productivity and Business Processes may sound unhelpfully generic, but it refers to the part of operations responsible for creating the incredibly profitable Office. The suite began as an add-on, a way to introduce Microsoft’s revolutionary operating system. But since the debut of Office in 1990, the applications that make it up have become almost mandatory for anyone who wants to conduct business. Over a billion people now use Office, to the point where Word and Excel are practically synonymous with word processing and spreadsheets respectively. Multiply that user base by $150 per abbreviations license Home and student version of Office, product whose marginal cost is close to zero, and it’s easy to see why Microsoft is doing everything in its power to keep Office profitable (and why competitors from OpenOffice to Google Docs want nothing more than to chip away at Office’s market share .)

The only serious competitor to the business unit for dominance at Microsoft is the company’s Windows division, whose latest contribution to the market is Windows 10. Windows’ share of the global operating system market is more than 35%.

The bottom row

All-in-one entertainment systems (Xbox One) and free worldwide audio and video conferencing (Skype) may be exciting things that make life in the 21st century more enjoyable, but their impact on Microsoft’s revenue is minimal. Instead, the company’s secret to staggering wealth lies in the day-to-day business of allowing users to create and manipulate documents; and providing software that performs a computer’s most important function—allowing data to pass from your computer’s hardware components to its display. It’s not attractive, but it pays the bills… to an extent few companies in history can measure up to.

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