11.03.10

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Microsoft Hides Billions in Losses in Areas

Posted in Finance, Microsoft, Office Suites, Windows at 1:50 am by Dr. Roy Schestowitz

“I was out with a couple of Silicon Valley software guys in New York the other night and got their view of Microsoft’s finances. Microsoft makes 60 percent of its profits on Windows, 60 percent on Office, and minus 20 percent on everything else, they said. “

Technology & Finance

Summary: “Nineteen quarters in a row Microsoft’s Online Division has lost money,” says AOL and it is not the only division suffering from this type of performance; another older article says that “[i]n the last half decade, Microsoft has swept over $25 billion of these “Other” losses under the rug”

On the Internet, in the period of just 1 year, Microsoft suffered $2 billion in losses. And that’s just one area among several where Microsoft is cashflow negative. How come almost nobody covers it? AOL is one of the exceptions here. It writes:

the division lost $560 million for Microsoft. That’s better than the previous quarter when it lost a staggering $696 million, but it’s much worse than a year ago, when it lost $477 million. In the past year, Microsoft has lost well over $2 billion from the division.

Let me repeat that: 1 year, a $2 billion loss.

Obviously, any startup that did that would have long since gone under — with that kind of burn rate, they probably would have gotten the plug pulled a few weeks into existence no matter how well-funded they were. But Microsoft keeps pumping money into the division. And they have to. Because even they realize it’s the future.

Of all the money Microsoft makes, the vast majority comes from two divisions: Windows & Windows Live Division (Windows) and Microsoft Business Division (Office). They make a good amount of money from the
Server & Tools division too, but it’s less than half of those other two. And both of those two are under direct assault.

The web is making Windows (and every operating system) less vital, while at the same time coming up with free and/or cheap tools to replace the relatively expensive Office. And new devices like smartphones and tablets have created an ecosystem where Windows is essentially a non-player (though we’ll see what happened with the just-released Windows Phone 7). And Office is basically non-existent in these spaces.

[...]

Five years ago, Microsoft’s Online Division was actually making money. Granted, it wasn’t a lot. But they were in the black. But for the past 19 quarters in a row now, Microsoft has lost money in this division. And as this chart put together last quarter by SAI shows, the losses have actually gotten worse over time. It’s a bloodbath being covered up by the profits from other divisions.

Nessuno remarks on this article by writing: “A great picture!

“I suppose they’re supposed to be burning cash.

“There’s an older article on Microsoft’s Office profits. I’ll try to dig it up.

Eventually he did and here it is. The author says that “[i]n the last half decade, Microsoft has swept over $25 billion of these “Other” losses under the rug” and to give some fragments from this long article (3 years old):

These three enormously profitable businesses allowed the company to painlessly absorb nearly $8 billion in losses–in just one year–related to its spectacular failures in WinCE, Windows Media, Windows Mobile, the Xbox 360 and Zune, its online businesses, and that “Other” black hole of what the company calls “corporate level activity.”

The “Other” losses Microsoft documents every year includes many individual fines and lawsuit settlements in the range of hundreds of millions of dollars related to its criminal activities around the
world. In the last half decade, Microsoft has swept over $25 billion of these “Other” losses under the rug, in addition to the many billions sprayed at failed efforts to establish monopolies in the
online, mobile, and consumer electronics arenas. [...]

Why do they spew such venom about the iPhone, Linux, and the Mac? Because Microsoft’s obscene profits from the sales of its outdated, overpriced, and consumer hostile products help to directly support the
wags’ chatterbox industry.

Spreading fear, uncertainty and doubt by spewing ignorance and false information are efforts to keep the world stuck in the tech rut of the 90s, where no critical thinking was required. Lazy pundits like no
possibility of being wrong, so working to keep the technology world enslaved to Microsoft helps them appear to be insightful when they prophesy that Microsoft will eventually come out with a copycat version of whatever anyone else is doing. Sure enough, it happens. [...]

With zero competition in the desktop PC operating system and productivity application markets, it’s no wonder why Microsoft hasn’t bothered to crank out any innovation in new versions of its products over the last half decade. It simply doesn’t have to!

Microsoft makes tens of billions of dollars every year selling intellectual property licensees without any competitive pressure from a functional market economy.

It’s no mystery why the record labels and studios desperately wanted Microsoft to set them up with the same sort of “free money” pipeline policed by the extreme, unilateral, anti-consumer DRM of Windows
Media.

It says volumes that Microsoft’s only competitor on the PC desktop is a non-profit volunteer effort. The company is so rich it can proudly operate above the law, as it documents in its earnings reports. [...]

If Microsoft were to lose its monopoly position with Office to real competition, a third of the company’s revenues would be at serious risk, but almost half of its profits would be in danger.

Without the easy money from Office, Microsoft would have to compete on a level playing field, something that the company has no proven ability to do. In fact, in markets where Microsoft has to compete, it
always fails miserably. Outside of its three monopolies, Microsoft hemorrhages cash faster than nearly a half dozen Amtrak operations combined, or eight times faster than Apple did at its most beleaguered point in 1995 when it reported a loss of nearly a billion dollars….

Without the Office cash cow, Microsoft would be unable to dump unfathomable amounts of money into profitless exercises intended to hold back innovation and prevent competition in new markets to increasingly broaden its sphere of influence. It’s therefore no surprise that Microsoft is working hard–and playing dirty–in efforts to maintain its monopoly position in Office software, which is worth nearly as much to the company as its Windows business.

Recall how much corruption was involved in the OOXML saga. It’s all about trying to save the few things that still bring income while Microsoft brings debt.

“Ballmer is credited with maintaining up the revenue stream from Office and Windows, which he has done in part by corrupting standards bodies and threatening to sue users of open source.”
      –Nessuno
“A basic question here is,” Nessuno adds, “how could they be so incompetent? In the recent analysis of this question in the media it’s been pointed out by both Microsoft insiders and outsiders that they are in some ways their own worst competitors, for example, cloud computing threatens Office, mobile threatens desktops, etc. And stories have been told about how groups inside Microsoft who are trying to do something new get sabotaged by the Office or Windows group because it will threaten them.

“Ballmer is credited with maintaining up the revenue stream from Office and Windows, which he has done in part by corrupting standards bodies and threatening to sue users of open source. But he’s also allowed good ideas inside his company to get crushed.

“Other companies (Google, Apple) don’t suffer from this problem.

“There was a post here quite a few years ago about a guy at Microsoft who was working on IE7 (I believe). He talked about how his group was trying to make a standards-compliant browser, but was getting opposition from the management. Even in IE8 (and I think IE9) the support for standards is somewhat wishy-washy.

“There are probably also struggles inside Microsoft regarding open source (those who favor it, those who hate it).

“Microsoft still leads the pack in profits, mostly because of Office and Windows, but has lost it this year in market cap and revenue.”

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2 Comments

  1. twitter said,

    November 3, 2010 at 7:54 am

    Gravatar

    Microsoft is failing because it is not growing. In a market that often grows at more than ten percent per year, flat revenue and income is failure for any business that has zero transport costs. Microsoft’s failure to grow is especially fatal because their real asset is user perception and faith. When Microsoft’s latest channel stuffing and PR blitz is over, we will see that the latest versions of Windows and Office have been even bigger failures than Vista era versions. Had they kept up with the market their channel stuffing should have done better than Vista did, but it did not because Vista killed half of their retail partners, like CompUSA, and people in non English speaking countries have had enough of it all.

    Microsoft does not depend on Office or Windows for profits, it depends on monopoly and belief in monopoly. From a user perspective, both Office and Windows have changed drastically over the last decade. The interfaces and formats are less continuous or integrated than any other software I’ve used. Somehow, Microsoft convinces people that the new version of Office or Windows will be less painful than a migration to anyone else’s software. That is, the company must convince everyone that all software sucks and that every company is just as evil as Microsoft is. Part of the faith is a cynical belief in the success of Microsoft’s criminal methods. Any real competition ruins the illusion and sinks Microsoft.

    Successful competition is all around and the Microsoft faithful dispair. Happy gnu/linux, Apple and Android users all prove to even the dullest Microsoft zealot that the things Microsoft says about other software is more projection than reality. People can see the ugly strings that held the company up.

    Dr. Roy Schestowitz Reply:

    Usually, above all it’s network effect.

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