The Fifth Person

Microsoft’s business model: How Microsoft makes money

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It’s safe to say that you have heard of Microsoft and used many of its products. Indeed, Microsoft is one of the most successful technology companies worldwide since it was founded 45 years ago by the legendary Bill Gates. It is also the third largest company listed in the U.S. (as of 2 September 2020).

Microsoft’s success intrigues me, so I proceeded to dig up more about the company’s business performance from an investor’s perspective. In this article, I’ll also cover the company’s economic moats, growth drivers, and some of the business risks it faces. Through this, I hope to give you a good overview of Microsoft’s business model and how it generates its revenues.

Business model

Microsoft is a technology company that provides software products and services to its consumers. It reports three business segments:

1. Productivity and Business Processes

This segment comprised 33% of Microsoft’s revenue in 2019. It consists of products and services in Microsoft’s portfolio of productivity and information services which include:

  • Office Commercial/Consumer — Revenue is derived from users subscribing to Microsoft’s Office software suite. Services in this segment are intended to enhance personal and organisational productivities. This segment is a key driver of revenue in this business segment of Microsoft.
  • LinkedIn — The professional social network makes money by offering three categories of monetised solutions : Talent solutions, marketing solutions, and premium subscriptions.
  • Dynamics — This business provides cloud-based and on-premises business solutions for business applications like enterprise resource planning (ERP) and customer relationship management (CRM). Dynamics revenue is driven by the number of users licensed, expansion of average revenue per user. and the shift to Dynamics 365 — the cloud component of Dynamics.

2. Intelligent Cloud

This segment comprised 31% of Microsoft’s revenue in 2019. It consists of Microsoft’s public, private, and hybrid server products and cloud services that power modern businesses:

  • Server Products and Cloud Services — Microsoft’s server software provides integrated server infrastructure and middleware designed to support software apps built on Windows. Server products include Microsoft’s SQL Server and Windows Server . Server products revenue is driven through volume licensing programs, licenses sold to original equipment manufacturers, and retail packaged products. Microsoft also provides a comprehensive set of cloud services through Microsoft Azure. This is in line with the secular growth of cloud computing as opposed to managing on-premises hardware and software. Azure makes money through users subscribing to its service.
  • Enterprise Services like Microsoft Consulting Services are project-based engagements to help customers plan and implement Microsoft products so they can reap as much value from Microsoft’s products as possible.

3. More Personal Computing

This segment comprised 36% of Microsoft’s revenue in 2019. It consists of products and services mainly catered to improving the user experience:

  • Windows – the operating system is still the most used desktop operating system in the world. Windows original equipment manufacturers’ (OEMs) revenue is derived from the purchase of Windows licenses by OEMs, which they pre-install on the devices they sell.
  • Devices — including Surface, PC, and other Microsoft intelligent devices. Revenue is derived from this segment from the sale of these devices.
  • Gaming — Microsoft’s generates gaming revenue from the sale of Xbox consoles and games.
  • Search – Microsoft’s search engine, Bing, generates advertising revenue.

Here’s a breakdown of Microsoft’s segmental revenue for FY2019:

business model for microsoft

As you see from the chart above, Microsoft’s server products, Office, and Windows comprised more than 69% of Microsoft’s revenue in FY2019. Microsoft’s success lies in its ability to form economic moats around its key business segments/products.

Economic moats

Let’s examine some of the economic moats Microsoft has established.

High switching costs

This is due to the industry standard Microsoft has created with its Microsoft Office software. Business functions like accounting procedures are often centered around Microsoft Excel. Thus, it would take a lot of work for users to transfer their financial spreadsheets to another platform and get used to the unfamiliar tools on the new platform (even if there were a superior alternative to Excel in the first place). Thus, it makes economic and psychological sense for companies to continue using Microsoft Office.

Microsoft’s Windows Server also forms the IT backbone of many of the world’s largest companies today. Given that it would be extremely costly for any company to replace any part of an enterprise’s IT environment, we can expect many companies to continue using Windows Server. Microsoft’s high switching costs lock customers into its unique ecosystem of Microsoft software.

Network effect

For starters, Microsoft’s network effect is established with the increased number of participants of Microsoft products, which improves the value of Microsoft’s platforms for users.

For example, with an estimated 750 million people in the world using Excel , it gives software developers the financial incentives and economies of scale when they create a variety of add-ins for Excel – such as integrating popular finance platforms like Bloomberg and Capital IQ into Excel. When the financial community wants to analyse financial figures via Bloomberg or Capital IQ, they would have an easier time doing so with Excel.

Moreover, Microsoft’s ability to move clients from an on-premises Microsoft environment to a cloud Microsoft environment via Azure has led to a wide variety of developers joining the ecosystem with applications and development tools. This has led Microsoft Server to become very attractive for CIOs and IT managers with a large installed base of users, which attracts developers which in turn attracts more users.

Growth drivers

Cloud computing.

The secular growth in cloud computing presents growth opportunities for Microsoft’s cloud business, Azure. With benefits like cost savings on hardware and automatic software integration, many companies are moving to the cloud. According to Gartner , the global cloud computing market size is expected to grow at a CAGR of 15.9% from 2018 to 2022, making it a US$354 billion industry by then. Gartner added that, by 2022, up to 60% of organizations will use an external service provider’s cloud-managed service, double that of 2018.

Seizing on the cloud computing trend, Azure’s revenue grew at an astounding year-on-year rate of 91% and 72% for FY2018 and FY2019 respectively. However, as Amazon entered the cloud computing space much earlier than Microsoft did, Amazon Web Services (AWS) still dominates the industry with 32.3% of market share in 2019. Azure is just behind AWS at second place with 16.9% of market share.

business model for microsoft

However, Microsoft is slowly closing on the gap. Just late last year, Azure pulled off a stunning upset to win a US$10 billion Pentagon technology contract , beating AWS. This underscores Azure’s growing reputation in the industry.

The top three cloud providers today — Google Cloud, Azure, and AWS — will be competing fiercely to capture market share in the cloud computing industry in the years to come. The cloud business is very technical, so here is an article to help you understand the competition in the cloud industry better.

Microsoft is the pioneer in office-related products and Microsoft Office 365 is part of CEO Satya Nadella’s vision for remaking Microsoft into a company where customers rent rather than buy software. Customers benefit as they no longer have to manage software on their own computer or data centers. Rather, Office 365 ensures that users are always on the latest Microsoft versions without having to upgrade anything.

The steadily increasing number of monthly active users on Office 365 indicates that Microsoft have been successful in convincing enterprise customers to upgrade to the subscription-based Office 365 licenses.

business model for microsoft

Financial performance

Microsoft is a very profitable company with steady revenue and net income growth over the past five financial years. This displays Microsoft’s ability to expand its user base and increase its average revenue per user.

business model for microsoft

Microsoft’s net income fell in FY2018 due to the Tax Cuts and Jobs Act which was enacted in December 2017. This required Microsoft to incur a one-time net charge of $13.7 billion on the repatriation of deferred foreign income not previously subject to U.S. income tax.

Microsoft also displays good earnings quality with its operating cash flow comfortable trending above its net income over the past five years. In FY2020, Microsoft generated $1.37 in cash for every dollar of profit.

Microsoft has also generates a high return on equity (ROE) relative to its peers.

business model for microsoft

Microsoft’s ROE of 40.16% as of June 2020 is higher than the FAANG stocks bar Amazon. Microsoft is also able to achieve this with a reasonable amount of debt – its debt/equity ratio in FY2020 is just 0.54.

Business model competition

Microsoft competes with companies with a growing variety of business models. Some of Microsoft’s competitors offer free applications and content by making money from selling third-party advertising. Hence, the products of Microsoft’s competitors are provided to its users at no cost, competing directly with Microsoft’s revenue-generating products.

Competitors also compete by modifying and then distributing open source software at little cost to users without having to bear the full R&D costs for the open source software. These products are very similar to the functionality and features of Microsoft’s products.

Cloud computing risks

Microsoft’s increasing focus on cloud-based services also presents execution and competitive risks. Microsoft incurs costs in building and maintaining infrastructure to support its cloud computing services. It needs to establish sufficient market share to achieve scale necessary to reap profits from its cloud business. This depends on its execution in several areas.

For example, making its suite of cloud-based services platform-agnostic, available on a wide range of devices; and ensuring its cloud services are secure and reliable for its customers. Not to mention Microsoft’s ability to distinguish itself from the fiercely competitive cloud computing market, notably Amazon and Google.

The fifth perspective

Microsoft is clearly a high-quality company. It scores highly on profitability, has wide economic moats and is venturing into new growth areas. Yet, Microsoft is a company that is heavily involved in the software space with technical concepts that can be hard to understand for the layman.

The technology sector is also a hugely competitive one, so an investor needs to conduct deeper-than-usual analysis of Microsoft’s competition, and assess whether Microsoft can remain relevant and profitable in the many years to come.

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May I know how do we evaluate intrinsic value of Microsoft? If one decide to enter a position in this counter, what should be the fair value price? Thank You

One way is to compare Microsoft’s current P/E ratio against its long-term historical average. All things equal, a stock that’s trading below its historical valuation average can be consider undervalued.

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Digital Enterprise

Microsoft’s Business Model

For decades, Microsoft has reigned as an industry titan, continually adapting to the ever-changing technological landscape while solidifying its global market dominance.

As we delve into the intricacies of Microsoft’s business model, a clear picture emerges: the company’s success rests upon a profound comprehension of market trends, an unwavering commitment to innovation, and a remarkable ability to deliver seamless user experiences through an extensive portfolio of products and services.

In this blog post, we embark on a journey to explore the diverse components that constitute Microsoft’s winning formula, conducting an in-depth analysis of the key drivers that propel this dynamic organization toward long-term prosperity.

Microsoft: Tracing the Evolution of Technological Innovation

Empowering progress: microsoft’s vision and mission, decoding the microsoft business model, reinvent productivity and business processes, build the intelligent cloud and intelligent edge platform, microsoft’s cloud: three economies of scale, create more personal computing, unveiling microsoft’s revenue generation methods, microsoft’s business model overview, a swot analysis, risks in microsoft’s business model, competitors.

Microsoft traces its roots back to 1975 when Bill Gates and his friend Paul Allen embarked on a journey to create something revolutionary. In those early days, computers were vastly different from what we know today, and the Internet was a nascent network mainly confined to academic institutions.

Undeterred by the limitations of the time, Gates and Allen set out to develop an operating system for the Altair 8800, considered the first “personal computer.” This endeavor laid the foundation for what would later become Microsoft’s groundbreaking legacy.

Fast forward a few years, and MS-DOS emerged as the go-to operating system for computers, establishing Microsoft’s presence in the technology landscape. However, the true turning point came with the introduction of Windows, a game-changing operating system that revolutionized the industry with its innovative interface.

Windows catapulted Microsoft to new heights, setting the stage for its future endeavors.

In 1986, Microsoft made a momentous decision to go public, offering shares on the stock market. This strategic move allowed the company to amass the financial resources needed to build its empire of PC operating systems. Over time, Microsoft’s product line expanded to encompass much more than operating systems.

Today, it encompasses Microsoft Office, Azure (cloud and AI services), Xbox Games, LinkedIn, GitHub, productivity applications, management tools, browsers, and an array of other cutting-edge technologies.

While Bill Gates still retains some ownership in Microsoft, he has divested much of his stake through sales and philanthropic efforts. In 2020, he stepped down from the board to dedicate more time to his philanthropy projects, furthering his commitment to making a positive impact on the world.

Microsoft’s journey from its humble beginnings to its current position as a technological powerhouse showcases a remarkable evolution marked by groundbreaking innovations and a relentless pursuit of excellence.

At the heart of Microsoft’s purpose lies a powerful mission statement: “to empower every person and every organization on the planet to achieve more.” This succinct declaration embodies Microsoft’s unwavering commitment to leveraging technology as a catalyst for transformation and improvement across the globe.

Microsoft envisions a future where innovative and accessible technology serves as the driving force behind seamless collaboration, enhanced productivity, and impactful problem-solving.

By creating cutting-edge software, hardware, and services, Microsoft aims to equip individuals, communities, and businesses with the tools they need to unlock their full potential.

Through their comprehensive portfolio of offerings, Microsoft seeks to drive human progress and facilitate lasting, positive change on a global scale.

Their mission goes beyond technological advancement; it is rooted in the belief that technology can be a powerful force for good, enabling individuals and organizations to achieve more, innovate, and address complex challenges.

With their relentless pursuit of innovation and their commitment to empowering individuals and organizations, Microsoft continues to shape the future of technology and make a meaningful difference in the lives of people around the world.

The Microsoft business model encompasses a diverse range of strategies to support its extensive portfolio of systems, software, and services. While the company operates in both the entertainment and business sectors, its core operations revolve around the sale, distribution, and support of these solutions.

Let’s explore the various components that make up Microsoft’s multifaceted business model:

  • Razor and Blade: Microsoft develops apps, software, and Xbox games that are specifically designed for its operating systems, ensuring optimal performance and compatibility;
  • Lock-in: Microsoft has established high switching costs for customers, making it more likely for them to continue using Microsoft software and apps due to the investment in familiarity and integration;
  • Freemium: Certain Microsoft offerings, such as LinkedIn, follow a freemium model. While the platform is free to use, additional resources and features are available exclusively to premium subscribers;
  • Subscription: Microsoft has successfully implemented a subscription-based model for various products and services, including Office 365 and cloud services. This model allows customers to access Microsoft’s offerings through recurring payments;
  • Hidden Revenue: Platforms like LinkedIn and Bing generate revenue through advertising, displaying targeted ads to users while they engage with these platforms;
  • Ingredient Branding: Microsoft’s branding is prominently displayed on products, even if they are just built into computers. This ingredient branding strategy ensures that Microsoft’s presence is readily visible to consumers.

Microsoft’s Business Strategy

The business strategy of Microsoft revolves around three fundamental pillars that underpin its success and shape its business model. Let’s delve into each of these pillars to gain a deeper understanding of Microsoft’s strategic focus:

Microsoft is dedicated to empowering its customers by providing them with the technology and resources needed to create secure and efficient hybrid work environments.

Microsoft’s diverse portfolio of products, including Office 365, Dynamics 365, and LinkedIn, plays a vital role in transforming the way the world works, learns, and connects.

Continuous innovation and advancement in productivity and collaboration tools and services are at the core of Microsoft’s growth strategy.

Microsoft recognizes the immense power of digital technology in empowering employees, optimizing operations, and engaging customers, sometimes even reshaping the very core of products and services in the enterprise landscape.

To cater to the increasing demand for fast and reliable access to its services, Microsoft continues to invest in high-performance and sustainable computing infrastructure.

By leveraging its extensive network of cloud computing infrastructure and data centers, Microsoft delivers the intelligent cloud and intelligent edge platform, providing the foundation for digital transformation.

Cost-efficient data centers that deploy computational resources at a significantly lower cost per unit, data centers that coordinate and aggregate diverse customer demands and usage patterns to optimize resource utilization, and multi-tenancy locations that reduce application maintenance labor costs.

Microsoft’s business strategy in cloud computing extends to making computing more personal and user-centric. By placing people at the core of the computing experience, Microsoft aims to enable users to interact with technology in intuitive, engaging, and dynamic ways.

This includes developing user-friendly interfaces, intuitive interactions, and personalized experiences that empower individuals to harness the full potential of technology and enhance their productivity.

Through these strategic pillars, Microsoft is committed to driving continuous innovation, delivering secure and cutting-edge solutions, and enhancing the productivity and experiences of individuals, organizations, and communities worldwide.

With a focus on productivity, intelligent cloud solutions, and user-centric computing, Microsoft continues to shape the future of technology and drive positive change in the digital era.

Microsoft’s revenue is derived from three fundamental business segments:

  • Transforming Productivity and Business Processes

This segment encompasses a wide range of products and services designed to enhance productivity and information management, representing approximately one-third of Microsoft’s revenue. At the forefront is the renowned Microsoft Office software suite, which remains a flagship product.

Additionally, this segment includes LinkedIn, the prominent professional social network, and Dynamics, a suite of cloud-based solutions for business applications like ERP and CRM.

  • Empowering with Intelligent Cloud Services

Comprising another significant one-third of Microsoft’s revenue, this segment focuses on the delivery of public, private, and hybrid cloud services. Microsoft SQL Server, Windows Server, and Azure are among the notable offerings. Furthermore, enterprise services such as Microsoft Consulting play a crucial role in assisting customers with planning and implementing Microsoft products effectively.

  • Enhancing Personal Computing Experience

The remaining one-third of Microsoft’s revenue is derived from products and services aimed at enriching users’ overall experience. The cornerstone of this segment is undoubtedly Windows, with licenses for devices serving as a primary revenue source. In addition, Microsoft offers a diverse range of solutions, including Xbox games and consoles, advertising through Bing (their search engine), and the sales of devices and PCs.

Let’s examine Microsoft’s business model using the Business Model Canvas framework. The different components of Microsoft’s business model are outlined below:

Customer Segments:

  • Commercial and corporate clients: Offering server management, IT support, consulting services, as well as cloud computing, Office, and Skype solutions;
  • General customers: Providing common solutions like Office, Outlook, Skype, cloud services, and mobile phone and video game platforms;
  • Advertising agencies and big brands: Offering advertising opportunities on the MSN portal and Bing search engine;
  • Server developers: Providing a suite of development tools.

Value Propositions:

  • Reliability as a market leader offering software solutions, including some free offerings;
  • Compatibility of apps and software across multiple platforms;
  • Trusted source of expertise for consulting services and a large user base for advertisers.
  • MSN portal;
  • Desktop, iOS, and Google Play apps;
  • Sales and marketing team.

Customer Relationships:

  • Self-service for software and hardware products, requiring minimal personal interaction;
  • Personal assistance for corporate products, consulting, support, and advertising;
  • Direct interaction with end customers through social networking profiles (e.g., Facebook and Twitter).

Revenue Streams:

  • Productivity and Business Processes;
  • Intelligent Cloud;
  • Personal Computing.

Key Resources:

  • Intellectual property;
  • Proprietary technology;
  • Data centers;
  • Human resources;
  • Bill Gates (as a notable figure).

Key Activities:

  • Developing, licensing, and supporting software products and services;
  • Designing and selling hardware products;
  • Delivering online advertising solutions;
  • Providing IT consulting and support services.

Key Partners:

  • Companies providing various services such as app development, data analytics, distribution, marketing, system integration, telecommunications, and more;
  • Resellers and independent software vendors.

Cost Structure:

  • Research and development;
  • Maintenance and security of data centers and servers;
  • Marketing and sales;
  • Office and general expenses.

Microsoft, a renowned technology leader, can be effectively evaluated through a SWOT analysis, shedding light on its strengths, weaknesses, opportunities, and threats from a business perspective.

  • Wide range of technology products, including Windows OS, Office Suite, Azure, and Xbox gaming platform;
  • Strong market presence and established brand recognition;
  • Vast R&D budget and diverse income sources;
  • Strong reputation for innovation and technological expertise.


  • Delays in product launches and challenges in addressing all customer segments with premium pricing;
  • Over-dependence on Windows OS;
  • Previous antitrust issues affecting its reputation and legal challenges.


  • Growth potential in the hybrid-cloud market and leveraging strength in cloud computing services;
  • Development of advanced security features to address increasing cybersecurity concerns;
  • Strategic collaborations to enhance offerings in gaming, artificial intelligence, and quantum computing.
  • Intense competition from tech giants like Google, Apple, and Amazon;
  • The need for continuous adaptation to rapidly evolving technological advancements;
  • Challenges arising from global economic and regulatory changes.

Microsoft’s business model faces several risks that need to be considered. Two key areas of concern are competition and cloud computing.

Microsoft faces competition from several key players in the technology industry. Let’s take a closer look at some of its major competitors:

  • Apple: Apple, led by Steve Jobs, has been a long-standing rival of Microsoft. The competition between the two companies extends beyond hardware, encompassing computers, tablets, and smartphones. They also compete in the realm of operating systems, with the perpetual rivalry between Windows and macOS;
  • Google: Google, a prominent subsidiary of Alphabet Inc., competes with Microsoft in both hardware and software. Google’s Chromebooks directly compete with computer manufacturers like Dell, Acer, Lenovo, LG, and Sony. Additionally, Google Chrome has surpassed Internet Explorer in the web browser market. The introduction of Microsoft Edge has sparked a new wave of competition between the two companies;
  • IBM: IBM, a multinational technology corporation, presents competition to Microsoft due to its involvement in computer hardware and software. While there have been partnerships between IBM and Microsoft in the past, they operate in the same market and are considered competitors;
  • Oracle: Oracle Corporation primarily focuses on software development, including cloud-engineered systems and customer relationship management (CRM) software. Although Oracle’s offerings differ from Microsoft’s broader product range, they still represent an indirect competitor in the software development space.

Microsoft’s business model plays a crucial role in the company’s ongoing success and growth. Through diversification, innovation, and a customer-centric approach, Microsoft has established a strong presence in the highly competitive technology market.

Their strategic partnerships and effective monetization strategies exemplify a resilient and adaptable business model that positions them for long-term success.

By cultivating a comprehensive ecosystem of hardware, software, and cloud services, Microsoft has demonstrated its ability to navigate the ever-changing technological landscape.

As the company continues to evolve and expand its offerings, one thing remains evident: Microsoft’s business model serves as a shining example for those aspiring to build thriving and sustainable enterprises in a fiercely competitive market.

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The Apple Business Model

The microsoft business model.

  • Special Considerations: Google
  • Tech Stocks

Apple vs. Microsoft Business Model: What's the Difference?

business model for microsoft

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

business model for microsoft

Apple Business Model vs. Microsoft Business Model: An Overview

More than any other American companies, Apple, Inc. (NASDAQ: AAPL ) and Microsoft Corporation (NASDAQ: MSFT ) dominate the intersection of technology and consumer access. Even though they compete across a huge range of sub-industries, such as computing software, hardware, operating systems, mobile devices, advertising, applications, and web browsing, each firm takes a different approach from an organizational and philosophical perspective.

As of Jan. 2022, AAPL had a market cap of around $2.61 trillion. Microsoft briefly edged out Apple as the largest company in the world riding on the strength in the growth of its cloud computing business, but MSFT has now fallen to second at $2.17 trillion.

Key Takeaways

  • As of 2021, Apple and Microsoft are two of the biggest companies in the world, alternating the title of the world's most valuable company.
  • Both companies have boasted a market cap of over $2 trillion.
  • Apple's business model is based on innovation and consumer-centric devices. They are able to keep their base due to easy-to-use designs and data migration to new product lines.
  • Microsoft built its success on the licensing of software such as Windows and Office Suite. Their business model has shifted, and they are releasing their own devices to compete with Apple's.
  • Both companies are run differently with different end purposes. They are both extremely successful and have revolutionized their respective industries.

It is difficult to recall a modern American business so thoroughly dominated by the ideas and personality of one individual as Apple was under the tutelage of Steve Jobs . Jobs' remarkable innovations propelled Apple to unprecedented heights until his passing from cancer in 2011.

During Steve Jobs' second reign—he was fired in 1985, returning in 1997—Apple returned to relevancy and revolutionized multiple subindustries. In 2001, the company released the iPod, a pocket-sized device that could hold 1,000 songs, and it soon took over the Sony Walkman. A few years later, Apple completely redefined mobile phones when the iPhone was released in 2007.

Apple easily bests its competitors in terms of hardware sales and high-end gadgets. Thanks to the company's early 2000s reputation as a nonconformist response to Microsoft, millennials grew up using Macs in large numbers. This is buoyed by the company's brilliant insistence on integrating its products, making it easier to keep using new Apple products and thus more difficult to switch to a competitor's interface; this is sometimes referred to as the "Apple Ecosystem Lock."

The weakness in the Apple's business model lies in the historic success of the company's golden invention: the iPhone. Nearly half of all Apple revenue comes from iPhone sales, and no new, comparable innovation has taken off since its former CEO died and was replaced by Tim Cook. However, Cook has done a good job of preserving Jobs' legacy and has propelled Apple stock to all-time highs.

For years, Microsoft dominated the computer industry with its Windows software; Apple was an afterthought for more than a generation of operating products. Before Google Web browsing began to dominate the market, Microsoft gave away Internet Explorer for free, driving Netscape and other similar companies out of business.

The Microsoft revenue model historically relied on just a few key strengths. The first, and most important, is the licensing fees charged for use of the Windows operating system and the Microsoft Office suite. After a few years of increasing irrelevance in the race against Google and Apple, Microsoft unveiled a new vision in April 2014, instantly shifting focus to make Windows software more compatible with competitor products, such as the iPad. Microsoft also has a few successful products, highlighted by the Microsoft Surface and Surface Pro, that battle Apple devices such as the iPad.

Moving forward, however, Microsoft realized that paid software is a more difficult sell in an age of low-cost alternatives. Additionally, tablets and phones are replacing PCs. A newer Microsoft business model has been telegraphed by CEO Satya Nadella, one that emphasizes product integration, a "freemium" software package, and a concentration on its cloud computing business.

For example, Microsoft wants customers to be more engaged and fixated on its products.

Special Consideration: Google's Business Model

Unsurprisingly, the heart and soul of the Google revenue stream is its search engine and web advertisements. While Google is not the only company to give away free services and bundle them with other goods, few do it as well or as successfully.

Google services did not originally cost the user anything. Google would lure in users and collect their data, and then sell access to eager buyers across the planet. Every marketing firm in the world wants the kind of information and repeat usage Google enjoys. Moreover, the company keeps getting better and more sophisticated at targeting consumers and businesses, syncing preferences and playing economic matchmaker. In recent years, some fees have been added for storage and other services.

This no-fee model is not just profitable, it is very disruptive to Apple and especially to Microsoft. While Apple and Microsoft keep competing to find better and more innovative products to charge consumers, Google is all too happy to find a way to monetize activities for which users are eager to stop paying.

Google does not charge for Android in the U.S., which is one of the chief reasons manufacturers are so drawn to it. The Google Web apps, which bear a striking resemblance to Microsoft Office programs, are also free. Since Google began offering a free operating system and computer software, sales for Microsoft Windows and Office have slowed.

Yahoo! Finance. " Apple Inc. (AAPL) ."

Yahoo! Finance. " Microsoft Corporation (MSFT) ."

Apple, Inc. " Statement by Apple’s Board of Directors ."

The New York Times. " How the iPod Ran Circles Around the Walkman ."

Apple, Inc. " Apple Presents iPod ."

Apple, Inc. " Apple Reinvents the Phone with iPhone ."

Apple.Inc. " Apple Media Services Terms and Conditions: Third-Party Devices and Equipment ."

U.S. Securities and Exchange Commission. " Apple, Inc. Form 10-K, For the fiscal year ended September 26, 2020 ," Page 21.

U.S. Department of Justice. " Justice Department Files Antitrust Suit Against Microsoft for Unlawfully Monopolizing Computer Software Markets ."

Microsoft. " Microsoft Showcases Latest Updates to Windows, Opportunities for Developers ."

Microsoft. " Satya Nadella: Mobile First, Cloud First Press Briefing ."

Google. " Subscriptions ."

U.S. Securities and Exchange Commission. " Alphabet, Inc. Form 10-K, For the Fiscal Year Ended December 31, 2020 ," Pages 33-36.

The New York Times. " Google to Charge Phone Makers for Android Apps in Europe ."

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The Strategy Story

How does Microsoft make money: Business Model & Strategy

Founded in 1975, Microsoft develops and supports software, services, devices, and solutions. Microsoft offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content. Microsoft also provides solution support and consulting services. Microsoft also delivers relevant online advertising to a global audience. 

Microsoft’s products include operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. Microsoft also designs and sells devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. 

Microsoft is innovating and expanding its entire portfolio to help people and organizations overcome today’s challenges and emerge stronger. Microsoft combines technology and products into experiences and solutions that unlock value for its customers. 

In a dynamic environment, digital technology is the key input that powers the world’s economic output. Organizations of all sizes have digitized business-critical functions, redefining what they can expect from their business applications. Customers are looking to unlock value while simplifying security and management. 

Microsoft is building a distributed computing fabric – across the cloud and the edge – to help every organization build, run, and manage mission-critical workloads anywhere. Artificial intelligence (“AI”) capabilities are rapidly advancing in the next phase of innovation, fueled by data and knowledge of the world. 

Microsoft is enabling metaverse experiences at all layers of Microsoft’s stack, so customers can more effectively model, automate, simulate, and predict changes within their industrial environments, feel a greater sense of presence in the new world of hybrid work, and create custom immersive worlds to enable new opportunities for connection and experimentation. 

In this strategy story, we analyzed the business model and strategy of Microsoft while learning how does Microsoft make money.

What is the Business Strategy of Microsoft?

The business strategy and hence the business model of Microsoft is based on three pillars:

Reinvent Productivity and Business Processes : Microsoft provides technology and resources to help its customers create a secure hybrid work environment. Microsoft’s family of products plays a key role in how the world works, learns and connects. Microsoft’s growth depends on securely delivering continuous innovation and advancing Microsoft’s leading productivity and collaboration tools and services, including Office 365, Dynamics 365, and LinkedIn. 

Build the Intelligent Cloud and Intelligent Edge Platform : For enterprises, digital technology empowers employees, optimizes operations, engages customers, and in some cases, changes the very core of products and services. As part of its business strategy, Microsoft continues to invest in high-performance and sustainable computing to meet the growing demand for fast access to Microsoft services provided by Microsoft’s network of cloud computing infrastructure and data centers. 

Microsoft’s cloud business benefits from three economies of scale: datacenters that deploy computational resources at a significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs. 

Create More Personal Computing : The business strategy of Microsoft in cloud computing is to make computing more personal by putting people at the core of the experience, enabling them to interact with technology in more intuitive, engaging, and dynamic ways. 

How does Google make money? What is Google’s Business Model?

How does Microsoft make money? What is the business model of Microsoft?

Microsoft made $198 billion in 2021 . The business model of Microsoft operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations. They provide a framework for the timely and rational allocation of resources within businesses. 

Productivity and Business Processes 

Microsoft’s Productivity and Business Processes segment consists of products and services in Microsoft’s portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. Productivity and Business Processes contributed $63.4 billion to Microsoft’s revenue in 2021. This segment primarily comprises:

  • Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva. Office Commercial revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Office 365. 
  • Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises and other Office services.  Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype,, and OneDrive, largely driven by subscriptions, advertising, and the sale of minutes.
  • LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.
  • Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.  Dynamics revenue is driven by the number of users licensed and applications consumed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications, including Power Apps and Power Automate.

Intelligent Cloud 

Microsoft’s Intelligent Cloud segment consists of Microsoft’s public, private, and hybrid server products and cloud services that can power modern businesses and developers. Intelligent cloud contributed $75.2 billion to Microsoft’s revenue in 2021. This segment primarily comprises:

  • Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services and per-user-based services such as Enterprise Mobility + Security. 
  • Enterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services.

More Personal Computing 

Microsoft’s More Personal Computing segment comprises products and services that put customers at the center of the experience with Microsoft’s technology. More Personal Computing contributed $59.7 billion to Microsoft’s revenue in 2021. This segment primarily comprises:

  • Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender for Endpoint, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”) as advanced security offerings.
  • Devices, including Surface and PC accessories.
  • Gaming, including Xbox hardware and Xbox content and services, comprises first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services. Xbox revenue is mainly affected by subscriptions and first- and third-party content and advertising sales.
  • Search and news advertising that delivers relevant search, native, and display advertising to a global audience.

Microsoft also classifieds its revenue into products and services. 

  • Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. Product contributed $72.7 billion to Microsoft’s revenue in 2021.
  • Service and other revenue include sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also include sales from online advertising and LinkedIn. Service and others contributed $125.6 billion to Microsoft’s revenue in 2021.

How Microsoft became cool by making others cool

Microsoft Financials

As per Microsoft’s 2021 Annual Report,

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Microsoft: Business Model, SWOT Analysis, and Competitors 2023

Inside This Article

Microsoft is one of the biggest tech giants in the world, with a business model that has transformed over the years. From its early days as a software development company, it has expanded to include hardware, cloud computing, and other innovative products. In this blog series, we will conduct a SWOT analysis of Microsoft and its competitors, and explore what the tech giant's business model might look like in 2023.

In this blog post, you will learn:

Who owns microsoft and the history behind the company's ownership..

  • The mission statement of Microsoft and how it guides the company's decisions and actions.
  • How Microsoft generates revenue and profits through its various business segments and product offerings. Additionally, we will explore the Microsoft Business Model Canvas and how it helps the company maintain a sustainable competitive advantage.
  • The top competitors of Microsoft in the technology industry and how they stack up against the company's offerings.
  • A detailed SWOT analysis of Microsoft, highlighting the company's strengths, weaknesses, opportunities, and threats. This analysis will provide insights into the factors that influence Microsoft's success and help readers understand the challenges and risks that the company faces in the market.

Who owns Microsoft?

Microsoft is one of the biggest names in the tech industry, and it's natural for people to wonder ## Who owns the company. The answer is not straightforward, as Microsoft has gone through several changes of ownership over the years.

The company was founded by Bill Gates and Paul Allen in 1975, with Gates holding a 64% stake and Allen owning 36%. Over the years, the company grew and went public in 1986, with Gates becoming the youngest self-made billionaire at the time.

In 2000, Gates stepped down as CEO and was replaced by Steve Ballmer. Gates remained as the chairman of the board and the largest individual shareholder, with a 12.5% stake in the company. However, Gates gradually sold his shares over the years, and as of 2021, he owns less than 1% of Microsoft.

Today, the largest shareholders in Microsoft are institutional investors, including Vanguard Group, BlackRock, and State Street Corporation. These investors hold a significant portion of the company's shares, but none of them own a controlling stake.

The current CEO of Microsoft is Satya Nadella, who has held the position since 2014. Nadella owns a relatively small number of shares in the company, but his leadership has been instrumental in driving the company's growth and success in recent years.

In conclusion, while Bill Gates was the original founder and largest shareholder of Microsoft, the company is now owned by a diverse group of institutional investors. Satya Nadella is the current CEO, and his leadership has been vital in the company's continued success.

What is the mission statement of Microsoft?

Microsoft is a company that has been around for over four decades. It has evolved from a small start-up to one of the world's largest technology companies. Despite this evolution, Microsoft's mission statement has remained relatively consistent throughout the years. The company's mission statement is to "empower every person and every organization on the planet to achieve more." This mission statement emphasizes the company's commitment to creating technology that helps people achieve their goals and improve their lives.

At its core, Microsoft's mission statement is about empowering people. The company believes that technology can be a powerful tool for improving people's lives, and it is committed to creating products and services that help people achieve more. This mission statement is reflected in the company's products, such as Windows, Office, and Microsoft Teams. These products are designed to make it easier for people to communicate, collaborate, and get work done.

Microsoft's mission statement is also reflected in its corporate culture. The company is known for its focus on employee development and empowerment. Microsoft encourages its employees to take risks, innovate, and push the boundaries of what is possible. This focus on employee empowerment has helped the company attract and retain some of the best talent in the industry.

In conclusion, Microsoft's mission statement is to empower every person and every organization on the planet to achieve more. This mission statement reflects the company's commitment to creating technology that helps people improve their lives and achieve their goals. It is a powerful statement that guides the company's products, services, and corporate culture.

How does Microsoft make money?

Microsoft is one of the biggest tech companies in the world, and it has a diverse range of revenue streams that it utilizes to generate income. Here are some of the main ways that Microsoft makes money:

Product Sales: Microsoft sells a variety of products such as Windows operating system, Microsoft Office suite, Surface devices, and Xbox gaming consoles. These products are sold through retail stores, online stores, and original equipment manufacturers (OEMs).

Cloud Services: Microsoft's cloud computing services, Azure and Office 365, have been a major source of revenue growth. Azure is a platform for building and deploying applications on Microsoft's cloud infrastructure, while Office 365 is a subscription-based service for Microsoft Office applications such as Word, Excel, and PowerPoint.

Advertising: Microsoft's search engine, Bing, generates advertising revenue through search ads and display ads on its website. Microsoft also has a digital advertising agency, Microsoft Advertising, that provides ad solutions to businesses.

Gaming: Microsoft's gaming division, Xbox, generates revenue through the sale of gaming consoles, games, and subscriptions to Xbox Live, a service that allows gamers to play online with each other.

Enterprise Services: Microsoft offers a range of services to businesses, including consulting, support, and training. These services generate revenue from enterprise customers who need assistance with deploying and managing Microsoft products and services.

In conclusion, Microsoft's revenue streams are diverse and varied, ranging from product sales to cloud services, advertising, gaming, and enterprise services. This allows the company to remain profitable and continue to innovate in the tech industry.

Microsoft Business Model Canvas Explained

The Business Model Canvas is a tool that helps businesses to map out their strategy and create a visual representation of their business model. Microsoft, being one of the biggest tech companies in the world, has a well-defined business model canvas that has contributed to its success. Here's an in-depth explanation of Microsoft's business model canvas:

Value Proposition - Microsoft's value proposition revolves around creating products and services that improve the lives of individuals and businesses through technology. The company offers a wide range of software, devices, and services that cater to different customer needs.

Key Partnerships - Microsoft has partnerships with various companies and organizations to enhance its product offerings. For example, it partners with hardware manufacturers to create devices that run on its software.

Key Activities - Microsoft's key activities include research and development, marketing, sales, and customer support. The company invests heavily in research and development to create innovative products and services.

Key Resources - Microsoft's key resources include its talented workforce, intellectual property, and brand reputation. The company's brand is globally recognized and trusted, which helps it to attract customers and partners.

Customer Segments - Microsoft caters to several customer segments, including individuals, small businesses, and large enterprises. The company tailors its products and services to meet the specific needs of each customer segment.

Channels - Microsoft's products are sold through various channels, including its online store, physical retail stores, and partnerships with other retailers.

Cost Structure - Microsoft's cost structure includes research and development expenses, marketing and advertising expenses, and the cost of goods sold. The company also invests heavily in data centers to support its cloud services.

Revenue Streams - Microsoft generates revenue from the sale of its software, devices, and services. The company also generates revenue from subscriptions to its cloud services, such as Microsoft 365 and Azure.

In conclusion, Microsoft's Business Model Canvas is a well-designed strategy that has enabled the company to remain competitive in the tech industry. By focusing on creating innovative products and services that cater to different customer needs, investing in research and development, and building strong partnerships, Microsoft has continued to grow and expand its business.

Which companies are the competitors of Microsoft?

When it comes to technology, Microsoft is a household name. However, it's not the only giant in the industry. Here are some of the biggest competitors of Microsoft:

Apple Inc. - Apple is Microsoft's biggest competitor, especially in the consumer electronics market. Apple's products, such as the iPhone, iPad, and MacBook, compete with Microsoft's Surface, Windows, and other software products.

Google - Google is a major competitor of Microsoft in the search engine and productivity software markets. Google's search engine and Chrome browser compete with Microsoft's Bing and Edge, while Google's G Suite productivity suite competes with Microsoft Office.

Amazon - Amazon is a competitor of Microsoft in the cloud computing market. Amazon Web Services (AWS) competes with Microsoft's Azure cloud computing platform.

Oracle - Oracle is a competitor of Microsoft in the enterprise software market. Oracle's databases and enterprise software solutions compete with Microsoft's SQL Server and other enterprise software products.

IBM - IBM is also a competitor of Microsoft in the enterprise software market. IBM's enterprise software solutions, such as its Watson platform, compete with Microsoft's enterprise software products.

Overall, Microsoft faces stiff competition from some of the biggest names in the tech industry. However, Microsoft's diverse product offerings and strong brand reputation have helped it remain a dominant player in the market.

Microsoft SWOT Analysis

Microsoft is one of the largest and most successful technology companies in the world. However, like any company, it has its strengths, weaknesses, opportunities, and threats. A SWOT analysis can be a useful tool to evaluate a company's overall position in the market. Here is a breakdown of Microsoft's SWOT analysis:

Strong brand recognition: Microsoft is a well-known brand that has been around for over four decades.

Diverse product portfolio: Microsoft offers a wide range of products such as Windows, Office, Xbox, and Surface, which helps it cater to various customer segments.

Strong financial position: Microsoft has a healthy financial position, with a revenue of over $110 billion in 2018, making it one of the most valuable companies in the world.

Large customer base: Microsoft has a massive customer base that includes individuals, small businesses, and large enterprises.


Dependence on Windows and Office: Microsoft's revenue heavily relies on the sales of Windows and Office, making it vulnerable to market changes and competition.

Limited presence in mobile: Despite its efforts, Microsoft's mobile presence is limited, with only a small market share.

High entry barriers: Microsoft's products require significant investment, which can be a barrier for small businesses and individuals.


Cloud computing: Microsoft's Azure cloud platform is growing rapidly, offering significant opportunities for the company.

Emerging technologies: Microsoft is investing heavily in emerging technologies such as AI, VR, and IoT, providing it with opportunities to innovate and create new products.

Diversification: Microsoft can explore new business areas and diversify its product offerings to reduce dependence on Windows and Office.

Intense competition: Microsoft faces intense competition from companies such as Google, Apple, and Amazon, which can limit its market share and revenue growth.

Cybersecurity threats: Cybersecurity threats are increasing, making it essential for Microsoft to invest heavily in security measures.

Changing market trends: Technology trends are continuously changing, and Microsoft must stay ahead of the curve to remain relevant and competitive.

Overall, Microsoft's SWOT analysis highlights its strengths, weaknesses, opportunities, and threats, providing valuable insights into the company's position in the market. By evaluating these factors, Microsoft can make informed decisions to address its weaknesses, capitalize on opportunities and mitigate threats.

Key Takeaways

Key takeaways:

  • Microsoft is a publicly traded company, meaning it is owned by shareholders who can buy and sell its stock.
  • The mission statement of Microsoft is to "empower every person and every organization on the planet to achieve more."
  • Microsoft primarily makes money through selling software and cloud services, as well as hardware such as the Xbox gaming console and Surface line of computers.
  • The Microsoft Business Model Canvas breaks down the company's key activities, resources, and partnerships that enable it to deliver value to customers and generate revenue.
  • Some of Microsoft's main competitors include tech giants like Apple, Google, and Amazon, as well as companies focused specifically on software and cloud services like Oracle and Salesforce.
  • A SWOT analysis of Microsoft reveals strengths such as its strong brand and market position, weaknesses such as its reliance on a few key products, opportunities such as expanding its cloud services offerings, and threats such as increasing competition and cybersecurity risks.

In conclusion, Microsoft is owned by its shareholders, and its mission statement is to empower every person and organization on the planet to achieve more. Microsoft makes money through various business segments, including productivity and business processes, intelligent cloud, and more personal computing. Through its business model canvas, Microsoft has been able to optimize its resources and create value for its customers. However, it faces stiff competition from companies such as Apple, Amazon, and Google. Despite this, Microsoft's strong brand, innovative products, and extensive resources position it well to continue dominating the technology industry. A SWOT analysis of Microsoft reveals its strengths, weaknesses, opportunities, and threats, which the company continues to leverage to remain relevant and competitive.

What are the strength and weaknesses of Microsoft?

Strengths: • Microsoft is a leader in the software and technology industry. • It has a strong brand name and customer base. • It has a large library of software and hardware solutions. • Microsoft has a strong presence in the cloud computing market. • Microsoft has a large and varied selection of products and services. • Microsoft offers a wide range of support and training options.

Weaknesses: • Microsoft is heavily reliant on its Windows operating system and Office suite of applications. • Microsoft’s products are often expensive and require significant upfront investments. • Microsoft is vulnerable to competition from other software and technology companies. • Microsoft’s products can be difficult to use and require significant training. • Microsoft’s products are vulnerable to security threats and malware.

Does Microsoft have a SWOT analysis template?

Yes, Microsoft does have a SWOT analysis template. It is available as part of Microsoft Word, Excel, and PowerPoint, and can be accessed via the template library. The template helps users create a comprehensive analysis of their organization's strengths, weaknesses, opportunities, and threats.

What is Microsoft main weakness?

Microsoft's main weakness is its slow adoption of new technologies and services. Microsoft often takes a long time to incorporate newer technologies into its products and services, which can lead to a slower response time to customer needs. Additionally, Microsoft has been known to be slow to react to changing market trends, which can also hinder its growth and development.

What are the 5 elements of SWOT analysis?

  • Strengths: Identify the internal strengths that can be used to help reach strategic goals.
  • Weaknesses: Identify the internal weaknesses that might hinder progress towards strategic objectives.
  • Opportunities: Identify external opportunities that can be taken advantage of to help reach strategic goals.
  • Threats: Identify external threats that could impede progress towards strategic objectives.
  • Outcomes: Identify the desired outcomes of the SWOT analysis and how these can be achieved.

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How Does Microsoft Make Money: Business Model Explained

Article Teaser: How Does Microsoft Make Money: Business Model Explained

Microsoft (MSFT) is one of the biggest companies in the world. It is known mainly for its Windows operating system and Office productivity tools. But are those two products still the main ways how Microsoft makes money?

Microsoft makes money by providing cloud resources and a wide range of software to businesses. Some of its products are also used by consumers, but business customers are Microsoft’s core focus and the primary source of its $198bn annual revenue. The only sizable exception is Microsoft’s Xbox platform.

The paragraph above might sound a little too general, and I agree. I will get to a more detailed breakdown of the business model and different products and services Microsoft offers later. The main point I want to make here is that business customers are at the center of nearly everything Microsoft does.

Visual of Microsoft's business model and how Microsoft makes money

The range of products and services Microsoft offers to businesses ranges from backend infrastructure used mainly by developers to productivity tools that help business users to do their job.

Business customers are the primary source of its $198bn of annual revenue and also the main driver of how the company resources are spent. This was true before, is true now, and will be true for the foreseeable future.

That being said, that does not mean consumers are not essential to Microsoft. They are. Microsoft has many reasons to care that consumers love its products, and it simply cannot afford to ignore consumers.

It makes perfect sense for Microsoft to offer Office, Teams, Windows, and other tools to retail customers for reduced price or even for free. Not only because it means additional billions of revenue without too much additional expense, but familiarity with Microsoft’s products among consumers is even more important than the relatively small revenue it is bringing in.

The only sizable part of Microsoft where consumers are the core focus of its business is gaming. Microsoft earned $16bn revenue from gaming, which represents 8% of its total revenue.

Gaming within Microsoft is mainly about its Xbox platform. For a long time, gaming looked like a weird fit for business-focused Microsoft. After years of trying, Sony was and still is way ahead of Microsoft in console sales market share . The synergies of Microsoft and Gaming were not obvious.

After many recent smaller gaming studio acquisitions by Microsoft and the introduction of Game Pass and Xbox Cloud Gaming , it became much easier to see an opportunity there. Recently, Microsoft decided to push into gaming even more by acquiring Activision Blizzard , a renowned developer of popular titles like World of Warcraft, Call of Duty, Candy Crush, and others.

Let’s now get more clarity on how much money Microsoft makes and the main revenue sources before digging deeper into how Microsoft earns money, its business model, and its revenue model.

Microsoft earned $198bn of revenue in 2022, and $72.7bn was net profit after taxes. The operating margin stayed at respectable 42%. The main revenue sources were Server Products & Cloud Services (34% of revenue), Office products and services (23%), Windows (12%), and Gaming (8%).

Microsoft's key income statement and cash flow metrics summary

Looking at the trajectory of Microsoft’s results above, it seems that Microsoft somehow defies gravity. It is growing in revenue and profits and has expenses well under control, resulting in increasing margins.

These trends result from successful bets on cloud infrastructure and cloud-based software. Looking forward, it is hard to see a significant change in those trends. The underlying shift of businesses to the cloud, both in backend infrastructure and productivity tools, is poised to continue. Microsoft is well-positioned to benefit from that.

“What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. “ — Satya Nadella, CEO of Microsoft, Earnings Call in January 2021

Microsoft will also benefit from other areas like cybersecurity , a sizable market . Large global providers like Microsoft have logical advantages there.

Another increasingly important part of Microsoft solutions is artificial intelligence (AI). Both in the form of specific Azure services used by developers and, more importantly, as an inherent part of all products that Microsoft develops. AI focus is also behind the acquisition of Nuance Communication for nearly $19bn.

“We are rapidly innovating in AI, and our large scale models are powering everything from meeting recaps in Teams, to helping developers code in GitHub, to “next best action” in Dynamics 365.” – Satya Nadella, CEO of Microsoft, Earnings Call in October 2021

Microsoft is currently one of the largest companies in the world, with a market capitalization around $2 trillions . Only Apple and Saudi Aramco are larger than Microsoft, but not by much.

Microsoft is flying high right now, but although it has been dominating force in technology for several decades, it went through some tough years roughly a decade ago.

The world of computing and software was quickly changing at the time, and Microsoft seemed too slow to adapt. It was not only the smartphone revolution that threatened the dominance of the Windows operating system but also the growing popularity of cloud-based software.

The threat at the time was that Microsoft could be left behind thanks to more nimble competitors like Salesforce or Google. These companies adopted cloud software more aggressively, and its managers at the time openly called Microsoft the “dinosaur.”

The issues Microsoft had were not so much visible in its financials. It was still earning vast amounts of money from Office and Windows, but the future of Microsoft looked bleak, and the market value of the company reflected that.

It all culminated with Microsoft’s Nokia acquisition, which turned out to be a desperate attempt to keep Windows and Microsoft relevant in smartphone operating systems. It did not work out. Nokia acquisition can be seen as a low point in Microsoft’s history.

Since then, things started to turn around , and Microsoft managed to pull one of the most successful corporate turnarounds in history. Microsoft made a tough decision to exit the smartphone business, which was already dominated by Google and Apple and focused predominantly on business customers.

Microsoft managed to transition Office to cloud-based service and heavily invested in Azure cloud, which now captures 21% market share , second only to AWS with 33% share. Microsoft also introduced a range of new products like Teams or Power BI , which captured market share quickly.

Microsoft is now back at the forefront of business software, and many of the same companies that called Microsoft a “dinosaur” are the ones struggling to keep pace with Microsoft.

I tend to think that Microsoft is still a dinosaur. But a dinosaur that is well alive, hungry, and going after its competitors aggressively.

The person who became the face of Microsoft’s turnaround is its , Satya Nadella . He became CEO of Microsoft in 2014, replacing Steve Balmer. At that time, giving the CEO’s job to Nadella was a bold move as he was mostly unknown outside Microsoft. Despite that, after a while, Microsoft started to gain the lost ground and got back on track.

Satya Nadella deserves a lot of credit for executing Microsoft’s turnaround. Nadella embraced open source and significantly changed Microsoft inside by breaking the silos and making it more cooperative. Microsoft is now again a company that is cool to work for. It is no surprise that soft-spoken Satya Nadella is one of the most-loved CEOs .

But correlation does not mean causation. The fact that is sometimes forgotten is that the turnaround that Nadella managed to execute so well was partially initiated before Nadella became CEO.

It was Steve Balmer that started the reorganization of Microsoft into a more cooperative and holistic company with more focus on cloud and services. In the video below, Nadella himself acknowledges this.

However, after pressure from Microsoft’s board and shareholders on the speed of this transition, it soon became apparent that some new face would probably be a better fit to manage this transition.

“Maybe I’m an emblem of an old era, and I have to move on,”… “As much as I love everything about what I’m doing,”.. “the best way for Microsoft to enter a new era is a new leader who will accelerate change.” — Steve Balmer, WSJ Interview, 2013

In the rest of the article, I will dive deeper into how Microsoft makes money. We will dive into different parts of Microsoft’s business model and break down its revenue model.

If you are primarily more interested in diving into a guided tour of Microsoft financials, I wrote a separate article focused on Microsoft’s financial statements that I recommend you check out.

Or you can find out Who Owns Microsoft and who controls is.

💼 Microsoft’s Business Model

Microsoft’s business model is about providing cloud infrastructure and highly integrated software tools for business customers. Microsoft offers software that covers the most common business needs. It ranges from office productivity apps to tools used by developers to build their own software.

Microsoft’s business model and how it makes money differs based on product segments. Office productivity tools are mainly subscription-based, Azure is primarily about paying based on consumed resources, Windows is still about selling per PC licenses, and Gaming is all over the place.

Microsoft’s range of products is so broad that we can see Microsoft as an operating system you can run your business on.

In the visual above, I tried to capture the main pieces of Microsoft’s business model. It shows Microsoft’s customers, the different channels Microsoft uses to reach them, and Microsoft’s main products and services.

You can see that I put Azure at the center of Microsoft as it is currently, in my view, the b eating heart of Microsoft . Microsoft rents Azure capacity and associated services to customers, and at the same time, it uses Azure as a backend for many of its own cloud-based products.

Microsoft often touts the openness of its products and platforms. What it means is that you have the option to stay entirely within the Microsoft ecosystem of products and services, or you can integrate with third-party software tools or other cloud infrastructure providers.

However, at the same time, Microsoft makes sure that staying within the Microsoft ecosystem is the easiest choice for its customers. Microsoft’s ecosystem is relatively open, but it is at the same time as sticky as ever.

Great “sticky” products are not the only key ingredient of Microsoft’s business model. Microsoft also has a significant advantage in historical relationships , often very complex ones, with many companies.

These historical relationships give Microsoft an advantage when these companies start shifting their business to the cloud. Another thing that stands out in Microsoft’s business model is a very well-oiled network of salespeople, partners, consultants, and resellers.

Put all these things together, and it is not any more such a big surprise that Azure is catching up to Amazon Web Services (AWS) and Microsoft productivity tools continue to be the market leader with over 400 million paid Office 365 users.

Despite its focus on business customers, Microsoft still cares a lot that consumers use its tools. Microsoft even earns sizable revenue from consumer versions of its products.

However, more important than that direct consumer revenue is the familiarity of billions of people with its products and services. This familiarity then feeds back into its revenue from business customers because familiarity with the tool is an essential part of the decision of any business when deciding which set of tools they will use and pay for.

That’s why basic versions of Office 365 tools are free to use, and Microsoft is pushing Teams to customers so hard that it is now integrated into Windows 11.

One segment breaks the pattern of business-focused Microsoft, and that is gaming . Gaming looks like a weird fit for Microsoft, but we can find some interesting synergies even in gaming. After all, game developers are businesses too.

However, gaming is, above all, a sizable consumer business opportunity where Microsoft’s cloud infrastructure and direct ownership of many successful game studios puts it into a great position to take a more significant piece of gaming market profits for itself.

📊 Microsoft’s Revenue Breakdown into Streams

Microsoft’s revenue was $198bn in 2022. The main revenue streams were Server Products and Cloud Services with $67bn (34% share), followed closely by $45bn from Office productivity tools (23% share). Windows was in third place with $25bn of revenue (12% share).

The chart below details Microsoft’s breakdown into different revenue streams based on the product group.

Microsoft's revenue segments breakdown chart

You can see that Microsoft’s revenue has been growing significantly throughout the years across different product lines. Still, some of them are growing much faster than others.

Sever Products and Cloud Services is the biggest revenue stream ($67bn) and one of the largest contributors to revenue growth in the last several years. It grew by 28% in 2022. When we would look only at Azure Cloud services alone, the revenue growth was 45% in 2022.

Server products dragged down the growth rate of the whole Sever Products and Cloud Services category. Server products revenue was still growing but only by single-digit percentage points.

The second biggest revenue stream with $45bn in 2022 is Office , with “only” 13% revenue growth, which given how long the product is on the market, is also a very good result.

Windows , which was Microsoft’s core product for decades, is currently in third place in revenue ($25bn) and growing just in single digits. Its importance, at least for direct revenue, is decreasing.

This decreasing importance of Windows for Microsoft’s revenue is more visible from relative shares of each revenue stream on total revenue. Windows share on revenue has been decreasing throughout the years. It is still growing in nominal terms, but other revenue streams like Server Product and Cloud services or even Office are growing much faster, decreasing Windows’ relative share.

Microsoft's revenue segments breakdown chart as percentage

The numbers shown above are based on 2022 financials which did not include the recently announced $75bn acquisition of Activision Blizzard. If this huge acquisition comes through regulatory approvals, gaming revenue might in time be bigger than revenue from Windows, which will be a huge historic shift.

The main driver of Microsoft’s revenue growth is obviously Azure , which is part of the Server Products and Cloud Services product category. Azure is now the beating heart for Microsoft not only as a backend infrastructure that Microsoft products depend on but also as a revenue generator.

In 2022 Azure Cloud Services revenue (without Server Products) was $44bn, growing by 45%. Therefore it is nearly certain that next year, revenue from Azure will be higher than revenue from Office, Microsoft’s historical money maker.

This part was just a quick introduction to show where is Microsoft’s revenue coming from and which parts are growing at a faster pace and which at a slower one. Let’s now dive into how Microsoft makes money by exploring its business model and revenue model piece by piece, starting with customers.

If you want to dig deeper into Microsoft financials instead, check my article about Microsoft’s financial statements. or article breaking down Microsoft’s revenue by product, segment and geography .

🧑 Who Are Microsoft’s Customers? Where Does Microsoft Revenue Come From?

Microsoft’s core customers are businesses of all sizes, especially corporations and SMEs, to which Microsoft sells multiple layers of different products and services. Microsoft provides products and services also to consumers, but businesses are where most of the revenue comes from.

Despite being business-oriented, and the fact that revenue coming from consumers is relatively small, Microsoft’s most numerous users are consumers.

Mainly for products offered for free, like its basic version of Office 365 or products where consumers do not pay directly to Microsoft, which is the case of the Windows operating system, which is mostly preinstalled on consumer-focused hardware. There is currently 1.4bn devices with active Windows 10/11 running worldwide.

Besides businesses and consumers, Microsoft software is also essential for the nonprofit sector and governments.

Now let’s look at different customer segments one by one.

Large and Medium-Sized Companies

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Microsoft is highly focused on business customers. That’s how they make their money. However, not all companies are equal, and some of them have more business potential for Microsoft than others.

Large and medium-sized companies are one of the most valued customers for Microsoft. That is not only because a large company usually means more money from Office and Window licenses, but it is also about the complexity of software and IT infrastructure for those companies.

For a company that grows above a certain size, you need to have some common platform through which you communicate and share documents. You also need to have backend servers on-site or in the cloud, and you will need software solutions for handling your data storage, data governance, and analytics needs.

If you do all those things, then on top of that, there is a need to protect those systems from threats from both outside and from inside the company.

In such a complex environment, where everything needs to be tightly knitted together and work seamlessly and securely, Microsoft thrives with its wide range of solutions . It is generally much easier to integrate one Microsoft product with another Microsoft product, even though Microsoft promotes its solutions as open.

It is often much simpler for a company with more complex needs to have just a few core reliable partners that are appropriately vetted with legal agreements chiseled out. An alternative would be managing many different tools tangled together, each from a different partner.

It is not that it cannot be done, but it is painful. And companies usually want to avoid that pain without sacrificing too much on what they want, and the price is not prohibitively higher.

The stickiness and pricing power Microsoft solutions have for large and medium-sized companies is especially obvious for companies that already have some Microsoft infrastructure or software.

When those companies need some additional software or infrastructure needs, and Microsoft has such a product within its Office 365, Azure, or Dynamics 365 range of products, that is, in many situations, the easiest and quickest route to get things up and running securely.

In this situation, Microsoft has a significant competitive advantage against competitors , and it drives them crazy. Even the ones that once called Microsoft a “dinosaur.”

There are several ongoing antitrust complaints against Microsoft. So far, without a clear result. One of them is Slack EU’s complaint against Microsoft for including Teams as part of Office 365. Another EU complaint is about Microsoft products being more expensive to run on other clouds than on Microsoft Azure.

The way how Microsoft services its large and medium-sized customers is very much dependent on their size and potential for future revenue.

For the most prominent companies, Microsoft has internal teams of salespeople and consultants that companies work with directly. However, most medium and large companies will probably be offered Microsoft products indirectly through many of its partners.

There is, of course, an option to buy Microsoft products through its website directly for anyone. But for larger and medium-sized companies, this option is too expensive and without an individualized contract.

Microsoft’s market position for larger corporate customers is strong, and Microsoft is pushing further by making both its Azure ecosystem and Office/Dynamics ecosystem of tools richer.

For example, Viva’s introduction suggests that Microsoft will try to enter people development and training tools, where it currently is not present. Apart from that, Microsoft is also now focusing more on cybersecurity solutions.

Large and medium-sized customers are such an important customer segment for Microsoft that I think we can generally expect that if there is any range of tools or infrastructure that these large customers will need, Microsoft will sooner or later introduce some products or services to meet those needs. Assuming that market will be big enough so Microsoft can make money from that.

Micro Businesses and Self-employed Customers

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Small businesses with just a few employees and self-employed people like freelancers, lawyers, or consultants are also businesses. Still, that is a much different customer segment, and Microsoft approaches it differently. These are much smaller customers, but there are many of them, so it is still a sizable potential market for Microsoft.

Behind the apparent difference in size by simply requiring fewer subscriptions and licenses than large companies, this segment also tends to have more simple needs . It usually relies just on a few tools and does not have any large in-house IT solutions. That means less potential revenue per user for Microsoft than for much larger customers.

Thanks to the much simpler needs of this smaller customer, Microsoft’s main strengths are less efficient. There is no incumbent advantage here.

It is easier for these companies to switch from one tool to another. Microsoft is therefore much more exposed to direct competition between different products, both from established companies and many startups offering a wide range of subscription-based cloud software.

Still, Microsoft has a good range of products to offer here, like Office 365 or Power Automate tools that are at par with other products on the market. But there are also very easy to substitute even if Microsoft versions might be more advanced in certain aspects.

For example, on a direct comparison of functionalities of Office compared to competing online tools, Microsoft has an “advantage” of offering desktop apps giving better speed and much more advanced functionalities. Yet, this has no relevant added value for companies that do not need those advanced features.

Where Microsoft struck gold recently was the development of Teams , a product that experienced massive growth during the COVID-19 pandemic.

“Teams is rapidly becoming the de facto unified communications platform of choice for every organization.” — Satya Nadella, CEO of Microsoft, Earnings Call in January 2021

On top of Teams being a successful product by itself, it is also becoming a new fast-growing platform for Microsoft. This can create advantages in the future for selling other products to Teams customers.

Microsoft is pushing Teams aggressively, and a simplified version of Teams is now integrated into Windows 11.

This market advantage that Tams brings to Microsoft did not go unanswered by competitors. Slack launched a complaint in the EU again Microsoft bundling Teams with Office.

Shortly after that, Microsoft’s old foe Salesforce, whose CEO Marc Benioff is known for calling Microsoft a “dinosaur,” followed by acquiring Slack for $27.7bn. Probably with a plan to create a similar productivity ecosystem that Microsoft managed to create with Teams.

There is also another difference between large and tiny businesses. This difference is in the channels Microsoft uses to sell to those customers and provide support, which is nearly identical to how it services consumers. If you are a tiny company with just a few people and no special IT needs, you can buy Microsoft products directly online or indirectly from resellers and online stores.

Software for smart devices is available to buy or download through third-party app stores. In the case of Windows, there is also the option to buy PCs from Microsoft OEMs partners with Windows already preinstalled and included in the price.

Governments & Nonprofit Customers

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We also have to acknowledge governments & non-profits as a separate customer group. Their needs are very much in line with business customers. In the case of governments, it is in line with the largest corporate customers.

Besides regular software and cloud infrastructure needs, Microsoft gets involved in individual large government contracts. For example, they have an agreement with the US government that Microsoft will provide specialized AR glasses for the military.

Microsoft won the JEDI contract from the US Department of Defense worth $10bn before losing it based on Amazon’s complaint. Legal fights around the JEDI contract were so prolonged that in the end, the Department of Defense decided to scrap it and chose a multivendor approach instead.

Consumers - Gaming Customers

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Gaming is Microsoft’s only purely consumer-focused segment. Users and paying customers significantly overlap, and therefore revenue comes directly from consumers. Gaming customers are mostly the users of Xbox consoles right now, but Microsoft’s strategy is to focus also on PCs and smart devices.

The main revenue driver is Xbox content and services , where Microsoft is getting revenue cut from third-party games sold on the Xbox platform and is also selling games made by its own game studios.

Significant revenue also comes from Xbox Gold subscriptions , which allow gamers to play online multiplayer games, and Xbox Games Pass subscription , which gives gamers access to hundreds of games for a monthly fee.

I should not also forget Xbox hardware , which, although not profitable by itself, brings billions of revenue each year and is an essential part of Microsoft’s gaming ecosystem.

Gaming seemed to be a weird fit for Microsoft for some time. Especially after Microsoft shifted its focus more on corporate and business customers after exiting the smartphone OS market.

But Microsoft clearly sees a business potential there and decided to pour a large amount of money into gaming by acquiring multiple gaming studios and then offering their games as part of the Game Pass subscription service.

Especially when taking into account Microsoft’s recent $75bn acquisition of Activision Blizzard, Gaming will be a very sizable part of Microsoft going forward.

Consumers - Non-Gaming Customers

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I intentionally separate Gaming Customers and Non-Gaming Customers as different customer segments because they differ significantly in what products they are about and also how Microsoft approaches them.

Microsoft sells many of its products directly through online channels or 3rd parties to consumers. Revenue coming from consumer non-gaming business is not insignificant but relatively small compared to total revenue of $198bn in 2022. Consumer Non-Gaming revenue mainly comes from the same products that it offers to smaller business customers, just adjusted and packaged for consumer users.

Yet, it would be wrong to suggest that consumers are not essential to Microsoft. They are essential, just not solely because of their revenue.

Microsoft is willing to offer its products to consumers cheaper or for free because having many users, and high familiarity with Microsoft’s products is an important factor that plays into which tools corporate users buy.

That is why Microsoft is not giving up on consumer versions of its products, even though some of them can hardly be called successful. For example, its free consumer version of Office 365 has a far smaller number of users than around 3 billion users of Google’s suite of productivity apps.

Google’s advantage is clearly its Android platform since Android users generally need a Google account, and many of Google’s productivity apps are preinstalled on Android phones. Unfortunately for Google, its dominance in free consumer tools does not translate to many paid users. Microsoft continues to dominate for paid accounts as its $45bn revenue from Office confirms.

Microsoft introduced new Windows 11 that are slowly increasing its share on Windows based consumer devices. Interestingly, Windows 11 is having consumer version of Teams preinstalled.

Windows also has Microsoft Edge browser preinstalled since version 10, with Bing as a default search engine. Microsoft is not shy to push it to Windows users aggressively , including nudges within Windows to log in to Microsoft account and use Microsoft’s own cloud services.

Overall, Microsoft’s consumer business is full of failures. And I don’t mean only because they failed in the smartphone OS business. Even on PCs, platform firmly under Microsoft’s control, it is a failure that they cannot persuade Windows users to stay with tis default Edge browser and Bing search engine.

For some reason, consumers don’t like those products, and instead of using them, they go through the hassle of switching to Chrome and Google Search on Windows.

Above mentioned Edge/Bing failure is a revenue hole for Microsoft. By not fixing it, Microsoft is simply handing over, according to my estimate, around $25bn in annual revenue to Google.

📦 What Products & Services Microsoft Offers and How It Makes Money from Them

Microsoft offers many products & services that can be categorized into four segments based on their value to customers.

  • Intelligent Cloud (Azure, Server Products)
  • Productivity and Business Processes (MS Office, Dynamics)
  • General Computing (Windows ecosystem)
  • Gaming (Xbox)

Overview of Microsoft's segments of products and services

The segments above are primarily based on three Microsoft official segments they use in their financials. The only difference is that I split their weirdly named “More Personal Computing” segment into separate General Computing segment and Gaming segment. I think that separating gaming makes sense since it is the only clearly consumer-focused group of Microsoft products.

Focusing on these Microsoft product segments and not individual products themselves is crucial because these segments very well represent Microsoft’s customer needs. Each segment can be seen as its own ecosystem of products and services and even as a separate business model. Explaining Microsoft through individual products would be a flawed approach, where we would not see the forest for the trees.

Business customers , especially the medium and large ones, are at the core of what Microsoft focuses on. Whatever need arises for these customers in the future, I will bet that Microsoft will try to address it and offer a solution. At least if there will be money to make from it either directly or indirectly.

If the solution will be the introduction of a new product or some functionality within an existing one is irrelevant detail here. That’s why focusing on segments rather than individual product makes so much sense here.

The first two segments that Microsoft calls “Intelligent Cloud” and “Productivity and Business Processes” both focus mainly on business customers. What separates them is the different needs they solve.

The Intelligent Cloud segment focuses on backend infrastructure and tools used mainly by developers, and the “Productivity and Business Processes” segment is mostly about tools for “regular” business users.

The third group that I named “ General Computing ” equals Microsoft’s official “More Personal Computing” segment without gaming-related products. This segment covers mainly Windows OS and related ecosystems of tools and services.

If we measure it in the number of users, consumers outnumber the business users of this product. However, the majority of revenue is still coming from businesses.

The fourth segment, “ Gaming,” differs not only in customer needs but is also a single purely consumer-focused business Microsoft has.

The visual below tries to go one layer deeper into the Microsoft revenue model and show product groups’ main revenue streams. It also shows what the core drivers of that revenue are.

Note that Azure and Server Products are two different categories here, and gaming numbers do not reflect the recently announced Activision Blizzard acquisition, which will put Gaming revenue very soon above that of Windows OS.

Revenue model breakdown visual, explaining how Microsoft makes money and from what

Let’s now look more in detail at each individual segment and see what exactly is within them and how those products and services are tied together.

How Microsoft Makes Money from Intelligent Cloud (Backend Infrastructure & Tools)

The first segment of Microsoft’s products and services that we will look into is the “Intelligent Cloud .”This segment includes products like Azure, SQL Server, and Window Server used to help companies with their infrastructure needs and manage their cloud or on-premise infrastructure productively and securely. These tools are usually used by developers and not by regular business users.

Microsoft makes money from Intelligent Cloud products and services mainly by renting out its cloud (Azure) infrastructure and connected tools (~44bn of revenue) and also by licensing traditional server software like Microsoft SQL Server or Windows Server (~$24bn).

Overview of Microsoft's backend product and services within intelligent cloud ecosystem

A smaller part of the Intelligent Cloud segment is support and consulting services, which earned $7bn in 2022.

Microsoft earns $15bn a year from different security solutions . However, this amount is not additional to Intelligent Cloud revenue. It is not reported officially in Microsoft’s financials and is probably an estimate of all security-related revenue from tools included across Azure, Microsoft Office, and other products.

Microsoft is becoming more and more active in cybersecurity. Apart from some of its more advanced tools that have been available for some time already, the company introduced Microsoft Defender for Business recently, which is accessible even for small businesses. Microsoft also announced different levels of new services that combine its AI-based cybersecurity services with real-life security experts.

Azure and Server Products are a core part of the Intelligent Cloud segment. Both in its importance and also in revenue they are generating.

I have to admit I am not a big fan of how Microsoft named this segment “Intelligent Cloud” since it is too general, and I would much prefer something more descriptive like “backed infrastructure and tools .”But that would make things even more confusing, so I will stick with the “Intelligent Cloud” naming in this article.

Azure is an ecosystem of different infrastructure services and backend tools. You can rent an Azure virtual machine from Microsoft, which is the most basic type of infrastructure as a service (IaaS).

Or you can just run your code or database in the cloud without even worrying about setting up a virtual machine at all, which is often called platform as a service (PaaS) . But Azure is much more than this.

Azure is an ecosystem of infrastructure and cloud tools to run on it. For example, with a product like Azure Synapse, Azure Purview, and Azure Machine Learning, you can run your data storage & advanced analytics in the cloud and manage your data sources across different clouds or even your on-premises servers.

Microsoft makes around $44bn a year from Azure by charging its customers fees based on how many resources they use. A resource can be data storage, computing time, number of transactions, or traffic volume. Price very much depends on the sophistication of the service.

The more sophisticated services are more expensive, making it more profitable for Microsoft. And I think it is essential to realize that this is where the future of a successful cloud business model is.

It is not in the “naked” infrastructure that will become more and more commoditized. The future is in offering integrated solutions that businesses need and providing necessary cybersecurity protection as a part of it.

Software is where Microsoft excels. With Microsoft’s early lead in hybrid solutions, where you can mix cloud resources with on-premises servers and still manage it as one infrastructure through Azure tools, I understand why Microsoft is rapidly gaining market share in the cloud.

Microsoft’s market share in the public cloud, which includes both IaaS, PaaS, and hosted private cloud, was 21% compared to 33% for AWS. Other market share numbers are floating around, which put AWS far ahead with around 40% market share and Microsoft at 20%, but it measures only “naked” cloud (IaaS) and not the full range of public cloud products.

Server Products

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Let’s now refocus on a second core part of Intelligent Cloud products and services, which are different server products Microsoft offers.

Microsoft makes around $24bn annually from Server Products, predominantly by licensing SQL Server and Windows Server. These products are not used only as on-premise servers but more and more also as part of cloud infrastructures, even the ones running on non-Azure clouds.

Even though SQL Server and Windows Server can be considered “old school” on-premise products that do not belong to a new cloud-centered world, the reality is different. For businesses that want to move into the cloud but have some dependencies that require them to run their applications on Windows Server, it might be more beneficial to keep using Windows Server in the cloud.

This benefit is because they can keep running Windows Server in the cloud for some time until switching to more modern cloud tools makes business sense. It is not an ideal solution, but it makes switching to the cloud easier and less time-consuming.

These companies can realize partial benefits of switching applications to the cloud more quickly and have the option to rebuild them with native cloud tools later. Microsoft will even sweeten the deal by allowing businesses to bring their existing licenses to the Azure cloud. The similar is true for SQL Server.

Market share for both products is still significant , even though Linux took the lead from Windows Server a long time ago.

Cloud and hybrid use for Windows Server and SQL Server are why licensing revenue is still slowly growing each year. It is only growing in the single digits, which is nothing compared to Azure growth of around 50%, but still, it shows that even not-so-sexy parts of Microsoft are still humming along nicely.

Another way to look at Server Products is that current on-premise server product customers are potential future Azure services customers.

The Server products category, as Microsoft defines it, also includes developer tools like Visual Studio or GitHub. Revenue coming from it is nothing to ponder about, but these products are an important part of the ecosystem.

How Microsoft Makes Money from Productivity & Business Processes Tools

Microsoft productivity and business processes tools consist of Office, Dynamics, Power Platform, LinkedIn, and newly Viva . These tools are focused mainly on business customers and their productivity needs. Their focus is also mainly on end business users and not developers.

Microsoft makes money from productivity and business processes tools primarily by selling subscriptions and licenses for Office ($45bn revenue) and selling subscriptions and ads on LinkedIn ($14bn). Microsoft also earns money from Dynamics and some Power Platform tools ($5bn)

Overview of Microsoft'S products and services within productivity and business processes ecosystem

I will not be able to go through each individual product in this article. Still, all the different productivity tools might be grouped into Office tools, including Teams, Power Platform Tools, Dynamics , and LinkedIn .

These tools cover nearly every possible business productivity need from document creation, email, messaging, audio, and video communication. It also includes tools for dealing with workflows and processes, automation, hiring, training, etc. The business model within this ecosystem is primarily subscription based.

Each product within this segment is a standalone product. But Microsoft built-in an integration between them strong enough that they create one large productivity ecosystem.

In the middle of all those tools is Teams, a Microsoft communication and cooperation too. Teams have become one of the most important apps within this ecosystem. The one you spend a lot of time in.

“Every organization today needs a digital fabric to connect and empower everyone inside and outside the organization, from knowledge and frontline workers to customers and partners. At the center of this digital fabric is Teams, which surpassed 270 million monthly active users this quarter. Organizations are using Teams to run their business with collaborative applications that bring business process data right into the flow of work. “ — Satya Nadella, CEO of Microsoft, Earnings Call in January 2022

Microsoft touts that its ecosystems are open and allows integration with third-party products. Relatively speaking, it is true. Despite that, Microsoft products are still sticky. If Microsoft offers the additional product that the company needs, it is easier to stay within the Microsoft ecosystem than deal with integrating with another provider.

So far, Microsoft Office , which consists of a wide range of apps and tools, is the main revenue generator for Microsoft. And although Office has been the bread and butter of Microsoft’s profitability for decades, it still is doing very well. Office revenue was growing in double digits for several years.

Dynamics is another range of Microsoft’s products. Its revenue is only in single billions of dollars, but it grows quickly and has a promising future. Dynamics is a relatively new product category for Microsoft and has so far low market share compared to Salesforce, which is the clear market leader in this category.

There is also a relatively new Microsoft Viva product, which, together with LinkedIn , seems like an attempt for Microsoft to make things much smoother for HR departments and employee training. So far, HR departments have had to look for a solution somewhere else or build their own internally.

How Does Microsoft Make Money from General Computing (Windows Ecosystem)

Windows operating system is at the center of the General Computing ecosystem that can be, to a certain extent, also considered productivity related. Apart from Windows, it contains tools like Edge browser, Bing search engine, and Microsoft’s own hardware products. Hardware is represented mainly by Surface devices, which, with the exception of Surface Duo , are based on the Windows operating system.

Microsoft makes money from Windows and its ecosystem of tools mainly by selling Windows licenses and subscriptions ($25bn revenue). Microsoft also makes money from Search advertising through its Bing search engine ($12bn) and selling hardware ($7bn).

Overview of Microsoft's products and services within general computing windows centered ecosystem

Microsoft’s official segmentation that it reports in its financials does not include Windows and related desktop tools as a standalone segment. Microsoft bunched these tools together with Gaming into the “More Personal Computing” segment.

I get that Windows is also used by consumers, similar to gaming but nearly 80% of the revenue comes from commercial Windows licenses or Professional OEMs versions and other non-consumer related revenue. Therefore it does not make too much sense to bunch them together.

Windows became less important for Microsoft than a decade ago when it was a crucial part of Microsoft’s total revenue and indirectly was a driver of Office revenue. Everything was linked to how many Windows PCs were running in the world.

Despite all that decline in importance, Windows was still business with $25bn of direct revenue annually in 2022. Its share on the total revenue is decreasing, but the absolute amount is still growing each year, albeit slowly.

I also think that Windows as a platform is more important for Microsoft than would its current 12% share of revenue suggest. Without Windows, many other existing or potential revenue streams would simply dry out. From Windows based servers used on-premises or in the cloud to Windows 365 Cloud PCs .

Microsoft’s market share of Edge browser or Bing Search engine would also suffer. However, it is currently tiny compared to the potential Microsoft has there as the owner of the Windows platform. Fixing Edge and Bing products and their popularity should be on top of the company agenda. Until they do that, Microsoft is simply handing over, according to my estimate, around $25bn of annual revenue to Google.

Microsoft browsers’s market share on desktops was around 10% worldwide and 14% in the US.

Like other Microsoft ecosystems, the Windows ecosystem is sticky, and Microsoft is trying to make it more sticky by offering a free version of its tools for desktop use.

An example is Power BI or Power Automate , which are powerful tools that anyone can use in their basic version for free. Wide adoption of these tools among businesses helps with stickiness to Windows OS. This stickiness makes Microsoft’s position stronger when companies need to switch to more advanced paid versions of this product.

We can also see an even more apparent approach in Windows 11, where a basic version of Teams is integrated into the operating system.

How Does Microsoft Make Money from Gaming (Xbox)

The gaming business is something Microsoft was involved in for ages, but it was never a huge part of how Microsoft made money. Just a few years ago, the future of gaming within Microsoft was quite cloudy. At least from the outside, it was not clear how Gaming fits into Microsoft’s strategy and if it is an attractive enough opportunity to keep investing in it. Today we can see more clearly that the sizable opportunity might be there, and Microsoft is making pretty aggressive moves within gaming.

Microsoft makes money from gaming by selling Xbox consoles at a loss and then making money primarily by taking a 30% commission from transactions in Xbox Store. Microsoft also makes money by selling its Xbox Gold and Game Pass subscriptions and selling games developed by its own gaming studios.

Overview of Microsoft's products and services within the gaming (Xbox) ecosystem

Apart from taking a commission from Xbox Store transactions, Microsoft earns money by selling different subscriptions to gamers. Xbox Live Gold subscription is a must-have $59.99 yearly add-on for anyone who wants to play non-free games in multiplayer mode on the Xbox console.

Xbox Games Pass is another subscription service with different tiers where the most expensive one can give you access to hundreds of games. It also includes Xbox Cloud Gaming , currently in beta, which allows you to stream games to your smartphone, tablet, and other devices without downloading them.

The older Xbox Live Gold subscription has around 100 million monthly active users, and a more recent subscriber count for the Xbox Game pass was 25 million .

Microsoft made $16bn from Gaming in 2022, representing a 8% revenue share. From that, $12.6bn came from content and services and $3.7bn from hardware. The main drivers of content and services revenue were commission from digital transactions, Xbox subscriptions, and also Microsoft’s own games sales.

Microsoft’s current gaming business model seems to be based on selling hardware, losing some money on it, and then really making money by selling games to users of Xbox consoles. The more consoles are sold and used, the more money Microsoft will make.

Microsoft was not a market leader in console sales historically. That title belonged to Sony and its PlayStation console. If we compare only PlayStation and Xbox consoles, PlayStation has always had a higher market share than Xbox. This was true mainly worldwide but also in the US, where Microsoft had a better position but still was trailing behind PlayStation.

In 2021 , shortly after a new generation of consoles hit the market, Microsoft gained market share relative to Sony. Xbox consoles market share worldwide was 39% in 2021 and in the US 48% . This was so far the best full-year result for Microsoft, but still, Sony took the crown.

Yet, based on the numbers for the beginning of 2022, it looks that Xbox might finally get ahead of PlayStation in the US, and even for worldwide sales, Microsoft is running neck to next with Sony. So far, it is not possible to say if it is thanks to Xbox having better success among gamers or if it is about supply chain problems hitting harder on Sony than Microsoft.

As an additional income, Microsoft charges Xbox users a fee to access online gaming options for paid content. When you buy games from the Xbox Store, you cannot access online multiplayer functionality, and you have to subscribe to Xbox Live Gold or Xbox Game Pass to get access to it.

Until recently, this was true for any game on Xbox consoles, but Microsoft changed their rules , and free games are since really free without a need for any additional subscriptions.

Microsoft is making many changes in its gaming business. Its business model is shifting from a hardware-based “walled garden” style ecosystem to a more open platform exosystem that is available from any device, not only for Xbox consoles.

I have already mentioned that both Microsoft and its rival Sony introduced a new generation of consoles at the end of 2020, but there are far more important changes than the new consoles.

The first significant change is that Microsoft invested heavily in acquiring several gaming studios to strengthen its own portfolio of games. Microsoft then offers those games as part of its Game Pass subscription.

The strategy behind this is to make all these directly owned games available in Game Pass, which should then attract subscribers. With many subscribers, after it is a proven successful platform, the expectation is that other game developers will be interested in joining in too.

“We invest in our first-party [games] as a catalyst for growth. In the end, I do know that most of the games, just like most of the games that are played on an Xbox, should be third parties. Those third parties have to build a healthy business on Game Pass. Otherwise, it doesn’t work.” — Phil Spencer, VP of Gaming at Microsoft, Decoder podcast by Verge

So far, Microsoft was acquiring mostly smaller studios, and the most sizable ones were Mojang and ZeniMax Media. That was the case at least until recently. In January 2022, Microsoft announced the acquisition of Activision Blizzard for $75bn.

It is the largest Microsoft acquisition ever, and it fits Microsoft’s pattern of strengthening its own gaming content. If this acquisition gets approved by regulators, gaming will have a more significant share of Microsoft revenue than Windows.

But buying studios to bolster subscriptions to Game Pass for a monthly fee only to a limited number of Xbox console users might not be enough profitable strategy to justify these acquisitions. Microsoft’s ambition here is to make Xbox Game Pass subscription successful outside consoles too. This includes PC gaming and especially gaming on smart devices.

My point is that this is not just about fighting with Sony for console market dominance anymore. Microsoft is trying to lead an attack on multiple fronts to break into other areas of gaming outside its Xbox consoles.

That makes perfect sense when you realize that around half (52%) of gaming market revenue is coming from mobile devices, and the rest is split between consoles (28%) and PCs (20%).

“The big bets we have made across content, community, and cloud over the past few years are paying off.” … ” And with our planned acquisition of Activision Blizzard, announced last week, we are investing to make it easier for people to play great games wherever, whenever, and however they want, and also shape what comes next for gaming as platforms like the metaverse develop.” — Satya Nadella, CEO of Microsoft, Earnings Call in January 2022

PC gaming is the obvious opportunity, which Microsoft neglected for years and now is in the situation where the leading gaming marketplace on Windows PC is Steam . Changing that won’t be easy.

Microsoft is trying to gain some market share by taking far lower commissions from PC games (14% vs. standard 30% charged by competition) and offering an Xbox Game Pass subscription, which includes the option to play Game Pass games on any platform, including PC.

Even more challenging will be Microsoft’s ability to gain share in smart devices gaming. Microsoft is not in control of its own smartphone ecosystem, making pushing into smartphone gaming tricky. So far, it looks like their strategy is based on Xbox Game Pass and Xbox Cloud Gaming.

Xbox Cloud Gaming is a service introduced by Microsoft for Game Pass subscribers to play Game Pass listed games from any device without downloading them. Games run on a server in Microsoft’s data centers, and screen output is then streamed on your tablet, phone, or another device that people already have in their home, like a TV.

Based on that, Microsoft’s potential for Game Pass might multiply because, suddenly, Microsoft is not limited to Xbox console users or PC users. Its customer can be anyone with a phone, tablet, or TV.

This looks like an immensely promising opportunity through which Microsoft’s gaming acquisition spree can be justified. Although, in practice, this opportunity will be pretty complicated to pull off . It requires high-speed internet with low latency, which is not the case everywhere, and without it, the cloud gaming experience can be highly frustrating.

On the other hand, Microsoft is just at the beginning of cloud gaming. If some company out there is in a position to figure out a way to make cloud gaming work, who better than Microsoft.

What I have in mind is that Microsoft as an owner of in-house gaming solutions, Azure cloud infrastructure, and Game Pass subscription service is in a unique position to experiment and deliver a more advanced solution for cloud gaming. It might be more about using cloud resources and limited device computing power to make sure latency issues are minimized.

If Microsoft somehow manages to crack this problem, they have an infrastructure, customer base, in-house gaming studios, and lobbying power to push it forward. With this in mind, Microsoft’s focus on gaming and level of investments starts to make sense.

Microsoft will need to overcome the obstacle that mobile gaming is currently running on platforms owned by Google and Apple, and they will protect their lucrative source of profits.

Microsoft is trying to position itself as a “good” tech giant , at least compared to Apple, Facebook, Google, and Amazon. So far, it kind of worked, and when US Congress grilled tech companies CEOs in July 2020 during its hearing on the “Online Platforms and Market Power,” Microsoft was not invited.

It will be interesting to monitor how long this Microsoft position as a “good” tech giant will last and how much pressure will intensify between Microsoft and Google, Apple, and other tech giants.

⚙️ What Microsoft Actually Does to Deliver Its Products and Services to Customers?

Microsoft is a predominantly software company, and therefore its core activities are centered around designing, developing, testing, and servicing software products. The last decade brought another dimension to Microsoft’s business model, which is a need to build and operate a worldwide network of data centers.

Apart from building software and data centers, Microsoft, like any company, has to be able to promote and sell its products. Therefore, a big chunk of its activities is also about sales and consulting.

Let’s now look into the core parts of Microsoft’s inner activities necessary for its business to function. I will also touch upon resources and partnerships it uses to deliver value to its customers.

Developing Software

Software development icon

Microsoft is, first and foremost, a software company. Yes, there are also other activities, like building data centers or developing hardware, that I will get to later, but developing software is the core activity of Microsoft and is also the core of its profits.

Developing software requires first finding a need from customers that are also willing to spend money to satisfy that need. Microsoft’s business is mostly about business customers, but some of Microsoft’s software serves both business users and consumers. In the case of gaming, it is purely consumer-based.

In the recent year, Microsoft scored a lot of points on the market by introducing products like Teams or Power BI that successfully captured customer attention and were quickly adopted. So unless Microsoft was extremely lucky, it had to do something well in identifying what its current and potential customers needed.

The journey from an idea of the product to something delivered to the customer is a long one. It starts with the design phase, which includes both technology and user experience design. Then I continue by writing the code, testing, and multiple rounds of fixing and rewriting.

Even after the software product is successfully launched, a workforce is still needed to keep it running and develop it further based on customer feedback. Microsoft needs to have people able to fix bugs that are discovered and patch security holes quickly. Somebody also has to provide customer support.

Remember that all of the above is happening simultaneously for the myriad of products Microsoft offers to its customers. It also includes gaming which will become an important part of Microsoft if the announced Activision Blizzard acquisition gets approved.

Therefore, to do all of that, Microsoft needs an army of engineers, designers, testers, and support employees. Moreover, Microsoft also requires a lot of managers and coordinators to make sure all those developing activities are synchronized among different teams.

Microsoft had 221 000 direct employees in 2022, and 73 000 were focused on product research and development.

Software development is not the only activity of Microsoft, and therefore not all R&D employees are developing software. But most of them are since that is the core of what Microsoft does. Note that those employee counts do not include contractors that are not direct employees.

Microsoft's costs and expenses breakdown chart

In dollar amount, Microsoft spent $25bn annually in 2022 on research and development, and nearly all of it was spent on employee compensation.

Besides R&D, Microsoft employs 85 000 people in operations . Again, this includes also people servicing data centers and hardware products, but software-focused operations are also part of it.

Building and Operating Datacenters

Network servers icon

Microsoft is a software company and mainly of cloud-based software. However, even cloud-based software has to run on some physical hardware somewhere. That’s where Microsoft’s network of data centers comes in.

As a provider of cloud infrastructure & cloud-based software, Microsoft needs to have enough data centers around the world that will handle its customers’ computing needs.

A lot of data centers mean the necessity to buy many processors, memory chips, and network equipment. Microsoft also needs land and buildings to house the computing equipment and ensure a reliable energy source nearby and backup generators. Of course, everything has to be very secure.

Simply said, many things have to happen to make sure that these data centers can run securely 24/7.

Datacenter infrastructure and related networking of those data centers together cost a lot of money to build and operate. Fortunately for Microsoft, its cash flow is strong enough to finance this investment and still return cash to investors as dividends or share buybacks.

Customers’ cloud computing needs continue to grow rapidly, and therefore Microsoft continues to build new data centers around the world. So far, there is no sign that this trend should change.

Building data centers is a relatively new activity for Microsoft . Historically, Microsoft assets were mainly about intangibles like patents, brands, and other intellectual property. But since cloud software started to gain track, it is interesting to see how Microsoft is a more “asset-heavy” company.

This change can be seen when looking at Microsoft’s balance sheet and the proportion of property and equipment in time.

Microsoft's balance sheet development as % share)

Microsoft datacenter network is roughly in line with AWS, and both companies service hundreds of datacenter around the world. Both AWS and Microsoft are trying to promote their network as the biggest, promoting the metrics each company is good at. Microsoft usually touts its number of regions and AWS its number of availability zones.

Sales & Promotion

Sales icon

Without Microsoft sales and promotional activities, having a great infrastructure and building great products would not be worth much.

Microsoft’s internal sales team, together with a network of its partners, is one of Microsoft’s core strengths. It is a full-fledged “sales machine” that includes Microsoft’s own staff and also an army of different consultants, resellers, and vendors that sell and promote Microsoft-centered solutions.

I see Microsoft’s “sales machine” as one of its core competitive advantages , and there are different dimensions to it.

Firstly, Microsoft has strong historical sales relationships both with its partners and directly with customers. This puts Microsoft at an advantage by itself.

Secondly, at least as I see it from the outside, sales and sales network and their importance for company success is an integral part of company DNA . 47 000 people are working in sales and marketing at Microsoft, and it is hard to find many other companies where so much credit is given to the sales team and partners publicly.

For example, the quote below is from Microsoft’s earnings call and depicts how Microsoft’s CFO introduced company great company results.

“Our sales teams and partners delivered a strong start to the fiscal year.” — Amy Hood, CFO of Microsoft, Earnings Call October 2021

The sales team always had a big role in Microsoft’s organization and not always in a good way. Yet, it seems that changes to sales organization by CEO Satya Nadella worked. At least from the outside, misalignment between sales and engineering is not noticeable; quite the opposite.

Part of sales & promotion activities are also activities focused on promoting Windows, Azure, and Xbox based ecosystems by providing tools and resources for developers and pushing adoption of these ecosystems.

Important partnerships that Microsoft needs to navigate are its relationship with Google and Apple as owners of the Google Play Store and AppStore. This is the crucial way Microsoft can distribute its products to smart devices as it does not have its own smartphone OS. Microsoft’s intention seems to be to push its Xbox gaming to these app stores, resulting in more clashes between Microsoft, Google, and Apple in the future.

Other Things Microsoft Does to Deliver Its Products and Services to Customers

I think all the activities mentioned before are the main ones. Obviously, Microsoft is such a large company, with such a broad product offering, that far more activities happen within it. They might not be as crucial for Microsoft as the ones I already mentioned, but the size of that operation would still be considered huge for many other smaller companies.

For example, hardware is not the core of what Microsoft does. Still, there are people, processes, and partnerships within Microsoft that allow it to design, develop and deliver to customers their Surface computers, keyboards, computer mice, and now even phones running on Android.

Partnership with manufacturers is how Microsoft distributes its Windows operating system. Multiple manufacturers called OEMs (Original Equipment Manufacturers) sell their desktops and notebook PCs with Windows already preinstalled, and this relationship is very fruitful for Microsoft.

Another Microsoft activity that is worth mentioning is its role as an investor in different startups through its venture capital arm called M12 . There is also ScaleUp , Microsoft’s accelerator.

📚 Resources & Links

Related articles.

  • Microsoft Financial Statement: Overview & Analysis
  • How Facebook Makes Money: Business Model Explained
  • A detailed breakdown of Microsoft’s revenue by product, segment and geography
  • Overview of who owns Microsoft and who controls it. With a list of the largest shareholders and how much is each of their stake worth.

Other Resources

  • Microsoft’s Annual Financials Statements (K-10)
  • Microsoft’s Investor Relation website
  • Official Microsoft Blog


  • At the time of writing this article, I had a long position in Microsoft.
  • The article was updated to include Microsoft’s 2022 fiscal year financials
  • Although I use third-party trademarks and logos in this article and its visuals, is an independent site. There is no relationship, sponsorship, or endorsement between this site and the owners of those trademarks.

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How does Microsoft make money?

By David Boyd   |   Verified by Andrew Boyd   |   Updated Aug. 17, 2023

How Microsoft Makes Money

  • Microsoft is the industry leader in desktop operating systems, with a 75% market share.
  • In the 30-years since its IPO, Microsoft saw a 71,000% increase in its share price.
  • Microsoft makes money by selling computing devices, cloud services, software, and other tech-related products.

Bill Gates and Paul Allen founded Microsoft in April 1975 in Albuquerque, New Mexico. The duo got the name for the company by combining the words "microcomputer software." Gates and Allen converted the BASIC mainframe programming language to create the first personal computing system, known as "Altair."

Microsoft had its IPO on the NASDAQ stock exchange on March 13th, 1986, under the ticker $MSFT . At the time of the IPO, Microsoft opened at a share price of $21, closing its first day of trading with a share price of $27.75. Gates sold $1.6 million in shares, retaining a 45% stake in the company worth $350 million. In 1987, Microsoft founder Bill Gates became the world's youngest billionaire.

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What does microsoft do, how does microsoft work, how microsoft makes money, future growth engine, competitors.

The Microsoft Corporation is a leading developer of PC software operating systems and apps. The company publishes multimedia titles and manufactures a range of hybrid tablet devices, laptops, and smartphones.

The company offers email services, and it owns the "Xbox" gaming platform. The company has sales offices around the globe, and it operates an R&D center at its corporate headquarters, based in Redmond, Washington.

Microsoft operates R&D labs at other global locations in Cambridge, England; Beijing, China; Bengaluru, India; Cambridge, Massachusetts; New York, New York; and Montreal, Canada.

Bill Gates stepped down from his role as the company's CEO in 2000. Gates handed over the reins to Steve Ballmer , who he met during his tenure at Harvard University in the 1970s. He nominated Ray Ozzie as the chief software architect in 2006.

Gates remains chairman of the board, but he has not had a direct role in company operations since 2006. Ray Ozzie left the company in 2010, and Ballmer retired in 2014, leaving current CEO Satya Nadella to run the company.

Microsoft retains its market-leading position in the consumer and business segments of PC operating systems, online gaming, and productivity software. Microsoft introduced its range of "Surface" tablets in 2012.

Microsoft makes money by selling digital devices, operating systems, productivity tools, cloud services, and gaming platforms to the consumer and corporate markets.

The company's largest revenue source is its cloud computing business, and it's the fastest-growing segment of its business model.

Productivity and business processes

Microsoft offers a productivity software suite to businesses and private users (Microsoft Office). The software has the goal of improving personal and corporate productivity and communications.

The productivity suite is available to commercial partners on license and personal users. The company charges a subscription fee for accessing its tools. This segment of the business accounts for approximately 35% of its revenues.

Cloud services

Microsoft's intelligent cloud services division includes Microsoft's private, public, and hybrid server offerings. It also covers its cloud computing and storage services for its business partners.

Its cloud services include Microsoft Azure, Windows Server, SQL Server, Enterprise Services, GitHub, and others. This division of Microsoft's business accounts for 37% of its total annual revenues, and it's the fastest-growing segment of the Microsoft business model.

Personal computing

The Microsoft personal computing division consists of products and services that place its customers at "the center of the Microsoft experience with its technology."

This division of the business includes its Windows OS, Surface devices, Xbox gaming products, and search and news advertising. This business segment accounts for approximately 29% of Microsoft's annual revenues.

In early 2022, Microsoft acquired Activision Blizzard for a record $68.7 billion, making it the company's most expensive acquisition. The company intends to use AB as its foothold into the "Metaverse."

Microsoft intends to close the deal in 2023, making it the third-largest gaming company in the world by revenue, behind Tencent and Sony.

Microsoft has a chokehold on the OS segment of the market, and it's the most prominent OS in the world.

However, it faces stiff competition from tech companies competing in the space. Some of the company's top competitors include the following organizations.

  • International Business Machines Corp (IBM)
  • Oracle Corp (ORCL)
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  • Ethan Klein's net worth
  • Mike Cernovich's net worth
  • Richard Cooper's net worth
  • Benny Johnson's net worth
  • George Janko's net worth
  • Matt Walsh's net worth
  • Robert F. Kennedy Jr.'s net worth
  • Tom Bilyeu's net worth
  • Lara Trump's net worth

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Why microsoft's business model is so successful.

business model for microsoft

Microsoft business model canvas

business model for microsoft

Microsoft’s Company Overview

Microsoft Corporation (commonly referred to as Microsoft or MS) is an American multinational technology company headquartered in Redmond, Washington, that develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers and services. Its best known software products are the Microsoft Windows line of operating systems, Microsoft office suite, and internet Explorer and Edge web browsers. Its flagship hardware products are the Xbox video game consoles and the Microsoft Surface tablet lineup.

Country: Washington

Foundations date: 1975

Type: Public

Sector: Technology

Categories: Software

Microsoft’s Customer Needs

Social impact:

Life changing: self-actualization, motivation, affiliation/belonging

Emotional: reduces anxiety, design/aesthetics, badge value, attractiveness, provides access

Functional: saves time, simplifies, makes money, reduces risk, organizes, integrates, connects, reduces effort, avoids hassles, reduces cost, quality, variety, informs, sensory appeal

Microsoft’s Related Competitors

Microsoft’s business operations.


This approach generated money by sending promotional marketing messages from other businesses to customers. When you establish a for-profit company, one of the most critical aspects of your strategy is determining how to generate income. Many companies sell either products or services or a mix of the two. However, advertisers are frequently the source of the majority of all of the revenue for online businesses and media organizations. This is referred to as an ad-based income model.

The aikido business model is often characterized as using a competitor's strength to get an edge over them. This is accomplished through finding weaknesses in a competitor's strategic position. In addition, it adds to marketing sustainability by exposing rivals' flaws, finding internal and external areas for development, and attracting consumers via specific product offers that deviate from the norm.

Archetypes of business model design:

The business model archetypes include many business personalities and more than one business model linked to various goods or services. There is a common foundation behind the scenes of each unit, but from a management standpoint, each group may operate independently.

An auction is a procedure in which prospective purchasers submit competing bids for assets or services. Providing a product or service for sale to the highest bidder is a standard business practice. Because they satisfy both businesses and customers, auction business models help to market sustainability. Companies gain because their product is accessible to a pre-existing market. Customers profit from the auction model since they have a say in the product's ultimate pricing.

Benchmarking services:

Benchmarking is a technique for evaluating performance and gaining insights via data analytics. It may be used to conduct internal research on your firm or compare it to other businesses to enhance business processes and performance indicators following best practices. Typically, three dimensions are measured: quality, time, and cost. In this manner, they may ascertain the targets' performance and, more significantly, the business processes that contribute to these companies' success. The digital transformation era has spawned a slew of data analysis-focused software businesses.

Best in class services:

When a firm brings a product to market, it must first create a compelling product and then field a workforce capable of manufacturing it at a competitive price. Neither task is simple to perform effectively; much managerial effort and scholarly study have been dedicated to these issues. Nevertheless, providing a service involves another aspect: managing clients, who are consumers of the service and may also contribute to its creation.

Blue ocean strategy:

The blue ocean approach is predicated on the premise that market limits and industry structure are not predetermined and may be reconfigured via the actions and attitudes of industry participants. This is referred to as the reconstructionist perspective by the writers. Assuming that structure and market boundaries exist solely in managers' thoughts, practitioners who subscribe to this perspective avoid being constrained by actual market structures. To them, more demand exists, primarily untapped. The core of the issue is determining how to produce it.

Multiple products or services have been bundled together to enhance the value. Bundling is a marketing technique in which goods or services are bundled to be sold as a single entity. Bundling enables the purchasing of several goods and services from a single vendor. While the goods and services are often linked, they may also consist of different items that appeal to a particular market segment.

Combining data within and across industries:

How can data from other sources be integrated to generate additional value? The science of big data, combined with emerging IT standards that enable improved data integration, enables new information coordination across businesses or sectors. As a result, intelligent executives across industries will see big data for what it is: a revolution in management. However, as with any other significant organizational transformation, the difficulties associated with becoming a big data-enabled company may be tremendous and require hands-on?or, in some instances, hands-off?leadership.

Corporate innovation:

Innovation is the outcome of collaborative creativity in turning an idea into a feasible concept, accompanied by a collaborative effort to bring that concept to life as a product, service, or process improvement. The digital era has created an environment conducive to business model innovation since technology has transformed how businesses operate and provide services to consumers.

Culture is brand:

It requires workers to live brand values to solve issues, make internal choices, and provide a branded consumer. Developing a distinctive and enduring cultural brand is the advertising industry's holy grail. Utilizing the hazy combination of time, attitude, and emotion to identify and replicate an ideology is near to marketing magic.

Customer data:

It primarily offers free services to users, stores their personal information, and acts as a platform for users to interact with one another. Additional value is generated by gathering and processing consumer data in advantageous ways for internal use or transfer to interested third parties. Revenue is produced by either directly selling the data to outsiders or by leveraging it for internal reasons, such as increasing the efficacy of advertising. Thus, innovative, sustainable Big Data business models are as prevalent and desired as they are elusive (i.e., data is the new oil).

Channel per purpose:

Creating separate channels for selling and purchasing current goods and services. A marketing plan is a vendor's plan for distributing a product or service to the end consumer through the chain of commerce. Manufacturers and retailers have a plethora of channel choices. The simplest method is the direct channel, which involves the seller selling directly to the consumer. In addition, the vendor may use its own sales staff or offer its goods or services through an e-commerce website.


Excluding current clients that are unprofitable or who do not adhere to company principles. Efforts directed towards reducing (not eliminating) demand for a product that (1) a company cannot provide in sufficient quantities or (2) a firm does not want to sell in a particular area due to prohibitively expensive distribution or marketing expenses. Increased pricing, less promotion, and product redesign are all common demarketing tactics.

A digital strategy is a strategic management and a business reaction or solution to a digital issue, which is often best handled as part of a broader company plan. A digital strategy is frequently defined by the application of new technologies to existing business activities and a focus on enabling new digital skills for their company (such as those formed by the Information Age and frequently as a result of advances in digital technologies such as computers, data, telecommunication services, and the World wide web, to name a few).

Digital transformation:

Digitalization is the systematic and accelerated transformation of company operations, processes, skills, and models to fully exploit the changes and possibilities brought about by digital technology and its effect on society. Digital transformation is a journey with many interconnected intermediate objectives, with the ultimate aim of continuous enhancement of processes, divisions, and the business ecosystem in a hyperconnected age. Therefore, establishing the appropriate bridges for the trip is critical to success.

Direct selling:

Direct selling refers to a situation in which a company's goods are immediately accessible from the manufacturer or service provider rather than via intermediate channels. The business avoids the retail margin and any extra expenses connected with the intermediaries in this manner. These savings may be passed on to the client, establishing a consistent sales experience. Furthermore, such intimate touch may help to strengthen client connections. Finally, direct selling benefits consumers by providing convenience and service, such as personal demonstrations and explanations of goods, home delivery, and substantial satisfaction guarantees.

Disruptive trends:

A disruptive technology supplants an existing technology and fundamentally alters an industry or a game-changing innovation that establishes an altogether new industry. Disruptive innovation is defined as an invention that shows a new market and value network and ultimately disrupts an established market and value network, replacing incumbent market-leading companies, products, and alliances.

Dynamic pricing:

This pattern allows the business to adjust its rates in response to national or regional trends. Dynamic pricing is a pricing technique known as surge pricing, demand pricing, or time-based pricing. In which companies establish variable prices for their goods or services in response to changing market conditions. Companies may adjust their rates based on algorithms that consider rival pricing, supply and demand, and other market variables. Dynamic pricing is widely used in various sectors, including hospitality, travel, entertainment, retail, energy, and public transportation.

Electronic commerce, or e-commerce (alternatively spelled eCommerce), is a business model, or a subset of a larger business model, that allows a company or person to do business via an electronic network, usually the internet. As a result, customers gain from increased accessibility and convenience, while the business benefits from integrating sales and distribution with other internal operations. Electronic commerce is prevalent throughout all four main market segments: business to business, business to consumer, consumer to consumer, and consumer to business. Ecommerce may be used to sell almost any goods or service, from books and music to financial services and airline tickets.

A business ecosystem is a collection of related entities ? suppliers, distributors, customers, rivals, and government agencies ? collaborating and providing a particular product or service. The concept is that each entity in the ecosystem influences and is impacted by the others, resulting in an ever-changing connection. Therefore, each entity must be adaptive and flexible to live, much like a biological ecosystem. These connections are often backed by a shared technical platform and are based on the flow of information, resources, and artifacts in the software ecosystem.

This model collects data and connects it to others; it is suggested to investigate the impact of advertising on consumer purchase dynamics by explicitly linking the distribution of exposures from a brand's media schedule to the brand purchase incidence behavior patterns over time. The danger is that we may be unable to react productively and cost-effectively to technological and market changes.

Fast fashion:

Fast fashion is a phrase fashion retailers use to describe how designs travel rapidly from the catwalk to catch current fashion trends. The emphasis is on optimizing specific supply chain components to enable these trends to be developed and produced quickly and affordably, allowing the mainstream customer to purchase current apparel designs at a reduced price.

This model is used to describe a pricing system that charges a single flat price for service regardless of its actual use or duration. A company may establish a responsible position in a market if customers get excellent pricing before performing the service. The consumer benefits from a straightforward cost structure, while the business benefits from a predictable income stream.

Guaranteed availability:

Guaranteed availability is a property of a business system that attempts to maintain an agreed-upon level of operational performance, often uptime, for a longer time than is typical. The idea is often linked with terms such as high availability and catastrophe recovery.

Hidden revenue:

A hidden revenue business model is a revenue-generating strategy that excludes consumers from the equation, preventing them from paying for the service or product provided. For example, users of Google do not pay for the search engine. Rather than that, income streams are generated via advertising dollars spent by companies bidding on keywords.

Infrastructure as a Service (IaaS):

Infrastructure as a Service (IaaS) is a subset of cloud computing that offers on-demand access to shared computing resources and data to PCs and other devices. It is a paradigm for ubiquitous, on-demand access to a pool of customizable computing resources (e.g., computer networks, servers, storage, applications, and services) that can be quickly provided and released with little administrative effort.

Ingredient branding:

Ingredient branding is a kind of marketing in which a component or ingredient of a product or service is elevated to prominence and given its own identity. It is the process of developing a brand for an element or component of a product in order to communicate the ingredient's superior quality or performance. For example, everybody is aware of the now-famous Intel Inside and its subsequent success.


A systems integrator is an individual or business specializing in integrating component subsystems into a unified whole and ensuring that those subsystems work correctly together. A process is known as system integration. Gains in efficiency, economies of scope, and less reliance on suppliers result in cost reductions and may improve the stability of value generation.

Layer player:

Companies that add value across many markets and sectors are referred to be layer players. Occasionally, specialist companies achieve dominance in a specific niche market. The effectiveness of their operations, along with their economies of size and footprint, establish the business as a market leader.

A formal agreement in which the owner of the copyright, know-how, patent, service mark, trademark, or other intellectual property grants a licensee the right to use, manufacture, and sell copies of the original. These agreements often restrict the licensee's scope or area of operation, define whether the license is exclusive or non-exclusive, and stipulate whether the licensee will pay royalties or another kind of compensation in return. While licensing agreements are often used to commercialize the technology, franchisees also utilize them to encourage the sale of products and services.

The lock-in strategy?in which a business locks in consumers by imposing a high barrier to transferring to a competitor?has acquired new traction with New Economy firms during the last decade.

The long tail is a strategy that allows businesses to realize significant profit out of selling low volumes of hard-to-find items to many customers instead of only selling large volumes of a reduced number of popular items. The term was coined in 2004 by Chris Anderson, who argued that products in low demand or with low sales volume can collectively make up market share that rivals or exceeds the relatively few current bestsellers and blockbusters but only if the store or distribution channel is large enough.

Make and distribute:

In this arrangement, the producer creates the product and distributes it to distributors, who oversee the goods' ongoing management in the market.

Make more of It:

The business invests time and money in developing in-house expertise and development that may be used both internally and outside to sell goods or services to clients or third parties. AWS was created to meet Amazon's cloud computing requirements. They quickly discovered that they could offer their services to end-users. At the moment, AWS accounts for about 11% of Amazon's overall income.

On-demand economy:

The on-demand economy is described as economic activity generated by digital marketplaces that meet customer demand for products and services via quick access and accessible supply. The supply chain is managed via a highly efficient, intuitive digital mesh built on top of current infrastructure networks. The on-demand economy is transforming commercial behavior in cities worldwide. The number of businesses, the categories covered, and the industry's growth rate are all increasing. Businesses in this new economy are the culmination of years of technological progress and customer behavior change.

Online marketplace:

An online marketplace (or online e-commerce marketplace) is a kind of e-commerce website in which product or service information is supplied by various third parties or, in some instances, the brand itself, while the marketplace operator handles transactions. Additionally, this pattern encompasses peer-to-peer (P2P) e-commerce between businesses or people. By and large, since marketplaces aggregate goods from a diverse range of suppliers, the variety and availability are typically greater than in vendor-specific online retail shops. Additionally, pricing might be more competitive.


Orchestrators are businesses that outsource a substantial portion of their operations and processes to third-party service providers or third-party vendors. The fundamental objective of this business strategy is to concentrate internal resources on core and essential functions while contracting out the remainder of the work to other businesses, thus reducing costs.

Platform as a Service (PaaS):

Platform as a Service (PaaS) is a class of cloud computing services that enable users to create, operate, and manage apps without the burden of establishing and maintaining the infrastructure usually involved with designing and developing an app.

Product innovation:

Product innovation is the process of developing and introducing a new or better version of an existing product or service. This is a broader definition of innovation than the generally recognized definition, which includes creating new goods that are considered innovative in this context. For example, Apple launched a succession of successful new products and services in 2001?the iPod, the iTunes online music service, and the iPhone?which catapulted the firm to the top of its industry.

Skunkworks project:

A skunkworks project is one that is created by a small, loosely organized group of individuals who study and develop a project with the primary goal of radical innovation. The terminology arose during World War II with Lockheed's Skunk Works project. However, since its inception with Skunk Works, the phrase has been used to refer to comparable high-priority research and development initiatives at other big companies that include a small team operating outside of their regular working environment and free of managerial restrictions. Typically, the phrase alludes to semi-secretive technological initiatives, such as Google X Lab.

Software as a Service (SaaS):

Software as a Service (SaaS) is a paradigm for licensing and delivering subscription-based and centrally hosted software. Occasionally, the term on-demand software is used. SaaS is usually accessible through a web browser via a thin client. SaaS has established itself as the de facto delivery mechanism for a large number of commercial apps. SaaS has been integrated into virtually every major enterprise Software company's strategy.

Solution provider:

A solution provider consolidates all goods and services in a particular domain into a single point of contact. As a result, the client is supplied with a unique know-how to improve efficiency and performance. As a Solution Provider, a business may avoid revenue loss by broadening the scope of the service it offers, which adds value to the product. Additionally, close client interaction enables a better understanding of the customer's habits and requirements, enhancing goods and services.


In most instances, support is not intended to be philanthropic; instead, it is a mutually beneficial commercial relationship. In the highly competitive sponsorship climate of sport, a business aligning its brand with a mark seeks a variety of economic, public relations, and product placement benefits. Sponsors also seek to establish public trust, acceptability, or alignment with the perceived image a sport has built or acquired by leveraging their connection with an athlete, team, league, or the sport itself.


Subscription business models are built on the concept of providing a product or service in exchange for recurring subscription income on a monthly or annual basis. As a result, they place a higher premium on client retention than on customer acquisition. Subscription business models, in essence, concentrate on revenue generation in such a manner that a single client makes repeated payments for extended access to a product or service. Cable television, internet providers, software suppliers, websites (e.g., blogs), business solutions providers, and financial services companies utilize this approach, as do conventional newspapers, periodicals, and academic publications.

Take the wheel:

Historically, the fundamental principles for generating and extracting economic value were rigorous. Businesses attempted to implement the same business concepts more effectively than their rivals. New sources of sustained competitive advantage are often only accessible via business model reinvention driven by disruptive innovation rather than incremental change or continuous improvement.

Technology trends:

New technologies that are now being created or produced in the next five to ten years will significantly change the economic and social landscape. These include but are not limited to information technology, wireless data transmission, human-machine connection, on-demand printing, biotechnology, and sophisticated robotics.

Trialware is software that has an expiration date. The user may use the software fully featured until the trial time expires. At this point, it reverts to a limited functionality (freemium, nagware, or crippleware) or non-functional mode until the user pays the licensing price and gets a registration code to unlock the program. Trialware has established itself as the industry standard for an online software as a Service (SaaS).

Two-sided market:

Two-sided marketplaces, also called two-sided networks, are commercial platforms featuring two different user groups that mutually profit from the web. A multi-sided platform is an organization that generates value mainly via the facilitation of direct contacts between two (or more) distinct kinds of connected consumers (MSP). A two-sided market enables interactions between many interdependent consumer groups. The platform's value grows as more groups or individual members of each group use it. For example, eBay is a marketplace that links buyers and sellers. Google connects advertising and searchers. Social media platforms such as Twitter and Facebook are also bidirectional, linking consumers and marketers.

Rent instead of buy:

Services that do not need the product to be purchased but rather rent it for the economic benefit of requiring less money to access the commodity. When you rent, you assume less obligation since most of the burden is placed on the owner's shoulders. There is no debt; you are just responsible for the monthly rent. When renting, you have more flexibility by signing a six-month or one-year lease. This implies that you will be confined to that location for at least that period. When your lease term expires, you have the option of switching to another product or renewing your lease.

Virtual reality:

AR/VR is the fourth significant platform change (after PC, web, and mobile). First, CEOs must choose how to play. Business models are determined by installed bases, use cases, and unit economics; there is no one-size-fits-all answer; each situation is unique, and developers must do market research and analysis before making a choice. Relying on advertising-income is a handy strategy for unknown businesses or newcomers to the market. It allows them to use their prior expertise with mobile and online ad campaigns.

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How Microsoft became an Intelligence Driven Organization – and how your business could do the same

Leentje Chavatte

Leentje Chavatte

Microsoft, Data & AI and Digital Transformation

Microsoft has learned how to make digital transformation work, not just from projects undertaken with customers, but also by committing to its own transformation journey.

Digital transformation may be a buzzword, but that doesn’t make it meaningless. Far from it – a journey of transformation can open up infinite possibilities for organizations of any size and in any sector.

In recent years, Microsoft has supported large-scale transformations across many industries, delivering real, measurable results.

Robotics giant ABB saw a 20% increase in customer satisfaction after Microsoft’s Azure AI products helped transform its workforce management solution. Rockwell Automation achieved $300,000 in savings every day after transitioning to Office 365. A chatbot Microsoft created for UPS engaged in over 200,000 customer conversations in its first eight months alone.

These are some examples of the outcomes that can be realized when data is leveraged with Artificial Intelligence (AI). But digital transformation is not about isolated achievements. It is about recalibrating the entire organization around collecting, analyzing and using data. It is about becoming an organization with the ability to learn and evolve.

It’s not a one-time fix, it’s a journey. And it’s one Microsoft has been on itself.

Making it happen at Microsoft

Over four decades, Microsoft has grown from a small start-up to a $110 billion business with more than 130,000 employees. As the 4th Industrial Revolution hit, Microsoft felt the need for its own digital transformation to be at the forefront of the digital age.

The company set out to become a truly Intelligence Driven Organization with data at its heart. But to transform on such a massive scale, everyone from the CEO down had to align behind a vision that could inspire real change. It meant committing to new ways of working that would transform every process on which Microsoft was built. The whole business would need to work differently, experimenting more and learning from failure.

The transformation was a strategic imperative from the beginning. Looking back, you can follow the journey Microsoft was taking through CEO Satya Nadella’s public announcements. In April 2014, Satya said: “You have to build deeply into the fabric of the company a culture that thrives on data.” From that point on, everyone at Microsoft embraced a way of working that was centered around leveraging data to better understand and make decisions.

In 2017, Satya wrote the book Hit Refresh, covering the transformation at Microsoft within the context of AI and its impact on everyday life – a story encapsulated in his statement that “AI is the runtime that is going to shape all of what we do going forward.”

One year later, he introduced the idea of Tech Intensity, explaining that, “every organization will need to have what I describe as tech intensity…to be a fast adopter of digital technology…to build their own proprietary digital capability .”

A growth mindset

At the heart of Microsoft’s transformational journey was the concept of a growth mindset: the idea that everyone can change, learn and grow. To bring this vision to life, Microsoft identified four attributes that would allow this mindset to flourish.

The first attribute was obsessing over the people who matter most – the customers – and really understanding what truly matters to them. Second, Microsoft wanted to become a more diverse and inclusive organization. Third, the company wanted to break down its siloes and start operation as a single unit. And finally: to make a difference to the lives of each other, customers and the world around them.

As Satya pointed out, “as a culture, we are moving from a group of people who know it all to a group of people who want to learn it all .”

To track the progress of their cultural transformation, Microsoft began by asking employees if they were seeing evidence of positive change. This data was then evaluated against attributes that were measured over time. They included quantitative and qualitative analytics, with regular focus groups to ensure the trends that emerged were fully understood. To drive openness and transparency, all findings were regularly shared with senior management.

Becoming intelligence driven

Microsoft’s digital transformation offering is delivered by Microsoft Consulting Services (MCS). With a long list of global clients from Toyota to the UN Refuge Agency, MCS applies enterprise technology to business problems by understanding goals, identifying risks, and guiding digital transformation.

It helps organizations unlock powerful insights, empower teams with organizational agility, and enhance security for a competitive edge. And it offers support at every step – helping businesses make the best use of the Microsoft ecosystem.

In short, MCS helps its customers become Intelligence Driven Organizations . That is, an organization that leverages data combined with AI-technologies to foster growth, innovation, speed to market and cost efficiency.

It’s an approach to digital transformation that is shaped not only by Microsoft’s own story, but also by years of conversations with business leaders the world over undertaking their own transformations.

Together, these influences led directly to the development of the Intelligence Driven Organization (IDO) model.

The IDO model

The IDO model is not a tech solution, or an offer. It’s MCS’ approach to helping organizations navigate their own transformations.

The IDO model helps organizations identify their ‘north star’ – that is, the set of business outcomes they wish to achieve and where they want to go in the future.

Then, it provides a roadmap that allows organizations to design the processes that will generate these outcomes – and build the capabilities to digitalize those processes so that they can be implemented, monitored, measured and continuously improved over time, creating digital feedback loops.

Digital Feedback Loop

Digital feedback loops

Digital feedback loops can be seen as flows of information that emerge when a business process has been redesigned around data. That process could be an interaction with customers (e.g. website use, sales enquiries or product purchases). It could concern back-office operations. It could involve employee activity (e.g. intranet use or response to a survey) or it could involve the real-time usage of products (e.g. application crash data transmitted back to the software developer). The data is collected and used to optimize that process by AI-enabled applications. Crucially, all information can be surfaced to the business processes that need it. There are no data silos.

Digital feedback loops are a central component to becoming an Intelligence Driven Organization – creating a foundation that fuels positive change, enabling organizations to be more productive at scale and become increasingly customer centric.

The four axes of the IDO model

The IDO model provides a framework for organizations to make digital feedback loops a reality. It distills everything Microsoft has learned globally about how to approach digital transformation and breaks it down into four key axes.

The first involves development of an executive strategy that will see an intelligence driven culture take root. The second axis ensures the right technical capabilities are in place, creating a foundation for the journey ahead. It concerns the capabilities that will be needed, along with where they should be developed and when. Third comes a look at the day-to-day execution of the transformation, before the fourth and final stage – this is where the organization must envision and prioritize a set of scenarios that represent the desired business outcomes.

Framing an approach to transformation through the four axes helps organizations overcome the key obstacles to becoming intelligence driven that are often highlighted in research . These include availability of data, a shortage of data science skills, a difficulty envisioning the right business use cases and, most importantly, a culture that struggles to understand the need to be data driven.

The right way to rebound

In April 2020, Satya Nadella said:

“we’ve seen two years’ worth of digital transformation in just two months.”

Now a new normal is emerging in the way people travel, work and shop. Organizations must respond quickly, becoming more efficient, more agile and more adaptable.

The principles behind Microsoft’s digital transformation can form the basis of similar projects in any organization. By becoming a business driven by data and AI – one that learns and evolves – companies can build the resilience they need to face the challenges of the future.

Microsoft Consulting Services can help business leaders use this moment as a trigger to transform, repositioning their organizations for a more competitive age. In the future, change will come even faster. To thrive, everyone must adapt.


Artificial Intelligence in Europe Report: At a glance

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AI is driving value across businesses in Europe – so why is only 4% of the public sector seeing real impact?

business model for microsoft

Follow the Leaders: What Competencies are Required to Get AI Right?

business model for microsoft

Roadmap to Digital Infinity: How to become an Intelligence Driven Organization

Get the eBook

Unleash the potential of your organization with Microsoft’s practical guide to harnessing data and AI.

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business model for microsoft

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How Microsoft Makes Money? Understanding Microsoft Business Model

business model for microsoft

This post is about how Microsoft makes money. Firstly, we explain the key elements of Microsoft business model . Then, we provide the revenues, the profits, and the profit margins of Microsoft for FY 2015 (fiscal year ending June 2015). Then, we provide information on Microsoft business segments. Finally, we provide Microsoft revenues by its business segments and key product groups for the year FY 2015.

About Microsoft

Microsoft is the world’s leading technology company. Microsoft offers a wide range of software products, services, and devices. Microsoft offers:

  • Software products , including operating systems for computing devices, servers, phones, and other intelligent devices; Server applications for distributed computing environments; Cross-device productivity applications; Business solutions applications; Desktop and server management tools; Software development tools; Video games; and Online advertising.
  • Hardware products , including PCs, Tablets, Gaming and entertainment consoles, Phones, Other intelligent devices, and Related accessories.
  • Cloud-based solutions .
  • Consulting and product solution support services .
  • Training and certification services .

business model for microsoft

Key Elements of Microsoft Business Model

Microsoft generates revenue by developing, licensing, and supporting a wide range of software products, by offering an array of services, including cloud-based services to consumers and businesses, by designing, manufacturing, and selling devices that integrate with its cloud-based services, and by delivering relevant online advertising to a global audience.

Microsoft customers include individual consumers, organizations, OEMs ( original equipment manufacturers ), and application developers.

Individual consumers make own buying decisions for the devices they use at work or home. They obtain Microsoft products through distributors, re-sellers, and OEMs. Microsoft generates revenues from individual consumers through Office Consumer, Devices, Gaming, and non-volume licensing of Windows operating system.

  • Office Consumer  includes Microsoft Office applications sold through retail or through an Office 365 Consumer subscription. Office Consumer services include, OneDrive, and consumer Skype services.
  • Devices  include Lumia and other non-Lumia phones, Surface devices and accessories, and Microsoft PC accessories.
  • Gaming includes Xbox hardware and Xbox Live. Microsoft generates revenue from Xbox Live through transactions, subscriptions, and advertising. Microsoft also earns revenues through the sale of first-party video games and third-party video game royalties.

business model for microsoft

Microsoft serves organizations of different sizes, including large global enterprises, small- and medium-sized organizations (SMEs), public sector institutions, Internet service providers , and Academic institutions. The company offers tailored license programs, enterprise-wide support, consulting services, and other specialized services to the organizations. Microsoft generates revenues from organizations through Office Commercial, Volume licensing of Windows operating system, Microsoft Dynamics business solutions, server products and services, enterprise services, and advertising.

  • Office Commercial  includes volume licensing to Microsoft Office for business and subscriptions to Office 365 Commercial and services such as Microsoft Office, Exchange, SharePoint, and Skype for Business, and related Client Access Licenses (“CALs”).
  • Microsoft Dynamics’ business solutions  include Dynamics ERP products, Dynamics CRM on-premises, and Dynamics CRM Online (“Microsoft Dynamics”).
  • Server products and services  include Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related CALs, as well as Microsoft Azure.
  • Enterprise Services  include Premier Support Services and Microsoft Consulting Services.
  • Advertising includes MSN Display advertising and Bing Search Advertising.

Microsoft distributes software through OEMs that pre-install software on new PCs, tablets, servers, phones, and other intelligent devices that they sell. The largest component of the OEM business is the Windows operating system pre-installed on computing devices. Along with Windows OEM licensing (“Windows OEM”), Microsoft also generates revenue through Windows Phone licensing, patent licensing, and Windows Embedded.

Microsoft serves two broad categories of OEMs. There are “Direct OEMs” such as Acer, ASUSTek, Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, and Toshiba. Microsoft manages relationships with these OEMs through a direct agreement. Then, there are lower-volume PC manufacturers, which source Microsoft software for pre-installation and local distribution primarily through the Microsoft distributor channel rather than through a direct agreement with Microsoft.

The company also generates revenues from application developers through developer tools and training and certification on various Microsoft products. Creating a strong developer community is an important element of Microsoft’s business model. This helps them create platform-based ecosystems that can benefit from the same-side and the cross-side network effects among users and application developers. The network effects help in accelerating growth and creating a strong competitive advantage.

To advertise their products and services to the appropriate target audience, all forms of businesses need advertisement. Advertising is the method of informing, educating, and reminding people about such goods and services through advertisements.

The following diagram shows the key elements of the Microsoft business model. It shows how the money flows in from the different customer segments and the key cost elements where the money flows out to.

business model for microsoft

Microsoft’s most significant expenses are related to compensating employees, designing, manufacturing, marketing, and selling its products and services, data center costs in support of its cloud-based services, and income taxes. The details of the key cost elements are as follows:

Cost of revenue include:

  • manufacturing and distribution costs for products sold and programs licensed;
  • operating costs related to product support service centers and product distribution centers;
  • costs incurred to include software on PCs sold by OEMs and drive traffic to its websites;
  • costs incurred to support and maintain Internet-based products and services, including data center costs and royalties;
  • warranty costs;
  • inventory valuation adjustments;
  • costs associated with the delivery of consulting services;
  • the amortization of capitalized software development costs.

Research and development (R&D) expenses include:

  • payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development;
  • third-party development and programming costs;
  • localization costs incurred to translate software for international markets;
  • the amortization of purchased software code.

Sales and marketing (S&M) expenses include:

  • payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel;
  • the costs of advertising, promotions, trade shows, seminars, and other programs.

General and administrative (G&A) expenses include:

  • payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources, and other administrative personnel;
  • certain taxes, and legal and other administrative fees.

Impairment, integration, and restructuring expenses include:

  • costs associated with the impairment of goodwill and intangible assets related to Microsoft’s Phone Hardware business;
  • employee severance expenses and costs associated with the consolidation of facilities and manufacturing operations related to restructuring activities;
  • systems consolidation and other business integration expenses associated with Microsoft acquisition of Nokia Devices and Services (NDS) business.

Microsoft profits and profits margins FY 2015

Of the $93.6 billion of Microsoft’s total revenues in FY’15 (fiscal year ending June 30, 2015), $33.0 billion were the cost of revenue. This resulted in $60.5 billion of gross profit and a gross margin of 64.7%. Microsoft’s other operating costs were $42.4 billion. These include research and development, sales and marketing , general and administrative, and impairment, integration, and restructuring expenses. This resulted in $18.2 billion of operating profit and an operating margin of 19.4%. After interest and other non-operating income and expenses and income taxes, Microsoft had a net profit of $12.2 billion and a net margin of 13.0%.

Microsoft Business Segments

Up until its last fiscal year (FY ending June 30, 2015), Microsoft had six business segments organized into two business groups: Devices and Consumer (“D&C”) and Commercial. The Devices and Consumer (“D&C”) segments included D&C Licensing, Computing, and Gaming Hardware, Phone Hardware, and D&C Other. The Commercial segments included Commercial Licensing and Commercial Other. These business segments are represented in the following diagram.

On September 28, 2015, Microsoft announced changes in the reporting of its financial results. Microsoft consolidated six operating segments into three.    The new segments are Productivity and Business Processes, Intelligent Cloud , and More Personal Computing. The different product groups were moved around to fit under the three reporting segments. The new structure, with the same product groups, is represented in the following diagram:

Below is a simplified version of Microsoft’s new financial reporting structure and the product groups within them.

business model for microsoft

Microsoft FY 2015 Revenues by Business Segments – As per Old Financial Reporting Structure

Of the total revenues of $93.6 billion in FY’15, Microsoft generated

  • $15.0 billion in revenues, 16.0% of the total, from the D&C Licensing segment.
  • $10.2 billion in revenues, 10.9% of the total, from the Computing and Gaming Hardware segment.
  • $7.5 billion revenues, 8.0% of the total, from the Phone Hardware segment.
  • $8.8 billion in revenues, 9.4% of the total, from the D&C another segment.
  • $41.0 billion in revenues, 43.9% of the total, from the Commercial Licensing segment.
  • $10.8 billion in revenues, 11.6% of the total, from the Commercial another segment.

Microsoft FY 2015 Revenues by Business Segments – As per New Financial Reporting Structure

  • $26.4 billion in revenues, 28.2% of the total, from the Productivity and Business Processes segment.
  • $23.7 billion in revenues, 25.3% of the total, from the Intelligent Cloud segment.
  • $43.0 billion in revenues, 45.9% of the total, from the More Personal Computing segment.

Microsoft FY 2015 Revenues by Key Product Groups

  • $23.5 billion in revenues, 25.2% of the total, from the Microsoft Office System.
  • $18.6 billion in revenues, 19.9% of the total, from the Server Products and Tools.
  • $14.8 billion revenues, 15.8% of the total, from the Windows PC Operating System.
  • $9.1 billion in revenues, 9.7% of the total, from the Xbox business.
  • $7.7 billion revenues, 8.2% of the total, from the Phone business.
  • $5.1 billion revenues, 5.4% of the total, from the Consulting and Product Support Services business.
  • $4.6 billion revenues, 4.9% of the total, from the Advertising business.
  • $3.9 billion revenues, 4.2% of the total, from the Surface devices business.
  • $6.2 billion revenues, 6.7% of the total, from the Other products.

business model for microsoft

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Evolution of Microsoft and its Business Model

It all started with two computer geeks who were fascinated by the world of computers. Microsoft Corporation is an American multinational technology company with headquarters in Redmond, Washington.

Microsoft develops, manufactures, licenses, supports, and sells computer software, personal computers, and related services. The best-known software products of Microsoft are the Windows line of Operating Systems, the Microsoft Office suite, and the Internet Explorer.

Its flagship hardware products are the Xbox video game consoles and the Microsoft Surface lineup of touchscreen personal computers. In 2016, it was the world's largest software maker by revenue. Microsoft ranked #21 in the Fortune 500 rankings 2020 of the largest United States corporations by total revenue.

In 2018, Microsoft surpassed Apple Inc . as the most valuable publicly traded company in the world after it was dethroned by Apple in 2010. In April 2019, Microsoft reached the trillion-dollar market cap, becoming the third U.S. public company to be valued at over $1 trillion after Apple and Amazon respectively.

The mammoth American multinational technology corporation has steered past Apple on October 29, 2021, to become the world's most valuable company, which is publicly traded. The market cap of Microsoft was recorded at $2.45 trillion , while that of Apple was at $2.41 trillion as of November 1, 2021.

Microsoft is among the largest tech giants, which in 2018 made over $110 billion in revenues. While Microsoft Office remains the most successful product. Other parts of the business are related to advertising,  accessible home and business software solutions, secure online storage, and search services. Microsoft business computers also occupy a central part of the current popularity that Microsoft enjoys today. As a dominant tech company, Microsoft tries to keep innovating and acquiring companies that allow it to enter new markets, quickly. If you are looking for Microsoft company information, then you can take a dive into the Evolution of Microsoft and its Business model that StartupTalky brings here in teh article ahead.

Microsoft - Latest News History of Microsoft Evolution of Microsoft Microsoft's Major Acquisitions Revenue of Microsoft FAQ

Microsoft - Latest News

January 20, 2022 - Microsoft seals deal with the Telangana government to set up a data center in Hyderabad. The Microsoft data center is estimated to be built with around Rs 15,000 crore worth of funds in an area spanning over 50 acres of land. The Microsoft building is estimated to be creating 300+ jobs.

January 18, 2022 - Microsoft announced that it is acquiring gaming giant Activision, the world's 3rd largest gaming company . The deal to acquire Activision Blizzard , as announced by Microsoft CEO and Chairman Satya Nadella , would be an all-cash transaction of $68.7 billion . Cleaning up the culture after the biggest tech acquisition in history now seems to be a mammoth task ahead !

October 29, 2021 - With a market cap of $2.45 trillion , Microsoft becomes the world's most valued publicly-traded company , passing Apple's market cap of $2.41 trillion .  

June 28, 2021 - Microsoft's code-sharing service GitHub launches GitHub Copilot, which is meant to be an AI-driven pair programming tool that will help coders with invaluable suggestions to complete their codes easily.

June 24, 2021 - Microsoft reveals the much-awaited release of Windows 11 will happen late this year, 2021 . The update to this latest version of Windows will be free for the existing Windows 10 users via Windows Update .

History of Microsoft

Before Microsoft was founded, Paul Allen and Bill Gates were just two friends in an age where computers were not a frequent sight. They were avid geeks, which once led them to hack into their school’s computer. Instead of being expelled, the school asked them to help in strengthening the school’s computer performance. Maybe this kindled the spirit in them to one day serve the world with the most preferred Operating System.

After this, both moved separate ways with Gates going to Harvard to pursue law in 1973 and Allen to Boston as a computer programmer. This is where faith stepped in. In January 1975, Allen read an article in Popular Electronics magazine about the Altair 8800 microcomputer and showed it to Gates. Gates called Micro Instrumentation and Telemetry Systems MITS, makers of the Altair, and offered his and Allen's services to write a version of the new BASIC programming language for the Altair.

After eight weeks, Allen and Gates demonstrated their program to MITS , which agreed to distribute and market the product under the name Altair BASIC. The deal inspired Gates and Allen to form their own software company. Thus, Microsoft was started on April 4,1975 in Albuquerque, New Mexico with Gates as the first CEO.

On July 29, 1975, Gates used the name "Micro-Soft" - which had been suggested by Allen—in a letter to Allen referring to their partnership. The name, a portmanteau of "microcomputer" and "software," was registered with the New Mexico secretary of state on Nov 26, 1976.

In August 1977, the company opened its first international office, located in Japan, which was called ASCII Microsoft. In 1979, the company moved to Bellevue, Washington, and two years later it was incorporated under the name Microsoft Inc. Gates was President of the company and the Chairman of the Board, and Allen was the Executive Vice President.

business model for microsoft

Evolution of Microsoft

Microsoft operating systems.

As a newly formed company, Microsoft's first operating system product to be publicly released was a version of Unix called Xenix, released in 1980. Xenix was later used as the basis for Microsoft's first word processor—Multi-Tool Word—a predecessor to Microsoft Word.

Microsoft's first operating system - XENIX

Microsoft's first wildly successful operating system was MS-DOS (Microsoft Disk Operating System), which was written for IBM in 1981. In the deal of the century, Gates licensed MS-DOS to IBM but retained rights to the software. As a result, Gates made a fortune for Microsoft, which had become a major software vendor.

Microsoft Windows

Also in 1983, Microsoft's crowning achievement was released. The Microsoft Windows operating system had a novel graphical user interface and a multitasking environment for IBM computers. Windows is constantly evolving with Windows 11 recently launched on June 24, 2021, which is deemed to be the successor of 2015 released Windows 10.

In 1986, the company went public, with the resulting rise in stock making an estimated four billionaires and 12,000 millionaires from Microsoft employees. The success meant that Gates became a billionaire at 31.

business model for microsoft

Microsoft Office

1989 marked the release of Microsoft Office, a software package that is a collection of programs for use in an office. Still used today, it includes a word processor, spreadsheet, mail program, business presentation software, and more.

Internet Explorer

Following Bill Gates' internal "Internet Tidal Wave memo" on May 26, 1995, Microsoft stepped into the world of the web. Other than Netscape, Microsoft was the only major and established company that acted fast enough to be a part of the World Wide Web practically from the start.

The other companies acted slow, giving Microsoft a market dominance. The company released Windows 95 on August 24, 1995, featuring pre-emptive multitasking. Windows 95 Plus was bundled with the online service MSN, and Internet Explorer, a Web browser.

In 2001, Microsoft introduced its first gaming unit, the Xbox system. Xbox faced stiff competition from Sony's PlayStation, and eventually, Microsoft discontinued the original Xbox in favor of later versions. In 2005, Microsoft released the Xbox 360 gaming console, which was a success.

business model for microsoft

After this, from 2007-2010, Microsoft launched a variety of services and products like Windows Vista, which focused on features and security. Azure Services Platform , the company's entry into the cloud computing market for Windows, launched on October 27, 2008.

On February 12, 2009, Microsoft announced opening a chain of Microsoft-branded retail stores , and on October 22, 2009, the first retail Microsoft Store opened in Scottsdale, Arizona; the same day Windows 7 was officially released to the public.

Windows 7's focus was on refining Vista with ease-of-use features and performance enhancements, rather than an extensive reworking of Windows. As the smartphone industry boomed in 2007, Microsoft struggled to keep up with its rivals Apple and Google in providing a modern smartphone operating system.

As a result, in 2010 it came up with Windows Phone OS. The strategy was to work more closely with smartphone manufacturers , such as Nokia . The new user Interface introduced the idea of minimalism.

Microsoft launched Windows 8 on October 26, 2012, an operating system designed to power both personal computers and tablet computers. The Surface was also launched, becoming the first computer in the company's history to have its hardware made by Microsoft.

In 2015, Microsoft began an advertising campaign centering on Windows 10, "Upgrade Your World” with the tagline "A more human way to do" , emphasizing new features and technologies supported by Windows 10 that sought to provide a more "personal" experience to users.

Other than this products like HoloLens, mixed reality headsets, acquisitions of platforms like LinkedIn , GitHub have made Microsoft a pioneer in the Tech industry.

On Tuesday, June 29, 2021 , Microsoft announces the launch of an AI-driven tool that will suggest codes for the world of software developers while they are busy coding. This new system, called GitHub Copilot , is named after GitHub because it draws upon the source code shared on Microsoft's code-sharing service GitHub. Microsoft and GitHub developed this pair programmer with the help of OpenAi , an AI research startup that was backed up by Microsoft in 2019.  

Microsoft's Major Acquisitions

Microsoft Acqusitions

With more than 250 companies under its belt of acquisition, Microsoft is nothing more than a giant, when it comes to acquisition. The latest acquisition of Microsoft came in on January 18, 2022, when it acquired Activision Blizzard, the 3rd largest gaming company, in the world's largest tech acquisition deal that amounted to $68.7 billion. The all-cash deal that the CEO and Chairman of the American software giant, Satya Nadella announced, is expected to close the deal in FY23. However, Microsoft will face a major challenge in cleaning up the culture of Activision, a company that is facing numerous accusations of sexual harassment and misconduct.

Microsoft's acquisition till now has largely meant that the acquired company will work autonomously. It has been so with the companies like Linkedin, GitHub, Skype, Mojang, and more, but to handle the situation of Activision, which is currently marred by a lawsuit from California regulators that allege that the company "fostered a sexist culture" along with many other investigative stories that detail the allegations of sexual harassment internally, will require a heavier hand. Here's a list of the last 10 acquisitions by Microsoft:

Revenue of Microsoft

Microsoft has branched its revenue and is routinely ranked among the world’s top 100 companies organized by revenue. The Company’s revenue is divided into three principal segments:

Productivity and Business Processes

This includes revenue gathered by the sale and licensing of its various software products and cloud services across a range of devices and platforms. This comprises commercial and consumer licensing of Microsoft’s suite of productivity products and cloud services, including those pertaining to the Office 365 suite, content management tool OneDrive, and call services provider Skype.

business model for microsoft

Intelligent Cloud segment

Comprises all revenue generated by its server products and cloud storage services, including the sale and licensing of Windows Server, Microsoft SQL Server, Visual Studio, System Center and Microsoft Azure services to commercial clients and general consumers. Revenue from the support and consulting services to develop innovative IT solutions for businesses – are also grouped into this segment.

More personal computing

This relates principally to its products and services that provide cross-platform utilities. This includes licensing of Windows operating systems, Microsoft patents, and Windows phones; the sale of Microsoft devices, including mobile phones and PC accessories, products relating to the Microsoft Xbox gaming platform, including Xbox Live subscriptions, transactions, third-party video game royalties, and advertising.

Microsoft revealed that it has earned $168 bn in revenue in FY21, marking an 18% year-on-year increase. Furthermore, the American software company's CEO and Chairman, Satya Nadella also mentioned that its operating income grew by 32% to $70 billion. Besides, Nadella also mentioned in the Annual Report 2021 that LinkedIn and the security business of Microsoft both crossed the $10 billion mark in annual revenue for the first time.  

business model for microsoft

What was Microsoft's first product?

Microsoft Operating Systems was Microsoft's first product.

When was Microsoft started?

Microsoft started was started on 4 April 1975, in Albuquerque, New Mexico, United States.

Did Bill Gates start Microsoft in his garage?

In 1975, Bill Gates and Paul Allen founded Microsoft, with just a few resources and an available garage space.

What is the Microsoft company?

Microsoft is a software giant, a multinational technology company founded by Bill Gates and Paul Allen, headquartered in Redmond, Washington, United States.

Who were the original founders of Microsoft?

Paul Allen and Bill Gates are the original founders of Microsoft.

The key takeaway from the above analysis of Microsoft as a company and its revenue models is that it has constantly evolved with the market and user requirements.

It strives to innovate and adapt to market scenarios from time to time. For an instance, when the industry switched to mobiles from PCs, Microsoft didn’t take a step back, instead, it brainstormed to set its foot by merging with Nokia.

Another time when we saw its determination to stay in the stocks was when the company knew that Android is dominating the phone industry, it came up with platforms for cloud computing, explored the less traveled road of mixed reality by supplying HoolLens headsets.

Microsoft also stepped into active advertising, which used catchy themes to attract more people to its core home PC values. It held strong to its belief in the requirements of a normal computer user with simple yet varied expectations. This is what made it stand out from its competitors like Apple and Google.

At the rate at which both of its competitors are succeeding, it must be a task for Microsoft to stay in the race, but surely it hasn’t let the market or the customers get used to its absence.

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The Business Strategy of Microsoft

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Microsoft Corporation is one of the largest technology companies in the United States and one of the most influential companies in the world. It was instrumental in popularizing personal computers and contributed to the expansion of the digital information age.

The company is behind some of the most well-known and widely-used software products and services. These include the Windows operating system, the Microsoft Office suite of productivity applications, and the Internet Explorer and Microsoft Edge web browsers, as well as notable consumer electronic products such as the Microsoft Surface and the Xbox.

Microsoft has become a household name. The success of the company stems not only from the initial leadership of Bill Gates and Paul Allen but also from a business strategy that revolves around innovation, market expansion, and product diversification.

An Analysis of the Elements of the Business Strategy of Microsoft

Market penetration through licensing agreements.

Take note that Windows is t he most popular desktop operating system in the world based on market share. This success stems from an aggressive market entry strategy that involved securing software licensing agreements with computer manufacturers. Microsoft specifically approached these manufacturers following the introduction of its operating system in 1985. It convinced them to produce personal computers that came preloaded with Windows.

Licensing became the most appropriate, profitable, and effective distribution strategy for Microsoft. The reason Windows gained a considerable amount of momentum and an expansive global market reach is that personal computer manufacturers were distributing this operating system. Windows computers outcompeted the Macintosh brand of computers from Apple and the IBM Personal Computer from IBM in terms of market share with ease.

The popularity of its flagship operating system also translated to a first-to-market competitive advantage despite the presence of earlier operating systems and computer systems. This advantage came from the fact that Microsoft had a wide and strong network of third-party distributors, a favorable response from hardware and software companies, an emerging user base, and a usable operating system with an intuitive graphical user interface.

Licensing is still essential to the business strategy of Microsoft and its business model. The five largest PC manufacturers in the world still produce desktop and laptop computers that come preloaded with Windows and other Microsoft software products such as Microsoft Office. This same strategy has been applied to Xbox. The company continues to secure agreements that allow video game developers to produce game titles for this video gaming console.

Proactive and Reactive Product Strategy of Microsoft

Innovation is at the core of tech companies. Microsoft specifically demonstrates the capabilities to innovate through a proactive and reactive approach to product strategy . It is important to note that the company was not the first to develop and introduce a desktop operating system featuring a graphical user interface. It did not invent the computer and was not the first to initiate the launch of personal computers. Microsoft was still considered innovative.

Microsoft approaches research and development by taking insights or cues from existing products and emerging trends in the market to develop and introduce new products that are more usable and more innovative. This is similar to the strategy of Apple. Microsoft developed and positioned Windows not only for business users but also for household or personal use. It ensured that this software was accessible in the market through its licensing deals.

The company expanded further the capabilities of Windows by making it an ideal desktop operating system for media consumption and media creation. It is important to highlight the fact that this operating system has been regarded as the best platform for high-end video gaming according to enthusiast-level and professional gamers. Even macOS from Apple has been struggling to compete against Windows in the PC gaming market

Microsoft has also introduced the Xbox as part of its attempt to enter the video gaming market. It is important to reiterate that this is not the first product of its kind in the market. Nintendo used to dominate the video gaming market until the improved PlayStation 2 and the Xbox entered the market. What made Xbox a viable video gaming platform was the use of powerful hardware components and the DirectX found in high-end Windows personal computers.

The same proactive and reactive approach was demonstrated through the Microsoft Surface line of laptop computers. Microsoft made Windows a suitable desktop operating system both for touch inputs and mobile computers. It is clear that it did not pioneer touchscreen computers nor it heralded an era of tablet computers but it succeeded in extending the appeal of Windows to a market segment with a preference for convertibles and hybrid computers.

Market Diversification and Market Segmentation

Remember that part of the business strategy of Microsoft is to maintain and expand further a broad market scope. The company does this through numerous product and service offerings that are relevant to existing and future market trends. Of course, while it has become known for its flagship products such as Windows and Microsoft Office, it continues to research and develop new products aimed at catering to different segments of the market.

Xbox is a notable example. The Surface line of computers is another. However, aside from these two, take note that the company has recently introduced other software and services that are relevant today. The launch of Microsoft Office 365 in 2011 signaled an attempt to embrace a subscription business model similar to the Google Workspace of Google and other companies that utilize software-as-a-service licensing and distribution business models.

The introduction of Azure in 2010 also marked an acknowledgment of the growing business trend directed toward cloud computing and models based on platform-as-a-service and infrastructure-as-a-service. Take note that Azure competes against cloud computing service providers such as Amazon Web Services of Amazon , Alibaba Cloud of Alibaba Group Holdings, Google Cloud Platform of Google, Oracle Cloud, and IBM Cloud, among others.

It is also obvious that the company offers products that compete directly with other technology companies. For example, similar to the Google Search of Google, the company has Bing. The company also competes against online video conferencing platforms such as Zoom and Google Meet through Microsoft Teams . Acquisitions have been part of its business strategy of Microsoft to expand further its product portfolio and address barriers to entry

Nevertheless, by diversifying its products and services, the company ensures that it remains a relevant technology company. Remember that the industry is ever-evolving, and to remain at the top, it must provide solutions that address the current and future needs of the market. Diversification also enables a business to reach different segments of the greater market. Microsoft essentially has products for different customers and use cases.

Maintaining a Multi-Stream Revenue Strategy

It is also important to underscore the fact that Microsoft makes money through different income streams. Software licensing agreements enable it to earn through one-time licensing fees and royalty fees from computer manufacturers and software developers. Products such as Windows, Office, and the Xbox are the main income drivers under this specific revenue model. Note that the company also earns from these products through retail sales.

Subscription is another source of revenue. The company generates a predictable and steady stream of income from its subscription-based software and technological services through software-as-a-service, platform-as-a-service, and infrastructure-as-a-service models. It earns recurring fees from customers at regular intervals. The earnings from subscriptions are also more substantial than the earnings from one-time licensing agreements.

A large chunk of its revenues come from business or enterprise customers that purchase server products and cloud computing services. Microsoft also earns from one-time sales to end users or retail customers. The Windows operating system and the Office suite of productivity applications can be purchased as off-the-shelf and standalone products. The company also earns from selling tangible products such as Surface devices and Xbox to end-user customers.

Digital advertising is another source of income. The Bing search engine generates revenues similar to Google Search. Earnings from Bing and the entire Microsoft Search network account for 6 percent of the total revenue of the company. Take note that the company acquired the business-oriented and employment-centric social networking site LinkedIn in 2016 which earns through a combination of digital advertisements and subscriptions.

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Enabling rapid business model innovation and growth

  • By Michele Ballinger, Senior Product Marketing Manager, Business Applications
  • Dynamics 365 Project Operations

The COVID-19 pandemic has certainly served as a wake-up call for many businesses. Not only has it highlighted the need for better insights across the entire operational experience, but this global stressor also exposed vulnerabilities in business models and workforce strategies.

The pandemic also brought to light the importance of agility and adaptability in the face of change. In order to survive and thrive in the new normal, businesses must be able to pivot quickly and effectively to meet the ever-changing needs of their customers. Enterprises are increasingly focusing on service-centric business models that provide recurring revenue streams.

To better understand these trends, Microsoft commissioned Forrester Consulting to investigate where companies are succeeding, struggling, and investing in their quest to move toward service-centric business models and project-based operations. In the study, Foster Business Model Innovation To Achieve Growth Goals , Forrester Consulting explored how this trend impacts the global business landscape and associated business teams.

Business model innovation

Learn how to achieve growth goals with business model innovation.

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Forrester highlights three areas of need

In March and April 2022, Forrester conducted an online survey of 509 global financial leaders who have decision-making influence within service and project teams or businesses. 1 They also performed two qualitative interviews with global practice and financial leaders. The research participants were asked about project-centric business tools. Companies ranged in size from 500 to more than 20,000 employees.

Forrester Consulting’s study highlighted three areas of need that organizations are struggling with.

Societal and business trends

With more employees working from home, the line between personal and professional life has blurred. This change compelled organizations to focus more on employee well-being, inclusion, and connectivity. Organizations are pushing for greater connectivity and convergence to foster an always-on culture.

These trends have pushed more than 75 percent of respondents to invest in the cloud, infrastructure as a service, software as a service, and the Internet of Things. By investing in these areas, organizations can provide their employees with the resources they need to succeed both at work and at home.

Multiple roadblocks

Macroeconomic trends, such as supply chain issues and staffing shortages, prevent organizations from adopting service-centric business models. About 42 percent of respondents reported struggling to keep up with demand due to external supply chain disruptions. Companies are also facing internal challenges, such as a lack of clarity and connectivity, which are preventing them from optimizing project delivery.

Unlocking new revenue streams

Revenue recognition is the main driver for business model transformation, with businesses looking to refine their product offerings as well as their pricing. About 40 percent of respondents are working to evolve their financial models, including how they charge customers and structure their entities.

This insight corresponds with a focus on improving strategy and planning that respondents are prioritizing. Improving team collaboration and connectivity also ranks highly with organizations investing in this area. Finally, workforce well-being is also a key concern, with organizations investing in improving the well-being of their employees.

Key takeaways to embrace service-centric business models

Let’s briefly touch on a few key takeaways you will find in the full study that can help companies address these challenges to embrace service-centric business models.

Beyond financial monetization

Forrester recommends that organizations take a comprehensive approach to business model innovation. Ideal innovation offers better insight into operational processes. It also gives employees modern workplace tools and environments, resulting in a holistic approach to critical process improvements.

Profit visibility

By investing in technologies that enable connectivity, organizations can improve communication and collaboration across their businesses. Forrester highlighted the importance of understanding how businesses can embrace service-centric business models. Companies improve profit visibility by focusing on customer outcomes through end-to-end project tracking. The right tools are necessary for organizations to fully understand their profit drivers. Microsoft Dynamics 365 Finance enables businesses to maximize financial visibility and profitability.

Finding the right partner

The study indicates that the right partners are essential for successful platform innovation and improved project-based operations. The right partner will have a deep understanding of the project requirements and the ability to effectively communicate and collaborate with the project team. Furthermore, technology investments and performance metrics should be aligned with business objectives.

In today’s business environment, it is critical for businesses to be able to implement service-oriented business models. To accomplish this, companies need visibility and connectivity into all aspects of their operations—including their projects, processes, and data. Due to siloed systems and data, many businesses lack this visibility and connectivity.

Businesses that can optimize their systems and implement service-oriented business models will be better positioned to succeed. Organizations can use tools such as Dynamics 365 Finance and Dynamics 365 Project Operations to support their progress toward project-based operational models.

Learn how Dynamics 365 Finance can improve your business’s financial decision-making and sign up to try it out yourself. For Dynamics 365 Project Operations, visit us online and check out the free one month trial offer. To read more about the rise of the services economy, check out Forrester’s study in full .

1 Forrester Consulting study, 2022. Foster Business Model Innovation To Achieve Growth Goals. Commissioned by Microsoft.

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Business Model of Microsoft & How Does Microsoft Make Money?

June 9, 2023 | By Hitesh Bhasin | Filed Under: Business

Microsoft , an American multinational technology company , is the leading company of technology in the world. The business model of Microsoft develops, designs, supports, licenses, and sells computer software, personal computers, consumer electronics, and related services.

Microsoft was founded by Bill Gates and Paul Allen shortly after 1975 when they developed BASIC on the Altair. It is a multi-faceted software and full-service technology company.

The best-known software products of Microsoft Business Model are the Microsoft Windows line of operating systems along with Microsoft Office suite, Internet Explorer and Edge web browsers.

It also releases its flagship hardware products such as Xbox video game consoles and the Microsoft Surface lineup of Touch-screen PCs. It provides efficient, reliable, and accessible home and business software solutions and innovative consumer electronic products and secure online storage and search services.

Microsoft comes in the league of the Big Five Technologies companies, together with Amazon , Google , Apple , and Facebook . This article aims to delve deep into the mechanism of how Microsoft makes its money to understand it is functioning and working process better.

Table of Contents

Introduction to the business model of Microsoft

Microsoft was founded a little while after 1975 by two friends, Bill Gates and Paul Allen. In 1975, they developed a system through which they could use BASIC, a popular mainframe programming language on Altair, an early personal computing system.

The word Microsoft comes from a combination of the two words, microcomputer and software. The leading company in technology and software, Microsoft offers a wide range of services. It was developed for several more years. Many other programming languages were also created.

After that, IBM approached Microsoft to create an operating system for its first personal computer. Microsoft acquired an existing operating system from a third party and modified it to form MS-DOS.

It was released in 1981 and became a big hit. It led to Microsoft launching its Windows operating system series and other office software. This ultimately provided the kickstart it needed, and soon enough, Microsoft became the world’s leading technology and software company.

What exactly is Microsoft?

Products offered by Microsoft Business Model

The word Microsoft comes from the combination of the words microcomputer and software. It is an American multinational software and technological corporation.

It offers various services, including software products, hardware products, cloud-based solutions, and training and certification services and consulting and product solution support services.

Products offered by Microsoft Business Model

  • Visual Studio
  • List of software

Services provided via Business Model of Microsoft

  • Microsoft Store
  • Windows Update
  • Xbox Game Pass

A timeline describing the growth of Microsoft Business Model

  • 1972–1985: The founding of Microsoft
  • 1985–1994: Windows and Office
  • 1995–2007: Foray into the Web, Windows 95, Windows XP, and Xbox
  • 2007–2011: Microsoft Azure, Windows Vista, Windows 7, and Microsoft Stores
  • 2011–2014: Windows 8/8.1, Xbox One,, and Surface devices
  • 2014–present: Windows 10, Microsoft Edge and HoloLens

Contemporary Global Presence of Microsoft

Microsoft has its headquarters in One Microsoft Way, Redmond, Washington, United States.

There are about 210 countries in the world where Microsoft operates and has its presence. It ranked number 30 in the Fortune 500 rankings of the largest United States corporations by total revenue.

Revenue – $143 billion

Operating income – $53 billion

Net income – $44.3 billion

Number of employees – 151,163

Total assets – $301,3 billion

Total equity – $118,3 billion

The numbers and data represented above speak for the massive and impressive presence of Microsoft around the world. It has made itself a global presence and is justifiably the most renowned and top technological company in the world, which makes it all the more fascinating to explore the intricacies of the functioning of this organization.

In November 2018, Microsoft got a $480 million military contract with the U.S. government for incorporating augmented reality (AR) headset technology in the weapon repertoires of American soldiers.

Decoding the Business Model of Microsoft

Decoding the Business Model of Microsoft

Microsoft generates its primary revenue and income by developing, manufacturing, licensing , supporting and selling a variety of software and hardware products, cloud-based services and services that integrate with it and by producing the relevant online advertising that reaches out to a global audience, thus maintaining and growing its scope and base.

The software products include operating systems for computing devices, servers, phones, etc., server applications for distributing computer environments, cross-device productivity applications, desktop and server management tools, business solution applications, video games, software development tools, and online advertising.

The hardware products include PCs, tablets, phones, gaming and entertainment consoles, other such devices and accessories.

Microsoft’s customer base can be divided into two main categories broadly –general consumers and commercial consumers. It offers the general software and cloud computing solutions through the Office 360 productivity suite email platforms such as Outlook and Exchange and online calling platform called Skype. This is generally used by both types of consumers globally.

Apart from that, its IT and consulting services are targeted more towards businesses and commercial consumers. Simultaneously, mobile and PC and gaming technologies are directed towards the general consumer and produced to the mass market to make it available for them.

This customer base includes individual consumers, organizations, original equipment manufacturers (OEMs), and application developers. All these elements of the customer base are interlinked and connected in many ways.

For example, individual customers and organizations obtain Microsoft software and services for their personal and business devices through retailers, distributors, original equipment manufacturers, etc.

Working of Microsoft in three steps

Microsoft serves organizations of various sizes and meets their different purposes to generate revenue.

  • It offers its services to organizations of different sizes and meets their demands accordingly by providing tailored license programs, enterprise wise consulting services, and support, and other specialized services.
  • It distributes through OEMs that pre-install Microsoft’s software on different devices that they sell to their customers.
  • It also generates revenue from different application developers by providing developer tools and training certification on various Microsoft products.

Microsoft attracts various major advertising agencies that have big brands by providing multiple advertising opportunities through its MSN portal and Bing search platforms.

Microsoft has established its reputation as an efficient, reliable, and authentic provider of software technologies. It is regarded as a market leader. On top of that, many of its products are available to the users free of charge and can be accessed through its MSN and Bing portals, which only serves to increase its popularity.

The content can also be synced across multiple platforms using Microsoft’s different devices, which makes it easier and effortless for the user in many different ways. It has done a great job of establishing itself as a trustworthy source of manufacturing software and providing various services. As a result of which, it has a loyal customer base around the world and many partners as well.

Main Partners of Microsoft

Microsoft has a Microsoft Partnership Network. It organizes and manages all the partnerships of the company. This network aims to enable different multinational and technology-based companies to build their businesses around the Microsoft Company and obtain its services to an as great extent as possible.

These partner companies provide various services, including systems integration, application development, data analytics, digital marketing , manufacturing, data management, distributions , telecommunications, and internet hosting services. This network also includes authorized resellers and software retailers.

These partners receive support tools directly from Microsoft and a great discount on its products and services. They can also achieve gold and silver memberships that have additional benefits.

Gold membership allows companies to access various Microsoft tools for free. It is considered to be the best one in that category.

Significant Resources incorporated by the Business Model of Microsoft

The primary resources of a company or business crudely refer to the essential services and products it provides to its customer, which makes it authentic and accessible. For Microsoft, this includes its line of technological devices, including PCs, tablets, Smart-phones, gaming and entertainment consoles, and other such intelligent devices used broadly by the general and commercial consumers.

Microsoft makes sure to design and program these products accordingly as well. Another one of its primary resources is its line of software and server management products.

Microsoft ensures to hire only the best and most qualified of the employees. It takes measures to develop its personnel within the company, especially the research and development teams that ensure the company’s position in the market.

In some ways, the founder Bill Gates is also viewed as a critical asset to the company. He is regarded as a forward-thinking leader and the basis and origin of the whole corporation, which makes him very important.

The latest product of Microsoft Business Model

The latest product of Microsoft Business Model

The Windows 10 operating system is the latest product of the Microsoft Corporation, and it is one of the best ones so far. It has a wide range of features that make it unique and fascinating and famous in the market.

The company has made many different wholesale changes to the way it monetizes windows with the launch of this product to the market. Most of the details of this change are kept confidential. This change is not sudden, rather a product of trends in the revenue systems that have been prevalent for many years.

This is affecting Microsoft in many ways. It used to dominate the global economy at one point in the tie. Compared to that, of course, the value is declining. Thus, this is the reason for making all these changes to the way this system functioned.

Revenue Generation of Business Model of Microsoft- How does Microsoft make money

Microsoft has diversified revenue streams, and it comes under the top 100 companies listed by their revenues in the world. Three main segments of Microsoft Revenue Generation are-

1. Productivity and Business Processes

It includes the revenues generated by sales and licensing of its different software products and cloud services for different devices and platforms. Some of such products and services are Office 365 Suite,, Email Platforms Exchange, Content Management Tools OneDrive and SharePoint, Call Services Skype, etc.

2. Intelligent Cloud

It includes revenues generated through Microsoft’s server products and cloud storage services.

Sales and licensing of Windows Service, Visual Studio, Microsoft SQL Server, System Center, and Microsoft Azure, etc. enable the business model of Microsoft to make money.

3. More Personal Computing

It comprised the revenues associated with the Microsoft products and services offering cross-platform utilities to the professionals, developers, and end-users. Licensing of Windows OS, Windows Phones, Microsoft patents along with sales of mobile phones, PC accessories let Microsoft generate its revenues.

It also makes money through the sales and licenses of Microsoft Xbox gaming platforms together with Xbox live subscriptions, transactions, advertising, and 3 rd part video game royalties. Revenues from display advertising via the MSN portal and search advertising via Bing Search Engines are also included in this segment.

Concluding Thoughts!

These are the basic features and key details of Microsoft’s business model, one of the leading technology-based companies in the world.

It is one of the most talented and most authentic models. This article consists of all the necessary information that you need it to know to understand the formation of this company and the working mechanism of its business model.

It is comprehensive and aptly arranged for your convenience and benefit to gain the most out of it.

What products and services of Microsoft do you use?

How pivotal do you find the role of the Business Model of Microsoft in changing the use of technology in today’s world?

Share your experiences with the M91 team in the comment section below.

Liked this post? Check out the complete series on Business Models

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About Hitesh Bhasin

Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.

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Profitable Business Models > Business models of large companies

Microsoft’s Business Model Canvas & History: How the Software Giant Completely Changed the PC World

  • by  Joanne Moyo
  • November 11, 2021

In today’s world, there’s nothing that gets our mouth-watering as a successful business with humble garage beginnings. From Amazon and Google to Microsoft, the story of how these mega giants began is told over and over again. Why? Because there’s something inspiring about the common man finding a lucrative business model in their idea.

Computers have been a part of our lives for a couple of decades now. Think about it, what would you do during your workday without a PC? As a leading tech company in the world today, Microsoft has a lasting impact on our work and daily lives. In fact, with a valuation of $2 trillion and a net income of $61.3 billion as of June 2021, it’s hard to think of a company that has had a more profound impact on technology than Microsoft.  

However, despite its role in disrupting technology, Microsoft has been saddled with the reputation of being an uninventive company that makes boring products. While there might be some truth in that statement (especially if you compare Microsoft to Google or Apple), Microsoft is still a force to be reckoned with.

So how did Microsoft go from a scrappy startup in New Mexico to a tech giant with more than 47.5% software market share in 2021? The story is not only fascinating, but it’s also full of lessons every new business owner can learn from.

Microsoft's Business Model Canvas Evolution And History

1975-1976: How Microsoft started

It’s April 1975, and then 19-year-old Bill Gates was studying mathematics and computer sciences at Harvard. He had a friend named Paul Allen who worked as a programmer for a company called Honeywell.

Paul Allen and Bill Gates knew each other from a private preparatory school in Seattle, Washington called Lakeside School. They spent hours learning everything they could about the school’s Teletype Model 33 ASR computer as well as a huge and bulky General Electric mainframe.

Allen, who was 22 years old, got the idea to write a code for the Altair computer, which was produced by a company called Micro Instrumentation and Telemetry Systems (MITS). This code would function as an interpreter for the popular BASIC programming language that would run on the Altair computer.

He has seen the January issue of a magazine called Popular Electronics, which featured the Altair microcomputer’s image. This computer was the “World’s First Minicomputer Kit to Rival Commercial Models.”

Allen visited Gates at Harvard to tell him about his coding idea. Excited about the prospects of Allen’s idea, Gates dropped out of Harvard and formed Microsoft out of a garage in Albuquerque, New Mexico. The company name was short for Microcomputer Software, a nod to the new era of microcomputers.

The pair hoped that having a dedicated interpreter for the world’s first minicomputer kit would appeal to hobbyist programmers. These were the people who could now use the code to write and execute their own codes. The interpreter would open up the functions of the Altair 8800, allowing programmers to use the computer for various things such as running thousands of CP/M software titles. It also allowed the average user to play games and create accounting spreadsheets.

Additionally, Allen predicted that the interpreter would make microcomputers cheaper. At some point, developing commercial software for these machines would become a viable and profitable business. 

Getting the wheels rolling

The following month in May, Allen and Gates contacted Ed Roberts, the founder of MITS. They offered him an in-person demonstration of their BASIC interpreter for the 8800 computer. Fortunately, Roberts agreed.

The gag, though, was that the interpreter was not ready. Allen and Gates weren’t even sure whether the code worked. So as soon as they secured the meeting with Roberts, Gates started working on the interpreter while Allen worked on the simulator.

Gates flew to MITS’ headquarters in Albuquerque, New, to present the interpreter. On the way to present the product, the boot-up system for the interpreter was not ready, so Gates was writing the last bit of code on the flight.

By the time, he landed he still had not run a full test of the interpreter. Luckily during the meeting, the interpreter ran perfectly the first time. Roberts was thoroughly impressed and agreed to sell their interpreter as Alter Basic.

Little did they know that they had just stumbled on what was to become a major revenue stream for Microsoft; licensing software.  Microsoft had managed to carve up a niche for itself in the growing microcomputer industry. 

In June, the following month, Allen and Gates sold the license to their code to MITS for $3,000, plus a percentage of royalty payments up to $180,000.

1976: Microsoft is formally registered

Microsoft was formally registered in New Mexico. Allen and Gates used the money to improve their code. Sure enough, Microsoft’s 8800 interpreter became increasingly popular with programming enthusiasts and computer hobbyists. By the end of the year, Microsoft had exceeded $16,000 in revenue.

1979-1980: Building a Monopoly – 1979-1980: Expansion into Asia and Partnership with IBM 

By the end of 1978, Microsoft had reached $1 million in annual revenue, thanks to the popularity of the Altair 8800.

Microsoft was facing a skilled staff shortage as the company started growing. They were failing to recruit skilled programmers in New Mexico. So Allen and Gates decided to relocate Microsoft to Washington State and officially opened its headquarters in Bellevue, Washington, on January 1, 1979.

That same year, Gates went into partnership with Kazuhiko Nishi and Keiichiro Tsukamoto to open Microsoft’s first international sales office in Japan, ASCII Microsoft.

Microsoft’s next big break came in the form of a software licensing partnership with IBM in 1980. This propelled Microsoft from a small niche development company to a household name. Before inking the deal with IBM, Microsoft didn’t have its own operating system (OS).

IBM had been toying with the idea of licensing a popular operating system known as the “Control Program for Microcomputers” (CP/M). The program had been developed by Gary Kildall of the California software company Digital Research, Inc.

With the IBM deal, Microsoft was contracted to develop an operating system for IBM’s new PC Model 5150 home computer. So Gates went on the hunt for an OS. He managed to license one developed by Seattle Computer Products known as “Quick and Dirty Operating System.” (QDOS).

Microsoft paid $10,000 for QDOS, which was similar to CP/M in form and function, so it was an ideal system for Microsoft to use. Microsoft started to rewrite a few core parts of the QDOS’s code for Microsoft’s brand-new contract with IBM.

By the end of the year, Microsoft had cemented its position. It was on its way to dominating the software industry.   

Microsoft’s Business Model Canvas: The Early Days

At this point, Microsoft’s Business Model Canvas looked like this:

Value Proposition

  • Easy to use software code for computer programmers and hobbyists

Customer Segments

  • Computer companies like MITS & IBM

Customer Relationships

  • Word of mouth

Revenue streams

  • Licensing fees

Key activities

  • Developing software
  • Developing OS

Key resources

  • Microsoft software and OS
  • Skilled staff (programmers etc.)

Key partners

  • Kazuhiko Nishi and Keiichiro Tsukamoto

Cost structures

  • Acquisitions

business model for microsoft

1981-1990: Global Dominance

In July of 1981, Microsoft purchased QDOS from Seattle Computer Products for $50,000. They rebranded the software and called it MS-DOS for its deal with IBM. A crucial condition of the sale was that Microsoft could license the OS to other companies.

Unfortunately, Seattle Computer Products  (SCP) later filed a lawsuit against Microsoft. They claimed that Microsoft had intentionally omitted that IBM was one of the first licensees of the MS-DOS. The court sided with SCP ordering Microsoft to pay $1 million in damages.  

This approach by Gates is the first example of the tactics that would lend Microsoft in trouble in the 1990s. Gates had created a corporate culture that entailed the company doing anything and everything possible (save for outright illegality) to secure a large chunk of market share.

1983: Taking over the software industry

The IBM deal and the fact that Microsoft still had lasting control over the MS-DOS was a stroke of genius for various reasons and proved to be the company’s golden ticket. Partnering with IBM was a crucial step in securing dominance of the software market because IBM was the computer giant at that time.

Microsoft had put itself right in the middle of the PC wave that was starting to rise. By the end of 1983, Microsoft’s revenues exceeded $55M.

During these early years, Microsoft was slowly developing its sales and manufacturing strategy. As we’ve previously stated, Paul Allen had anticipated an imminent explosion of the PC market.

At this point, Microsoft had very few competitors in the market, so the software didn’t have to be perfect. The sole focus was to get as many users as they could so that revenue would soar.

He had aptly predicted the rise of the consumer software market; thus, the company focused on quantity, not quality. So the company launched two of its iconic products that same year. The first was the Multi-Tool Word. The second was the Xenix operating system, a clone of AT&T’s Unix system that Microsoft had licensed in the late 1970s.

The Multi-Tool Word was one of the first software programs that relied primarily on mouse-based input to navigate the tool’s graphical user interface (GUI). While the tool was mainly aimed at computing enthusiasts, even the average PC user was amazed by the program’s visual interface.

1985: The launch of Windows

In 1985, Microsoft released its first retail version of Windows in 1985. Gates and Allen realized that their target market (computing enthusiasts) was slowly becoming interested in moving away from command-line interfaces in favor of GUIs.

This flagship OS was actually a GUI for MS-DOS. This first Windows was a significant step forward for Microsoft in home computing. However, the launch was not without controversy because Apple launched a lawsuit accusing Microsoft of infringing its own GUIs.

In an ironic twist, Apple lost the suit against Microsoft before fighting its own court battle against Xerox, which was accusing Apple of infringing on its GUI copyrights in Apple’s Lisa and Macintosh operating systems.

With the lawsuit settled, Microsoft released the first version of Excel in 1985, specifically for Apple’s Macintosh. Microsoft’s Windows version of Excel wouldn’t actually be released until 1987.

The launch of Excel was a massive milestone for the company. They were now slowly building towards Microsoft’s bundled Office package. The package would ultimately help the company secure an even greater market share in the rapidly growing productivity software market. 

The year 1985 wasn’t just all about essential product launches; Microsoft managed to enter into another critical partnership with IBM. The new deal cemented MS-DOS as the default operating system of IBM’s new line of home PCs.

So now, not only would Microsoft continue to dominate the home computing market with MS-DOS, but they could also sell and license its OS to other companies. The deal also had some significant benefits for IBM. It eased the fears and rumors that IBM was developing and migrating to its own closed-source proprietary operating system

1986-1989: The Office Package makes a debut & Microsoft goes Public

Microsoft continued to dominate the late 1980s. In 1986 the company went public, and the opening stock price was $21. In 1989, they released the first version of the Office suite of productivity applications. There was no question of Microsoft’s position in the software company in North America.

However, as good as the Office suite was, Microsoft missed a critical aspect of the home computing market—the internet. As the ’90s rolled around, the internet was becoming more mainstream. Computer users were beginning to buy hardware and software; however, Microsoft continued to prioritize the development of boxed software. This was a grave misstep that would almost bring the company to its knees.

Microsoft’s Business Model Canvas: The Expansion Days

  • Compatible software for home and office use
  • Business users
  • Personal users
  • Business sales and support
  • Developing software tools like Multi-Tool Word and the Xenix
  • Software acquisitions

business model for microsoft

1990-2000: Market Dominance

1995: windows 95 is launched.

Throughout the early ’90s, Microsoft continued to develop its flagship Windows product and started with the release of Windows  3.0 in 1990. And in 1995, the company launched Windows 95, which was to be Microsoft’s most important product launch to date.

Windows 95 was the first time that MS-DOS and Windows environments could be run on the same machine using the same GUI. This move gave many users’ preference for GUI-based operating systems and was designed to preempt Apple’s growing market share.

Apple was mainly a consumer-focused company, while Microsoft was targeting business environments. Hence, Apple posed no real threat at this point to Microsoft’s dominance. However, Microsoft realized they couldn’t allow Apple to make any further gains into the growing consumer market.

So that same year, Microsoft also began to take the internet seriously and unveiled their own browser, the Internet Explorer. This was a response to the launch of the Netscape Navigator Internet browser.

However, Microsoft didn’t want to let the market decide who would emerge victorious in the browser wars. Therefore in 1996, upon the release of Internet Explorer 3.0 in 1996, Microsoft once again bundled Internet Explorer with Windows. This solidified the company’s stranglehold on the emerging browser market.

This strategy worked, and by 1997, Microsoft had revenues exceeding $11 billion, and the return on revenue was more than 30%. Apple, on the other hand, was not performing well at all. Sales were going down, and badly the company stood on the brink of bankruptcy. (To read more about Apple’s woes at this time, read Apple’s business model canvas and its history.)

1997: Microsoft invests in Apple

In a move that rocked the tech world, Apple’s Steve Jobs announced that Microsoft would invest $150 million in Apple. Microsoft would be developing a series of applications for the Mac OS, including a native version of the Office suite package.

There’s no doubt that this move by Microsoft “saved” Apple during Apple’s darkest hour. Although some would argue that there was no genuine benevolence on Microsoft’s side. They believe Microsoft needed to score some good PR points, and bailing out an “enemy” was an excellent way to accomplish that. The ultimate goal for Microsoft was to control and eventually crush the competitor.

This relentless pursuit of dominating the PC market and the readiness to control and crush competitors would soon lead Microsoft to the brink of death. 

2000-2010: Rebuilding Trust and the Ballmer Era

2000: bill gates steps down as microsoft’s ceo.

Although Microsoft’s annual revenues exceeded $22 billion by the early 2000s, the company had been severely bruised by its numerous legal battles. They would spend the next few years attempting to restore its public image.

Bill Gates announced that he was stepping down as CEO of the company and was now working as a Chief Software Architect. Steve Ballmer was named as his replacement. This marked the beginning of significant challenges for Microsoft as the once-mighty company struggled with botched product launches and a severe identity crisis.

Up to this point, Microsoft had been extraordinarily successful at building strong software products. Unfortunately for Microsoft, their confidence in the security of dominance would jeopardize everything Microsoft had made thus far.

When Ballmer took over, Microsoft was valued at $558 Billion. The company was doing reasonably well with its internet products, and sales of Windows remained comparatively strong. However, their sole reliance on boxed software was slowly becoming a liability.

It was becoming increasingly popular to distribute software over the internet. Despite Microsoft’s uncontested dominance, it was clear that there was a growing need to find new revenue streams.

2001: Microsoft Expands Product Catalogue; Hello Xbox!

So in 2001, Microsoft decided to venture into the video games business with the release of the first-generation Xbox gaming console. The following year in 2002, Microsoft launched its online gaming network, called Xbox Live.

This was a brilliant move, and surprisingly the Xbox hardware was a resounding success.

Even more remarkable was that Microsoft was able to enter a crowded and highly competitive retail market with a brand-new product and nail it. After several failures, the success of the Xbox was a major relief.

Unfortunately, this success was short-lived. There’s no doubt that Microsoft was still the go-to for companies and corporations. Their early dominance had made sure that companies had built their workflows around Microsoft’s business productivity tools.

However, at this point, Microsoft was struggling to develop consumer products that people actually wanted. This became a big problem as competitors began to emerge that offered fundamentally better products than Microsoft’s.

2006-2009: Huge Product Failures

The period from 2006 to 2008 was particularly troublesome for the failing giant. Microsoft experienced a series of high-profile product failures that did extensive damage to Microsoft’s already bruised reputation.

For example, the immensely unpopular Zune MP3 player was launched as a direct response to Apple’s iPod. While there was nothing wrong with the Zune per se, it didn’t offer users anything different from Apple’s iPod. Moreover, Apple already had a five-year head start. 

The Zune was followed by the release of Windows Vista, which most experts deemed an utter failure because it was not an improvement of its predecessor, Windows XP. So the company had inadvertently set itself up for failure by backtracking on everything that made the XP OS so popular.

The cracks in Microsoft’s early culture of dominating by sheer force of numbers, as opposed to creating genuinely superior products, were now showing.

Some relief came in the form of Windows 7, which Microsoft released in 2009. Although it was a considerable improvement from Vista. Windows 7 directly addressed several of the unpopular Vista features such as; hardware compatibility issues and user account control issues. It was not a home run swing for Microsoft.

The tech giant completely mishandled the product launch. One major issue what that Microsoft released six different versions of Windows 7.

The sheer number of packages confused consumers. They received little guidance on what features came with each version or which version was right for them. This further demonstrated how Microsoft was struggling to understand its target market for this product. How could that be, you ask?

Well, Microsoft knew its early buyers, the manager of companies, not the user. The Windows 7 packages were meant for the user. So effectively, Microsoft packaged a consumer product for the business market.

The launch of Bing & Windows Phone

Once again, Microsoft was late to the party when it launched the Bing search engine in 2009. The goal for Microsoft was to start chipping away at Google’s market share and the massive advertising revenues. 

Bing was a poor imitation of the mighty Google, who had a five-year lead, controlled more than 64% of the U.S. search market, and earned approximately $22B in ad revenues from Google AdWords.

Finally, one of the biggest failures for Microsoft came in the form of the Windows Phone. Surprisingly the devices that ran Microsoft’s mobile OS weren’t the problem. In fact, many Windows Phone devices ran a lot smoother compared to Android devices.

The problem was Google. By the time the Windows Phone launched, Google had developed the very popular Android platform that dominated the mobile market. Google refused to develop apps for the Windows Phone, meaning apps such as YouTube were not available on Windows Phone devices. In general, the Windows Phone was very unpopular with consumers.

Despite these challenges, Microsoft ended the decade on a high note. It had secured at least 92% of the world’s operating system market, but it was struggling to get a foothold. 

Microsoft’s Business Model Canvas: The Dominant Days

  • Personal Computing (Microsoft OS)
  • Productivity (Microsoft Office)
  • Business PC users
  • Personal PC users
  • Mobile Phone users
  • Sales and support
  • PCs preinstalled with Windows
  • Software licensing fees
  • Advertising on Bing
  • Product Expansion
  • Releasing new, unstable versions of windows
  • Technological Infrastructure
  • Distribution

business model for microsoft

2011-Present: Rising from the Ashes

By 2011, Microsoft was spiraling out of control. The company was struggling to adapt its business to the changing nature of software distribution. Additionally, the numerous product failures confused consumers and cast doubt on Steve Ballmer’s leadership.

Microsoft was facing bitter competition from several Silicon Valley tech companies such as Apple and Google to make matters worse. Google, in particular, had gained significant traction by creating a suite of office tools available to users for free. This was a direct jab at Microsoft’s core business, selling boxed software.

Microsoft debuts Office 365

In an attempt to invigorate its ailing product division, Microsoft debuted Office 365 in 2011. This moved more of Microsoft’s services to the cloud. Soon after launching Office 365, Microsoft announced it was acquiring VoIP telecom service Skype for $8.5B. This was the company’s largest acquisition at that time.

The acquisition raised eyebrows, mainly because most people didn’t see why and how Microsoft could fit Skype within its business model. The company already had Live Messenger and Lync 2010, which had three times as many users as Skype. Additionally, on its own, Skype was struggling to reach profitability.

It made no business sense, especially because Microsoft was paying more than $1,000 to acquire each of Skype’s paying subscribers. This figure was way more than each individual customer represented in terms of profit.

So why did Microsoft make such an ill-advised purchase? The simple truth is that Microsoft bought Skype so that Google or Facebook wouldn’t. There had been a lot of speculation and rumors stating that Google, Facebook, and Skype were entering into an agreement. Microsoft could not afford to let such a partnership happen. 

2012: Microsoft Surface & Windows 8

Once assured that it was slightly out of danger, Microsoft focused on their next big project, which was Surface. While the company may have shifted its focus to cloud-based services and online software, it hadn’t given up on securing another major hardware product win.

The Surface range of devices was unveiled at an event at Los Angeles’ Milk Studios. This was a unique product radically different from Microsoft’s historical modus operandi. And surprisingly,  the company had designed the Surface in-house specifically for Windows software. Thankfully, the Surface was immediately and wildly popular.

It came in two versions; a consumer-focused model optimized for Windows RT and a heavier model aimed at business users. Riding high on the success of the Surface launch, Microsoft could have leveraged the resurgence in its popularity to reinvent itself and finally shake its reputation as an out-of-touch company with few ideas.

Unfortunately, it released Windows 8 instead, which really showed that Microsoft hadn’t yet learned its lesson. Again while Windows 8 had significant improvements, the presentation and user interface confused many users and put off a lot more. 

In one awful review, one tech journalist described Windows 8 as “a Frankenstein’s monster of cobbled together parts that are clumsy and impractical.”

Ballmer’s reign at Microsoft ended in 2014 when Satya Nadella took over, arguably saving Microsoft from a disastrous path.

2014: Nadella Restructures Microsoft

Microsoft wasn’t just suffering financially; morale among the staff had also hit rock bottom because of the constant product launch failures. Everyone was burnt out.

His first primary focus was to shift the perspective that everyone in the tech world had about Microsoft. So Nadella announced that Microsoft was developing an iOS-native version of Office for Apple’s iPad.

Microsoft was now abandoning its isolationist stance, as it was clear to Nadella that some cooperation and collaboration would benefit the company. He was focused on bringing Microsoft into the digital era.

2015: Windows 10 fails to make an impact

In July 2015, Microsoft launched Windows 10, and true to form, the product failed to hit the mark. While it looked great on the surface and featured Microsoft’s savvy Cortana virtual assistant as well as the company’s Edge browser, the same problems still plagued the product.

For one thing, Microsoft was forcing users to upgrade even if they were happy with their existing Windows OS. Additionally, many customers were not too pleased with Windows 10’s built-in advertising. The ads were everywhere, on the recommended “suggested” apps from Windows 10’s home screen and the Start Menu.

The OS also frequently prompted users to upgrade to paid subscriptions of Office and other software tools. Simply put, Windows 10 was now an advertising platform that worked as an OS.

Again Microsoft was failing to carve an identity for itself in this new era. And between 2015 and 2018, the company flew under the tech industry’s collective radar. There were no major product launches during this time. Although the company was heavily investing in AI and Machine Learning, they had joined the game too late.

Nevertheless, Nadella’s influence on Microsoft’s corporate culture and business model could be seen. The company began building partnerships with Apple, IBM, and Google, to name a few. Integrating Microsoft’s products with many of its former enemies. Time will tell whether this will be enough.

Microsoft started off well and lost the plot along the way. Remarkably few companies would have survived the missteps and, at times, laziness that plagued Microsoft. In a world where competitors are emerging, innovating, and developing faster than you, complacency is unforgivable. This is a lesson that every business owner should remember.

However, for all its faults, Microsoft’s modern computing market would not be where it is today. Hopefully, under Nadella, we will see the company becoming more competitive, relevant, and profitable in the future.

  • Tags: apple , bill gates , business model canvas , ibm , microsoft , steve jobs , usa , windows

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Microsoft vs. Apple: Business Models Compared

Microsoft is a diversified company, still primarily making money with its productivity Windows Office package, and over the years, it has bought several other businesses (like LinkedIn, Bing, and Xbox).


Even though the company has been diversifying via an acquisition strategy by acquiring incredible assets like LinkedIn and GitHub.

In addition, in 2019 and then in 2022-23, Microsoft led a business partnership with OpenAI to integrate its technology within its core products, thus giving a second chance to its search engine Bing.

And by integrating AI into its browser, Edge, and its core products.


Apple primarily makes money by selling iPhones and other tech devices. Apple is less diversified, and it’s primarily a product company, more skewed toward software in the last few years.


Apple, managed to build the most valuable mobile business platform.


Both companies are tech giants with a dominant position in their own markets (Microsoft = Productivity, Apple = Smartphones).

Table of Contents

Key Highlights:

  • Diversified Business Model: Microsoft’s business spans a range of sectors, including productivity software (Office), cloud services (Azure), gaming (Xbox), professional networking (LinkedIn), and more.
  • Revenue Breakdown: In 2021, Microsoft generated over $198 billion in revenues. Notable revenue sources include server products/cloud services ($67 billion), Office products/cloud services ($44.8 billion), and Windows ($24.7 billion).
  • Acquisitions: Microsoft has strategically acquired companies like LinkedIn and GitHub to diversify its portfolio and expand its offerings.
  • AI Integration: Microsoft has integrated AI technology into its products, such as Edge browser and core software, improving user experiences and functionality.
  • OpenAI Partnership: Microsoft and OpenAI entered a commercial partnership in 2019, with Microsoft investing $1 billion. The partnership aims to leverage AI advancements in various products and services.
  • Azure AI Supercomputer: Through the partnership, Microsoft is developing the Azure AI Supercomputer, enhancing its Azure Enterprise Platform and integrating OpenAI’s models into products like GitHub, Office, and Bing.
  • Product and Service Model: Apple’s business is divided between hardware products (iPhone, Mac, iPad, wearables) and services (App Store, Apple Music, iCloud, etc.).
  • Revenue Composition: In 2022, Apple generated over $394 billion in revenues. Notably, iPhone sales accounted for $205.5 billion, services generated $78.13 billion, and Mac, iPad, and accessories also contributed significantly.
  • iPhone Dominance: Apple’s iPhone remains a primary revenue driver, contributing to a significant portion of its earnings.
  • Valuable Mobile Platform: Apple has established itself as a leader in the mobile industry, creating an ecosystem of products and services that interconnect seamlessly.
  • Focus on Software: While Apple is known for its hardware, it has been placing increasing emphasis on software and services, enhancing user experiences and expanding its offerings.

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Denis Oakley & Co

Denis Oakley & Co


September 13, 2018 By Denis Oakley

What is the Microsoft Business Model

What is Microsoft’s business model? In this video I describe how Microsoft makes money by working through all 9 components of Microsoft’s business model canvas.

Microsoft value proposition

Microsoft makes money by selling operating systems and office software to millions of consumers. It also sells the same products to major enterprises allowing both sets of customers to use computers cheaply and effectively to do thousands of everyday tasks

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Microsoft brings new AI image functionality to Copilot, adds new model Deucalion

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In a startling move, Microsoft today announced a redesigned look for its Copilot AI search and chatbot experience on the web (formerly known as Bing Chat), new built-in AI image creation and editing functionality, and a new AI model, Deucalion , that is powering one version of Copilot.

In addition, the Redmond, Washington-headquartered software and cloud giant unveiled a new video ad that will air during this coming Sunday’s NFL Super Bowl pro football championship game between the Kansas City Chiefs and the San Francisco Giants teams.

The redesign is arguably the least interesting part of the announcements today, with Microsoft giving its Copilot landing page on the web a cleaner look with more white space and less text, yet also adding more imagery in the form of a visual carousel of “cards” that show different AI-generated images as examples of what the user can make, plus samples of the “prompts” or instructions that the user could type in to generate them.

Here are images of the old Bing Chat and the new Microsoft Copilot design, one after another, for you to compare:

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business model for microsoft

The new Copilot is available publicly for all users at “ and our Copilot app on iOS and Android app stores,” though the AI image generation features are currently available “in English in the United States, United Kingdom, Australia, India and New Zealand,” for now.

A savvy pro-AI Super Bowl ad

The Super Bowl is of course one of the most widely viewed sports events in the world and the United States each year , and the price to air ads nationally during it starts in the multi-millions of dollars even for a short spot of just 30 or so seconds .

That’s not such a big cost for Microsoft given its position lately as one of, if not the most, valuable companies in the world by market capitalization (the lead spot fluctuates pretty regularly), but it does indicate how serious the company is about bolstering the Copilot name and its associations with generative AI as a technology more generally, convincing “Main Street,” to use the colloquialism for average U.S. residents, that they should be using Copilot for their web searching instead of, say, Google.

But the ad actually goes even further than this: in fact, if you watch it (embedded above), you’ll see it quickly but effectively shows people using it to “generate storyboard images” for scenes in a movie script, as well as “code for my 3D open world game.”

The message from Microsoft here is clear: Copilot can do much more than just search. It can create content and even software for you.

Emphasizing content creation in film/TV, video gaming, entertainment — even amid resistance and deepfake scandals

The emphasis on targeting the entertainment industry is notable as well at a time when many actors, writers, performers, musicians, VFX artists and even game makers are openly resisting and calling for more protections against AI taking away their work opportunities. Microsoft’s add pretty clearly and cleanly brushes past these objections, in my view, positioning Copilot and AI more generally as a a creative tool for up-and-coming strivers.

It’s also notable that Microsoft is bringing new AI image generation and editing capabilities directly to Copilot, which its release says is powered by its Designer AI art generator, similar to how OpenAI’s DALL-E 3 image generation AI model has been baked into ChatGPT.

Designer AI is of course, also powered by DALL-E 3 thanks to Microsoft’s big investment and support for OpenAI. As Microsoft’s news release authored by executive vice president and consumer marketing chief Yusuf Mehdi states:

“ With Designer in Copilot, you can go beyond just creating images to now customize your generated images with inline editing right inside Copilot, keeping you in the flow of your chat. Whether you want to highlight an object to make it pop with enhanced color, blur the background of your image to make your subject shine, or even reimagine your image with a different effect like pixel art, Copilot has you covered, all for free.  If you’re a Copilot Pro subscriber, in addition to the above, you can also now easily resize and regenerate images between square and landscape without leaving chat. Lastly, we will soon roll out our new Designer GPT inside Copilot, which offers an immersive, dedicated canvas inside of Copilot where you can visualize your ideas. “

Microsoft is plowing ahead with its AI image generation capabilities, trying to make them even more accessible to users across mobile and desktop, even amid the scandal that erupted late last month when explicit, nonconsensual AI generated deepfakes of musician Taylor Swift (who is expected to appear at the Super Bowl in support of her NFL player boyfriend) circulated on social platforms and the web, allegedly created with Microsoft’s Designer AI generator. And that was coming after more local deepfake scandals in at least one U.S. high school .

The company seems outwardly unconcerned about any criticisms of AI being misused, as well as unbothered by the lawsuit and federal investigation it is facing from various parties over its use of AI and alliance with OpenAI.

A new AI model emerges: Deucalion

Buried amid the announcements today — actually, not even mentioned in the release itself — is the fact that Microsoft has added a new AI model under the hood of one version of Copilot: Deucalion.

According to a post on X (formerly Twitter) from Microsoft Corporate Vice President and Head of Engineering for Copilot and Bing, Jordi Ribas, the company has “shipped Deucalion, a fine-tuned model that makes Balanced mode… richer and faster.”

We have also now fully shipped Deucalion, a fine tuned model that makes Balanced mode for @Microsoft Copilot richer and faster. — Jordi Ribas (@JordiRib1) February 7, 2024

“Balanced” mode refers to the middle category of results Copilot can produce. Users can select either “Creative,” “Balanced” or “Precise” modes for their responses from Copilot (and previously, Bing Chat), which will result in the AI assistant providing either more or less of its own generated output, and ultimately, more hallucinations the more creative one goes.

However, the “Creative” mode can be more effective for those seeking not specific facts but help with, as the name indicates, creative, open-ended projects such as fictional worldbuilding, writing, and designing.

For those doing research for school or work, the “Precise” and “Balanced” modes are probably a better bet. Of course, “Balanced,” as the name indicates, seeks to split the difference and provide both equal parts creativity and precision/factual responses for users.

Now, the big question is what the Deucalion is based on. Bing Chat itself was powered by OpenAI’s GPT-4 , the model underlying ChatGPT Plus/Team/Enterprise, so it stands to reason that GPT-4 and GPT-4 Turbo/V continue to power Copilot.

However, is Deucalion based on GPT-4, or another model, say Microsoft’s Phi-2? The fact that Ribas said it was “a fine-tuned model” makes me think it is a version of GPT-4 that has been further tweaked by Microsoft engineers for their purposes. OpenAI does support fine-tuning of GPT 4, according to its documentation .

Documentation for Deucalion is pretty scarce right now from what I’ve seen, but Mikhail Parakhin, Microsoft’s CEO of Advertising and Web Services, posted on X last week that the company was testing it and that it was named after the son of Prometheus in Greek mythology.

We are continually improving Microsoft Copilot, testing a new version of the base model in a flight. Fun fact: its internal name is "Deucalion" (the son of Prometheus in Greek mythology). — Mikhail Parakhin (@MParakhin) February 2, 2024

As seen in Mikhail’s X post/tweet, it was actually a response to third-party Windows developer and tech influencer Vitor de Lucca, who noticed that the answers provided in Copilot’s Balanced mode were “better and bigger.”

Copilot Creative vs Precise vs Old Balanced vs New Deucalion Balanced — Vitor de Lucca ?️‍? (@vitor_dlucca) February 5, 2024
Another example of Copilot's Deucalion model flight, with flights :) — Vitor de Lucca ?️‍? (@vitor_dlucca) February 4, 2024

de Lucca further posted on X yesterday that the translation capabilities from the new Deucalion-powered Balanced mode were also superior to the Creative mode.

The new Bing Deucalion on Balanced is also better for translations than creative lol — Vitor de Lucca ?️‍? (@vitor_dlucca) February 6, 2024

We’ve reached out to our Microsoft spokesperson contacts for more information and tweeted at Ribas for more information about it, and will update you when we hear back.

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The Verge

Microsoft is slowly building to a future where ‘every screen is an Xbox’

T aken on their own, today’s gaming announcements from Microsoft might not seem all that earth-shattering. A handful of unspecified Xbox games are coming to rival platforms, the subscriber numbers for Game Pass have grown, Diablo IV will lead the rush of Activision Blizzard titles on Game Pass, and more hardware is on the way, including a powerful next-gen console and possibly a handheld. But they all point to a future that Microsoft hasn’t exactly been shy about: making Xbox into more than just a console.

In an internal memo to employees, Microsoft Gaming CEO Phil Spencer explained the strategy like this:

We have a different vision for the future of gaming. A future where players have a unified experience across devices. A future where players can easily discover a vast array of games with a diverse spectrum of business models. A future where more creators are empowered to realize their creative vision, reach a global audience, unite their communities, and succeed commercially. A future where every screen is an Xbox.

It’s a bold idea, particularly because right now, the word Xbox is synonymous with a console that sits under your TV. So if it’s not a physical machine, what is Xbox?

In an interview with The Verge , Spencer said that “Xbox is our gaming platform and content business.” Notably, he did not use the word “console.” Instead, Xbox is an idea, a platform that spans multiple fronts. It started as a console, and now PC and the cloud are a huge part of the Xbox strategy, as is the subscription service Game Pass. With the addition of Activision Blizzard (and its games like Candy Crush and Call of Duty Mobile ), as well as the potential for a Microsoft mobile app store , you can add mobile devices to that, too. One day we might include a handheld to that mix. And following the success of previous multiplatform games, most notably Minecraft , rival platforms like the PS5 and Nintendo Switch are increasingly becoming a part of the overall concept of Xbox.

Microsoft seems to be taking measured steps to get to this future vision. It isn’t all in on any one part of the strategy — it sells hardware along with games and subscriptions, and it’s steadily been opening up where you can play those games and subscriptions. It doesn’t need every Xbox gamer to sign up for Game Pass or buy a console, but having both options, along with all of the other ongoing initiatives like cloud and mobile, creates the crux of what the brand is now and where it’s headed.

“I like the fact that we get a mix of things happening with our business,” Spencer explained. “Our business model is not just about hardware sales, it’s not just about first-party game sales. It’s a diverse business model that leads to the business success that we’re seeing today, which I think is kind of a testament to the path that we’ve been on for the last few years.”

Take launching on other platforms as an example. Microsoft says it’s bringing four existing Xbox games to the PS5 and Switch (it’s not saying which four, but they aren’t too hard to guess), and the company is viewing them as something of a test. “I’m going to learn about our partnership with other platforms,” Spencer said. “I’m going to learn about what happens with our players.” Instead of committing to every big Xbox game also being on other platforms, and the uproar that will inevitably occur if Starfield hits the PS5, the company is testing the waters with a few smaller single-player releases and live-service games that could use a boost in players

If this turns out to be a dead end for the Xbox brand, no real harm. But if titles like Pentiment or Sea of Thieves become multiplatform hits, it’s easy to see the initiative expanding with games from other Xbox studios like Bethesda. “We just want to make sure it’s good for the long-term health of Xbox,” Spencer said.

The question, of course, is whether this is a strategy that will ultimately work, and it’s clearly far too early to tell. What is clear is that something has to change. For years, Microsoft has been in a steady third place compared to its biggest rivals, and both PlayStation and Nintendo have largely stayed firm on the idea of selling consoles with big exclusive games. Sony sees an opportunity in other platforms like the PC , Nintendo is expanding into different forms of entertainment , and both are trying out subscriptions. But right now their core strategies haven’t strayed far from the traditional console business.

Despite all of its resources, Microsoft hasn’t been able to compete in that way, so it’s now trying something very different — with the potential to be a lot bigger.

This article may contain affiliate links that Microsoft and/or the publisher may receive a commission from if you buy a product or service through those links.

Microsoft is slowly building to a future where ‘every screen is an Xbox’

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Sora is ChatGPT maker OpenAI’s new text-to-video generator. Here’s what we know about the new tool

FILE - The OpenAI logo is displayed on a cell phone with an image on a computer monitor generated by ChatGPT's Dall-E text-to-image model, Friday, Dec. 8, 2023, in Boston. The maker of ChatGPT is now diving into the world of AI-generated video. Meet Sora — OpenAI’s new text-to-video generator. The tool, which the San Francisco-based company unveiled on Thursday, Feb. 16, 2024 uses generative artificial intelligence to instantly create short videos based on written commands. (AP Photo/Michael Dwyer, File)

FILE - The OpenAI logo is displayed on a cell phone with an image on a computer monitor generated by ChatGPT’s Dall-E text-to-image model, Friday, Dec. 8, 2023, in Boston. The maker of ChatGPT is now diving into the world of AI-generated video. Meet Sora — OpenAI’s new text-to-video generator. The tool, which the San Francisco-based company unveiled on Thursday, Feb. 16, 2024 uses generative artificial intelligence to instantly create short videos based on written commands. (AP Photo/Michael Dwyer, File)

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NEW YORK (AP) — The maker of ChatGPT is now diving into AI-generated video.

Meet Sora — OpenAI’s new text-to-video generator . The tool, which the San Francisco company unveiled Thursday, uses generative artificial intelligence to instantly create short videos based on written commands.

Sora isn’t the first to demonstrate this kind of technology. But industry analysts point to the high quality of the tool’s videos displayed so far, and note that its introduction marks a significant leap for both OpenAI and the future of text-to-video generation overall.

Still, as with all things in the rapidly growing AI space today, such technology also raises fears about potential ethical and societal implications. Here’s what you need to know.

A portion of a Opera page showing the incorporation of AI technology is shown in London, Tuesday, Feb. 13, 2024. The rise of generative AI chatbots is giving people new and different ways to look up information. (AP Photo/Alastair Grant)


Sora is a text-to-video generator — creating videos up to 60 seconds long based on written prompts using generative AI. The model can also generate video from an existing still image.

Generative AI is a branch of AI that can create something new. Examples include chatbots, like OpenAI’s ChatGPT, and image-generators such as DALL-E and Midjourney. Getting an AI system to generate videos is newer and more challenging but relies on some of the same technology.

Sora isn’t available for public use yet (OpenAI says it’s engaging with policymakers and artists before officially releasing the tool) and there’s a lot we still don’t know. But since Thursday’s announcement, the company has shared a handful of examples of Sora-generated videos to show off what it can do.

OpenAI CEO Sam Altman also took to X, the platform formerly known as Twitter, to ask social media users to send in prompt ideas. He later shared realistically detailed videos that responded to prompts like “two golden retrievers podcasting on top of a mountain " and “a bicycle race on ocean with different animals as athletes riding the bicycles with drone camera view.”

While Sora-generated videos can depict complex, incredibly detailed scenes, OpenAI notes that there are still some weaknesses — including some spatial and cause-and-effect elements. For example, OpenAI adds on its website, “a person might take a bite out of a cookie, but afterward, the cookie may not have a bite mark.”


OpenAI’s Sora isn’t the first of its kind. Google, Meta and the startup Runway ML are among companies that have demonstrated similar technology.

Still, industry analysts stress the apparent quality and impressive length of Sora videos shared so far. Fred Havemeyer, head of U.S. AI and software research at Macquarie, said that Sora’s launch marks a big step forward for the industry.

“Not only can you do longer videos, I understand up to 60 seconds, but also the videos being created look more normal and seem to actually respect physics and the real world more,” Havemeyer said. “You’re not getting as many ‘uncanny valley’ videos or fragments on the video feeds that look ... unnatural.”

While there has been “tremendous progress” in AI-generated video over the last year — including Stable Video Diffusion’s introduction last November — Forrester senior analyst Rowan Curran said such videos have required more “stitching together” for character and scene consistency.

The consistency and length of Sora’s videos, however, represents “new opportunities for creatives to incorporate elements of AI-generated video into more traditional content, and now even to generate full-blown narrative videos from one or a few prompts,” Curran told The Associated Press via email Friday.


Although Sora’s abilities have astounded observers since Thursday’s launch, anxiety over ethical and societal implications of AI-generated video uses also remains.

Havemeyer points to the substantial risks in 2024’s potentially fraught election cycle, for example. Having a “potentially magical” way to generate videos that may look and sound realistic presents a number of issues within politics and beyond, he added — pointing to fraud, propaganda and misinformation concerns.

“The negative externalities of generative AI will be a critical topic for debate in 2024,” Havemeyer said. “It’s a substantial issue that every business and every person will need to face this year.”

Tech companies are still calling the shots when it comes to governing AI and its risks as governments around the world work to catch up. In December, the European Union reached a deal on the world’s first comprehensive AI rules , but the act won’t take effect until two years after final approval.

On Thursday, OpenAI said it was taking important safety steps before making Sora widely available.

“We are working with red teamers — domain experts in areas like misinformation, hateful content, and bias — who will be adversarially testing the model,” the company wrote. “We’re also building tools to help detect misleading content such as a detection classifier that can tell when a video was generated by Sora.”

OpenAI’s Vice President of Global Affairs Anna Makanju reiterated this when speaking Friday at the Munich Security Conference , where OpenAI and 19 other technology companies pledged to voluntarily work together to combat AI-generated election deepfakes. She noted the company was releasing Sora “in a manner that is quite cautious.”

At the same time, OpenAI has revealed limited information about how Sora was built. OpenAI’s technical report did not disclose what imagery and video sources were used to train Sora — and the company did not immediately respond to a request for further comment Friday.

The Sora release also arrives amid the backdrop of lawsuits against OpenAI and its business partner Microsoft by some authors and The New York Times over its use of copyrighted works of writing to train ChatGPT. OpenAI pays an undisclosed fee to the AP to license its text news archive.

O’Brien reported from Providence, Rhode Island.

business model for microsoft

Mark Zuckerberg is risking a Steve Ballmer moment with his Apple Vision Pro takedown

  • Mark Zuckerberg trashed Apple's Vision Pro this week and called out Apple's "fanboys."
  • But Zuckerberg isn't the first to vocally dismiss an Apple flagship product.
  • Steve Ballmer infamously laughed off the iPhone at first.

Insider Today

Mark Zuckerberg posted a takedown this week of Apple’s just-launched Vision Pro, criticizing its cost and specs, and calling out Apple's "fanboys."

It was a surprising swipe from the Meta boss at one of his biggest virtual-reality rivals. But if history's any indication, underestimating Apple is a risky play.

After the iPhone launched in 2007, the outspoken Microsoft founder Steve Ballmer infamously laughed off the product.

"Five hundred dollars? Fully subsidized? With a plan?” Ballmer said at the time . “I said, that is the most expensive phone in the world, and it doesn't appeal to business customers because it doesn't have a keyboard — which makes it not a very good email machine. Now, it may sell very well or not."

It sold — very well.

Now Zuckerberg has hit out at Apple’s $3,500 Vision Pro, deriding Apple “fanboys” and saying they're hyping a product with inferior specs to Meta’s $500 competitor, the Quest headset.  

Zuckerberg said on top of being cheaper, the Quest had a brighter screen and was more comfortable than Apple's divisive device — though he did concede the Vision Pro had “really nice” eye tracking and resolution.

"I know that some fanboys get upset whenever anyone dares to question if Apple's going to be the leader in a new category," Zuckerberg said in an Instagram review of the Vision Pro posted Tuesday.

"But the reality is that every generation of computing has an open and a closed model," he said. "And yeah, in mobile, Apple's closed model won, but it's not always that way."

He added: "I really want to make sure that the open model wins out. Again, the future is not yet written."

business model for microsoft

Watch: Here’s the historic moment when Steve Jobs unveiled the first iPhone ten years ago

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