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.

Photo of Dean Goh

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.

Weaknesses:

  • 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.

Opportunities:

  • 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.

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, Outlook.com, 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,

business model for microsoft

A passionate writer and a business enthusiast having 6 years of industry experience in a variety of industries and functions. I just love telling stories and share my learning. Connect with me on LinkedIn. Let's chat...

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How Microsoft Became Innovative Again

  • Behnam Tabrizi

business model for microsoft

Inside the cultural turnaround that helped the tech giant think like a startup.

How did Microsoft revive its culture of innovation? For years, the company has been written off for playing defense on its position in the tech world. But, as signaled by its partnership with OpenAI and its challenge to Google’s search supremacy, it has gone back on the offense. The about face was, at its core, a cultural shift, driven by CEO Satya Nadella. He drove this by inviting an existential moment when he stepped into the job, reconsidering the company’s purpose. Then, he laid out strategic changes that would enable the company to think more like a startup, and made business decisions that committed the company to this new direction.

For years now, observers of tech have written off Microsoft as a 20th-century phenomenon, fat and happy from its Windows monopoly. The tech giant hadn’t had a breakthrough innovation in decades. It was rich enough to be a fast follower, but too big and bureaucratic to lead in any market. Jeff Bezos was known to gesture east and admonish his Amazon colleagues not to become complacent like their Seattle neighbor.

business model for microsoft

  • BT Behnam Tabrizi has been teaching “Leading Organizational Transformation” at Stanford University’s Department of Management Science and Engineering and executive programs for more than 25 years. An expert in organizational and leadership transformation, he has helped thousands of CEOs and leaders plan, mobilize, and implement innovative transformational initiatives. He has written ten books, most recently  Going on Offense : A Leader’s Playbook for Perpetual Innovation  (IdeaPress Publishing, August 2023). TabriziBehnam

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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.

Weaknesses:

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.

Opportunities:

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 Office.com 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 Microsoft Makes Money

Intelligent Cloud Generates the Most Profit

business model for microsoft

Microsoft Corp., one of the world's biggest tech companies, sells a variety of products and services to support the various efforts of people and businesses in work and life. The source of its greatest amount of revenue is its Intelligent Cloud business segment.

For the AI era, Microsoft is reexamining all of its customer solutions and every part of its tech stack to ensure that it delivers responsibly designed AI and maintains the company's mission to "empower every person and every organization on the planet to achieve more."

Microsoft's products include operating systems, server applications, business solution applications, software development tools, and collaboration applications. It also designs and offers personal computing devices such as PCs, tablets, and gaming consoles.

Its services include cloud-based computing solutions, online advertising, online platforms and content, and consulting.

The foundation for all of Microsoft's efforts are the core principles of fairness, reliability and safety, privacy and security, inclusiveness, transparency, and accountability.

Key Takeaways

  • Microsoft sells computing devices, cloud systems and services, software, and other products to consumers and businesses.
  • The company's Intelligent Cloud segment is the largest source of profit, as well as the fastest-growing.
  • Microsoft is focused on delivering AI solutions to customers in a broad swath of industries.
  • Some of its many competitors include Apple, Amazon, Meta, Alphabet, Oracle, and IBM.
  • Microsoft's current CEO is Satya Nadella.

Microsoft's Industry

Microsoft (MSFT) operates in the software industry within the information technology sector. AI continues to drive the software industry at a lightning pace. Microsoft is at the forefront of the development and distribution of AI for application by all types of companies, business industries, people, and countries.

Its three business and reporting segments, Productivity and Business Processes, Intelligent Cloud, and More Personal Computing face competition from such well-known companies as:

Productivity and Business Processes

  • Apple (AAPL)
  • Cisco Systems ( CSCO )
  • Meta ( META )
  • Alphabet ( GOOG )
  • Okta ( OKTA )
  • Slack ( WORK )
  • Zoom ( ZM )
  • Oracle ( ORCL )
  • Salesforce ( CRM )
  • SAP ( SAP )

Intelligent Cloud

  • Amazon Code Whisperer
  • IBM ( IBM )
  • Hewlett-Packard ( HPE )
  • Adobe ( ADBE )
  • CA Technologies

More Personal Computing

  • Amazon ( AMZN )

Microsoft is the largest company in the world as measured by market cap.

Microsoft's Financials

As of May 2024, Microsoft's market capitalization was $3.07 trillion.

Microsoft's 2023 annual report reported the company's financial results for the 2023 fiscal year (FY) . Additionally, on April 25, 2024, the company announced financial results for the quarter ended March 31, 2024.

For FY 2023, revenue was $211.91 billion, an increase of 7% over the previous year's $198.27 billion. For the third quarter of FY 2024, revenue was $61.9 billion, an increase of 17% over the previous year's third quarter.

For FY 2023, net income was $72.36 billion, a drop of 1% from the previous year's $72.73 billion. For the third quarter of FY 2024, net income was $21.9 billion, an increase of 20% over the previous year's third quarter.

Operating Income

For FY 2023, operating income was $88.52 billion, an increase of 6% over the previous year's $83.38 billion. For the third quarter of FY 2024, operating income was $27.6 billion, an increase of 23% over the previous year's third quarter.

Revenue From Business Segments

Microsoft divides its business into three segments for the purpose of operating and reporting. These segments are Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Underscoring the financials of the Intelligent Cloud segment, CEO Satya Nadella wrote, “Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.” In addition, for the third quarter of FY 2024, Microsoft Cloud revenue was up 23% year over year, at $35.1 billion.

This segment offers a portfolio of products designed to enhance corporate productivity, communication, and information services. One of its major products is Microsoft's Office software suite, including both the commercial and consumer divisions. The segment also includes business solutions products such as Dynamics 365, as well as the professional networking site, LinkedIn.

For FY 2023, Productivity and Business Processes generated $69.3 billion in revenue, up 9% over the previous year. Operating income was $34.1 billion, an increase of 15% over the previous year.

For the third quarter of FY 2024, revenue was $19.6 billion, an increase of 12% over the same period the previous year. It was driven by Dynamics products and cloud services which increased 19%. Operating income for the quarter was $10.1 billion, up about 17%.

The Intelligent Cloud segment is comprised of all of Microsoft's public, private, and hybrid server products as well as cloud services for business. These include Microsoft Azure, SQL Server, Windows Server, GitHub, Enterprise Services, and more.

For FY 2023, Intelligent Cloud generated $87.9 billion in revenue, up 17% over the previous year. Operating income was $37.8 billion, an increase of 14% over the previous year.

For the third quarter of FY 2024, revenue was $26.7 billion, an increase of 21% over the same period the previous year. In addition to the growth of revenue from Microsoft Cloud mentioned above, revenue from Azure and other cloud services grew 31%, which powered the overall revenue from server products and cloud services to a 24% growth. Operating income for the quarter was $12.5 billion, up about 32%.

Microsoft describes its More Personal Computing segment as consisting of products and services aimed at putting "customers at the center of the experience with our technology." The Windows operating system, Surface device, gaming products, and search and news advertising are all included in this segment.

For FY 2023, More Personal Computing generated $54.7 billion in revenue, down 9% from the previous year. Operating income was $16.4 billion, down 20%.

For the third quarter of FY 2024, revenue was $15.6 billion, an increase of 17% over the same period the previous year. Revenue from Xbox content and services grew by 62%. Search and news advertising revenue grew by 12%. Operating income for the quarter was $4.9 billion, up about 16%.

Microsoft was founded in 1975 by Bill Gates and Paul Allen. It is headquartered in Redmond, Wash.

Gates was a software developer and manager in the company. He stepped away from daily activities in 2008 and resigned from the Board of Directors in 2020. Gates continues to meet with the company's product teams to discuss a variety of relevant topics, and in particular, artificial intelligence and Microsoft's role in developing AI's capabilities for a variety of applications.

Allen was Microsoft's chief technologist until he resigned in 1983. He passed away in 2018.

In January 2000, Steve Ballmer was named Microsoft's President and Chief Executive Officer. He left the company in 2014. Satya Nadella has held the position of CEO since 2014. He has overseen an important period of change for the company, during which it has placed a major focus on cloud computing and subscription services, and AI.

• In May 2024, Microsoft announced its intended investment in Southeast Wisconsin to develop AI-powered economic activity, innovation, and job creation. The amount of $3.3 billion will go to cloud computing and AI infrastructure, an AI co-innovation lab that will focus on manufacturing, and a program to train more than 100,000 Wisconsin residents in AI.

• In April 2024, Microsoft announced an investment of $1.7 billion to build new cloud and AI infrastructure in the nation of Indonesia. It will also offer training in AI for 840,000 people. The investment is the largest Microsoft has ever made in Indonesia. Microsoft's goal is to assist the Indonesian government in achieving its Golden Indonesia 2045 Vision of developing the nation into a "global economic powerhouse."

• In March 2024, Microsoft and NVIDIA merged their efforts to deliver the capabilities of generative AI, the cloud, and accelerated computing to companies focused on healthcare and life sciences. Microsoft Azure,  NVIDIA DGX Cloud , and the  NVIDIA Clara  computing platforms and software will be used to improve patient care.

What's the Value of a Share of Microsoft Stock?

On May 10, 2024, a share of Microsoft was trading at $413.86.

What's Microsoft's Primary Focus Now?

As with other technology companies, Microsoft has dramatically increased its efforts to develop artificial intelligence for use by people and companies. One of its goals is to design a natural language for a more intuitive human-computer interface and a new reasoning engine.

Does Bill Gates Still Run Microsoft?

No, Bill Gates left behind day-to-day business activities at Microsoft in 2008. He resigned from the Board in 2020. Now, he focuses a lot of time on the Bill and Melinda Gates Foundation .

Founded in 1975 by Bill Gates and Paul Allen, Microsoft is the world's largest technology company today, measured by market cap.

It offers products and services related to, among other things, software, business applications, cloud computing, gaming, and online advertising. It invests heavily in AI.

The greatest amount of revenue for the company comes from its Intelligent Cloud business segment.

Microsoft. " Annual Report 2023: CEO's Letter ."

Microsoft. " Annual Report 2023: Business–What We Offer ."

Microsoft. " Annual Report 2023: Business–Embracing Our Future ."

companiesmarketcap. " Largest Companies by Market Cap ."

companiesmarketcap. " Market Capitalization of Microsoft (MSFT) ."

Microsoft. " Microsoft Cloud Strength Fuels Third Quarter Results ."

Microsoft. " Annual Report 2023: Summary Results of Operations ."

Microsoft. " Segment Information ."

Microsoft. " Annual Report 2023: Segment Results of Operations ."

U.S. Securities and Exchange Commission. " Form 10-Q Microsoft Corporation ," Page 29.

Forbes. " Exclusive: Bill Gates On Advising OpenAI, Microsoft And Why AI Is ‘The Hottest Topic Of 2023’ ."

Microsoft. " About Microsoft: Satya Nadella Marks Five Years as CEO ."

Microsoft. " Microsoft Announces $3.3 Billion Investment in Wisconsin To Spur Artificial Intelligence Innovation and Economic Growth ."

Microsoft. " Microsoft Announces US$1.7 Billion Investment To Advance Indonesia’s Cloud and AI Ambitions ."

Microsoft. " Microsoft Announces Collaboration With NVIDIA To Accelerate Healthcare and Life Sciences Innovation With Advanced Cloud, AI and Accelerated Computing Capabilities ."

business model for microsoft

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The business model of Microsoft.

We dive into the challenges Microsoft has overcome to grow, how leveraging new technologies has helped them stay future-proof, and where it all started. We have all used Word at some point in our lives, many of us even produced an Excel spreadsheet or two. Microsoft has evolved into an international digital powerhouse, a far cry from its humble beginnings. Now the company ventures in cloud computing, with Azure; and Artificial Intelligence, with their billion-dollar investment in OpenAI – the company behind ChatGPT- and the development of CoPilot.

The origins of Microsoft.

In 1975 Bill Gates and Paul Allen founded Microsoft. Their interest in technology and programming brought them together to shake up the tech world of the 70’s. By this time, computers were predominantly used for business purposes, operated by IT specialists. Their user interfaces, nothing like what we are used to today, functioned on Octal or HEX code. The machine that would function as the fire starter for Microsoft would emerge in the early 70’s. The MITS Altair 8800 was sold as the first commercially available personal computer (PC). Gates and Allen recognized the potential of this machine and saw an opportunity to create a version of the BASIC programming language for it, turning the pc into something average consumers would be able to use. They developed Altair BASIC, which became one of the first programming languages available for personal computers. Commercializing on the success of this language, the two founded Microsoft, in 1975. Their first major deal: Licensing BASIC for the Altair 8800. 

business model for microsoft

Rise of Windows.

Ten years later, in ‘85, Microsoft was competing with another tech company, founded in ‘76, Apple. Both companies were focusing on bringing the pc to the masses, however Microsoft focused on software alone, while Apple’s focus was on hardware, supported by their proprietary software. Steve Jobs, Apple’s then Chairman, brought this combination to life through project Lisa and the Macintosh. Both projects started development around the early ‘80s and were quick to pop up on Microsoft’s radar. As these machines provided a user-friendly Graphical User Interface (GUI), Apple was to take ground on Microsoft’s market share. To stay future proof, Microsoft started leveraging the emerging technology of GUI. And in 85, Microsoft launched Windows, a GUI for MS-DOS. 

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Expansion and evolution..

Over the years, Microsoft developed many services and products, ranging from productivity suites to development tools, and server software. Under the leadership of CEO Satya Nadella, from 2014, Microsoft made a significant push into cloud computing with its Azure platform and Office 365 suite. This shift has been largely successful, with Azure emerging as one of the leading cloud service providers globally. It was Microsoft's early investments in cloud computing and its recognition of the growing importance of cloud services in the technology industry. This provided them with new opportunities and created new revenue streams. With Azure, the company was now able to offer more than Software as a Service (SaaS) as it scaled up to Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

Navigating the shift to cloud computing.

Following the launch of Azure, Microsoft expanded its competitive landscape beyond Apple to engage with the titan of cloud computing, Amazon Web Services, challenging the established dominance of Amazon in the cloud domain. Microsoft strategically focused on its existing enterprise customers and continued to invest in its platform. By prioritizing the end-user and creating a developer-friendly environment, Microsoft managed to secure a noteworthy market share.

“Languages evolve; ideas blend together. In computer technology, we all stand on others' shoulders.”

- paul allen., ai and research group..

Following the introduction of Azure in 2010, Microsoft marked another significant milestone in 2016 with the launch of its AI and Research Group, aiming to accelerate its AI innovations and integrate AI into all its products, a clear sign of its commitment to the emerging field of artificial intelligence.  While Microsoft’s journey has been marked by remarkable innovations, it faced competition in the AI space from other tech giants like Google and Amazon, and public scrutiny over ethical concerns with AI deployments. To stay ahead, Microsoft made a one-billion-dollar investment in OpenAI positioning itself as a leader in ethical AI development and collaboration. Read more about the business model of OpenAI in our blog. This strategic move underscores Microsoft’s commitment to responsible AI and enhances its competitive edge by aligning with emerging technology and thought leadership in AI. By embracing this challenge as an opportunity for growth, Microsoft continues to evolve and adapt, ensuring its place at the forefront of the technology landscape. 

business model for microsoft

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Future-proofing business..

Their strategic partnerships, like the significant investment in OpenAI, showcase a commitment to ethical AI development, keeping them at the forefront of technological advancements. By continuously evolving and adopting forward-thinking technologies, Microsoft not only secures its position but actively shapes the future of the tech industry. The ability to recognize and exploit the potential of emerging technologies is a critical takeaway from Microsoft's strategy, offering a blueprint for future resilience and growth. As the world is changing below our feet and new technologies emerge daily, it is up to us to recognize and exploit these technologies and further grow our businesses. Seeing emerging technologies as a business opportunity, exploring their worth and understanding their role in the world and our businesses to leverage them and become future proof is one of the most valuable lessons learned from Microsoft. However, we have learned more from Microsoft.

Three learnings from Microsoft.

Recognize and seize opportunities. Identify emerging trends. Act swiftly to innovate and capitalize on them. Microsoft capitalized on the emerging market of cloud computing by launching Azure, positioning itself as a leader in providing cloud solutions. 

Adapt to market trends. Stay updated on market shifts. Adjust your strategy to meet evolving demands. Microsoft identified AI as a critical future trend and integrated AI capabilities into Azure, enabling businesses to build intelligent applications, and showcasing foresight into technological advancements. 

Invest in emerging technologies. Stay ahead of technology. Invest in and integrate emerging tech for business growth. By transitioning from primarily offering software products to providing cloud services and AI solutions, Microsoft has adapted its business model to align with market demands for more flexible and scalable technology solutions. 

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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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More From Forbes

How microsoft’s digital transformation created a trillion dollar gain.

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Microsoft CEO Satya Nadella at Microsoft's Annual Shareholders Meeting

At a time when most digital transformations are falling short , last week’s appointment of CEO Satya Nadella as chair of Microsoft’s board is a shout of confidence in Nadella’s leadership and in the digital transformation that he has led since 2014. After having split the CEO and chairman’s roles in 2014, rejoining them is an unusual governance move .

The appointment reflects confidence in Nadella’s combination of technical expertise, business savvy, inspirational capability, and dazzling financial results. The seven-fold increment in Microsoft’s market capitalization of some $1.5 trillion makes Microsoft one of the world’s few digital giants, leaving most other companies in the dust, as shown in Figure 1.

Starting Position: Grim

It’s hard to remember now that in 2014, Microsoft was on the ropes. PC sales were falling. Microsoft’s software products were in decline. Its static, old products lacked pizzazz and personified ‘boring’. Windows couldn’t compete with Google’s free operating system. Microsoft’s investment in the Nokia phone was disastrous. Microsoft’s share price was stagnant. Few saw a viable path forward.

Moreover, Microsoft’s corporate culture was notoriously combative, both inside and outside the firm. It was personified in the prior CEO, Steve Ballmer . (I had visited Microsoft in 2004 and experienced it first-hand.)

Staff were demoralized and even saw Nadella’s appointment as disappointing: only an outsider could re-energize the tired old giant.

Microsoft seemed a relic of an industrial-era company that, like so many other big firms, had failed to grasp the meaning of the emerging digital economy.

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Although each firm is unique, many CEOs could learn from Nadella’s successful six-step playbook.

1.   Kill Losing Business Models

Most firms undertaking a digital transformation soldier on with their losing, industrial-era business models, while they dabble in digital innovation on the side. The common result: the loss of energy that is sucked into the losing business models prevents the firm from ever putting its heart into digital innovation. The firm muddles along, cutting costs to make money, as the stock market punishes its lackluster performance and lack of growth prospects. In due course, the firm’s board loses patience and a newcomer CEO is hired to restart the cycle.

Nadella did the opposite. At the outset, he did the unthinkable. He gave Windows away for free and dropped the Nokia phone. In so doing, he freed up energy for promising domains.

2.   Establish A Customer-Focused Purpose

Given the popular cry for firms that have a purpose beyond making money, many CEO’s blunder into declaring some high-sounding goal (like ‘we save the environment’) unrelated to the firm’s business. The result is a PR disaster that undermines trust. Customers see immediately that it’s just a stunt. Internally, it causes mass confusion.

While the search for purpose is worthwhile, seeking it in some alternative arena is misguided. In the customer-driven digital age, Peter Drucker’s dictum —“there is only one valid purpose for a corporation: to create a customer”—is still the guiding star.

What CEOs can do, as Nadella did, is to spell out how the firm will create customers. Microsoft would not waste time chasing Apple’s iPhone or replacing Google’s search. Instead, Microsoft’s mission is help empower people wherever they are, whatever device they are using. Nadella’s simple purpose of empowering everyone on the planet inspired staff. They could see how it applied to their daily work, whether they were a coder, designer, marketer, or customer-support technician. Nadella also talked about the environment, but he did so without distracting from Microsoft’s core purpose of empowering customers.

3.   Define Areas Of Opportunity

Nadella defined the two main areas of opportunity—mobility and the cloud. While Microsoft’s competitors defined their products as mobile, Microsoft was about the mobility of human experiences , experiences made possible by Microsoft’s cloud technologies. Microsoft’s cloud could make working on Apple’s iPhone more useful. It also led to innovative hardware products like the Surface PC and gaming products that won the hearts of hip customers who wanted something cool. Microsoft would only be in the phone business if it had something that really differentiated.

4.   Address Culture Up Front

Many firms attempting digital transformation shy away from the issue of culture, thinking it too “mushy” and “touchy feely” to achieve anything meaningful. They may believe that “if we do things right, culture will adjust of its own accord.” If only it were so.

Nadella recognized that culture, as the unspoken—sometimes unconscious—set of values, habits and assumptions about ‘how things are done around here,’ is hard and tangible, not soft or mushy. Microsoft’s confrontational culture of ‘us versus them’ and ‘take no prisoners’ had deep historical roots in the firm. It was the antithesis of what was needed to succeed in the digital economy.

So Nadella confronted culture on day one and announced that from then on, the culture would be one of collaboration and finding mutually profitable solutions. Instead of ‘us vs them’, it would be ‘us with them.’

Nadella had no idea what the response would be. Cynics feared the worst. But they were wrong. Leaders who agreed with the vision were invited into Nadella’s leadership team and staff responded positively. Those at the top who disagreed were not dismissed, but they soon saw that their future lay elsewhere and left. The result? Little time lost on unnecessary culture wars.

5.   Make Empathy Central

Nadella took another risk in making empathy the centerpiece of his culture initiative. His personal philosophy is to connect new ideas with empathy for other people. “Ideas excite me. Empathy grounds and centers me.”

Making empathy the keynote concept of a major corporation is almost unprecedented. But Nadella saw that without empathy, Microsoft would never succeed in understanding customer needs—particularly needs customers themselves didn’t know they had—and delivering solutions to meet those needs. The bet paid off, as Microsoft’s staff found ways to upgrade and enhance products that had users exclaiming, “I didn’t know I could do that!”

6.   Inspire and Unleash The Hidden Agile Army

Six years before Nadella became CEO, around 2008, many lower-level teams began exploring Agile software development practices , without top support. Nadella himself had found in 2008 that “the key was agility, agility, agility. We needed to develop speed, nimbleness, and athleticism to get the consumer experience right, not just once but daily. We needed to set and repeatedly meet short-term goals, shipping code at a more modern, fast-paced cadence.” ( Hit Refresh, p.51)

By 2014, there was an army of thousands of enthusiastic Agilists who remained stifled by the warlike culture at the top. Nadella’s culture of collaboration enabled this army to come out of the shadows and perform their magic with official, top-management blessing. They became Microsoft’s mainstream, rather than fighting daily battles as renegades.

Many big firms have similar hidden armies of enthusiastic Agilists, but they remain imprisoned in their IT departments, working at odds with the top of the firm. Those firms have yet to do what Nadella did: set the Agilists free.

The net result of these six moves? A $1.5 trillion gain in market capitalization. The question is: why don’t the CEOs of other struggling big companies shown in Figure 1 do what Nadella did?

And read also:

Surprise! Microsoft Is Agile

Why Digital Transformations Are Failing

FIGURE 1: Financial landscape: 55 large firms as of June 2021

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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.

  • https://nira.com/microsoft-history/
  • https://www.investopedia.com/how-microsoft-makes-money-4798809
  • https://news.microsoft.com/facts-about-microsoft/
  • https://www.investopedia.com/articles/markets/111015/apple-vs-microsoft-vs-google-how-their-business-models-compare.asp
  • https://www.thestreet.com/technology/history-of-microsoft-15073246
  • https://www.reuters.com/article/us-microsoft-succession-timeline-idUSBREA131R720140204
  • https://hostingtribunal.com/blog/microsoft-statistics/
  • Tags: apple , bill gates , business model canvas , ibm , microsoft , steve jobs , usa , windows

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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

Corporation icon

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

Small business icon

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

Government icon

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

Gaming icon

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

Consumers icon

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

Server icon

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

Disclaimers

  • 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, kamilfranek.com is an independent site. There is no relationship, sponsorship, or endorsement between this site and the owners of those trademarks.

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The Leading Source of Insights On Business Model Strategy & Tech Business Models

microsoft-vs-apple

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).

apple-business-model

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.

openai-microsoft

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-business-model

Apple, managed to build the most valuable mobile business platform.

apple-vs-android

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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Why microsoft's business model is so successful.

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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.

Advertising:

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.

Demarketing:

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.

Integrator:

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.

Orchestrator:

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.

Sponsorship:

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:

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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Denis Oakley & Co

Denis Oakley & Co

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

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

That’s the secret of Microsoft’s business model

What is the Microsoft Business Model

About Denis Oakley

Explorer | Trail Runner | Mountain Lover

'Big' companies are civilisation. I stay in the wilderness guiding entrepreneurs and startups on their journey to becoming 'Big'.

Then I head back to the frontier

Strategy | Marketing | Operations

Ready to start?

What is the Microsoft Business Model

I help entrepreneurs transform their industries through wiser choices

Outcome : More Traction, Bigger Rounds, Better Products

Method : Problems, Customers, Business Models, Strategy

business model for microsoft

business model for microsoft

2024 Work Trend Index: Learn how AI is reshaping work.

Grow your business with Microsoft 365

Bring your business ideas to life with the tools you need to create and connect—now supercharged with AI and Microsoft Copilot for Microsoft 365.

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Bring your business ideas to life

Reach and exceed your company goals with Microsoft 365. Manage your content and tools—like productivity apps, email, appointment scheduling, video meetings, chat, and enterprise-grade security—all in one place.

Build customer relationships

Connect with new customers using the tools that help you communicate more effectively, manage appointments, and deliver greater value.

Stand out from the competition

Develop a strong marketplace presence with branded documents, meeting backgrounds, marketing videos, and a custom email for your business.

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Simplify how you run your business with a single solution that helps you foster teamwork and creativity securely from anywhere.

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Find the Microsoft 365 plan that’s right for you

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10+ additional apps for your business needs (Microsoft Bookings, Planner, Forms, and others)

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Anytime phone and web support

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Everything in Business Basic, plus:

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Microsoft 365 Business Premium

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Everything in Business Standard, plus:

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  • Dynamics 365 Finance

Enabling rapid business model innovation and growth

  • By Michele Ballinger, Senior Product Marketing Manager, Business Applications
  • Dynamics 365 Project Operations
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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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Microsoft's in-house AI model, reportedly called MAI-1, is a chance for CEO Satya Nadella to prove he doesn't need OpenAI

  • Microsoft is building its own AI model dubbed MAI-1, The Information reported. 
  • The language model will be separate from OpenAI's GPT-4 and will be overseen by Mustafa Suleyman. 
  • It's a sign Microsoft is ready to depend less on the ChatGPT maker as the AI wars heat up.

Insider Today

Microsoft is reportedly working on its own AI model separately from OpenAI — a chance for CEO Satya Nadella to prove his company doesn't need the ChatGPT maker to get ahead in the AI wars.

Microsoft is working on building an in-house large language model model it calls MAI-1, The Information reported earlier this week. It's the first stand-alone AI model the software giant is building since it poured $10 billion into OpenAI for rights to power its generative AI tools like Copilot with GPT-4, which underlies ChatGPT.

The creation of MAI-1 could help address some concerns that Microsoft has become too focused on its ongoing OpenAI partnership as the race to build the best generative AI tools heats up.

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In reference to OpenAI , CEO Nadella once said that Microsoft was "below them, above them, around them, "which one investor noted was a "baller" thing to say.

The in-house project is overseen by Mustafa Suleyman , the cofounder of Google's DeepMind, who joined Microsoft in March to lead its AI division after leaving his startup Inflection AI as CEO.

To train MAI-1, Microsoft is said to be compiling a dataset that includes text from ChatGPT and outside sources like public information on the web, one source told The Information. Some data used to train Inflection's models may also be used to help train Microsoft's new in-house one, two Microsoft employees told the outlet.

MA-1 is expected to be larger than the open-source models made by rivals like Meta and Mistral, which will require ample amounts of compute power and training data. That's on top of the smaller, less advanced models Microsoft is developing for smartphone apps, reflecting the tech titan's multi-pronged approach to developing advanced AI.

After the news of the project was announced, Kevin Scott, the CTO of Microsoft, noted that Microsoft's relationship with OpenAI remains symbiotic and a key driver in helping both companies build the best AI.

"We will continue to be on this path — building increasingly powerful supercomputer for OpenAI to train the models that will set pace for the whole field — well into the future," Scott wrote in a LinkedIn post following The Information's report. "There's no end in sight to the increasing impact that our work together will have."

Still, it's not clear what the in-house model will look like just yet, and Microsoft didn't immediately respond to a request for comment from Business Insider when asked to confirm the details.

More information about MAI-1 may be revealed during Microsoft's Build conference for developers that will take place in Seattle from May 21 to 23.

Axel Springer, Business Insider's parent company, has a global deal to allow OpenAI to train its models on its media brands' reporting.

Watch: Sam Altman moves to Microsoft after OpenAI fires him as CEO

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A.I. Start-Ups Face a Rough Financial Reality Check

The table stakes for small companies to compete with the likes of Microsoft and Google are in the billions of dollars. And even that may not be enough.

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By Cade Metz ,  Karen Weise and Tripp Mickle

Cade Metz and Tripp Mickle reported from San Francisco, and Karen Weise from Seattle.

Call it the end of the beginning of the A.I. boom.

Since mid-March, the financial pressure on several signature artificial intelligence start-ups has taken a toll. Inflection AI, which raised $1.5 billion but made almost no money, has folded its original business. Stability AI has laid off employees and parted ways with its chief executive. And Anthropic has raced to close the roughly $1.8 billion gap between its modest sales and enormous expenses.

The A.I. revolution, it is becoming clear in Silicon Valley, is going to come with a very big price tag. And the tech companies that have bet their futures on it are scrambling to figure out how to close the gap between those expenses and the profits they hope to make somewhere down the line.

This problem is particularly acute for a group of high-profile start-ups that have raised tens of billions of dollars for the development of generative A.I., the technology behind chatbots such as ChatGPT. Some of them are already figuring out that competing head-on with giants like Google, Microsoft and Meta is going to take billions of dollars — and even that may not be enough.

“You can already see the writing on the wall,” said Ali Ghodsi, chief executive of Databricks, a data warehouse and analysis company that works with A.I. start-ups. “It doesn’t matter how cool it is what you do — does it have business viability?”

While plenty of money has been burned in other tech booms, the expense of building A.I. systems has shocked tech industry veterans. Unlike the iPhone, which kicked off the last technology transition and cost a few hundred million dollars to develop because it largely relied on existing components, generative A.I. models cost billions to create and maintain. The cutting-edge chips they need are expensive and in short supply . And every query of an A.I. system costs far more than a simple Google search.

Investors have poured $330 billion into about 26,000 A.I. and machine-learning start-ups over the past three years, according to PitchBook, which tracks the industry. That’s two-thirds more than the amount they spent funding 20,350 A.I. companies from 2018 through 2020.

The challenges hitting many newer A.I. companies stand in contrast to the early business results at OpenAI, which is backed by $13 billion from Microsoft. The attention it has generated with its ChatGPT system has allowed the company to build a business charging $20 a month for its premium chatbot and offered a way for businesses to build their A.I. services with the technology that drives its chatbot, which is called a large language model. OpenAI pulled in around $1.6 billion in revenue over the last year, but it is unclear how much the company is spending, two people familiar with the company’s business said.

OpenAI did not respond to requests for comment.

But even OpenAI has had challenges broadening sales. Businesses are wary that the A.I. systems can generate inaccurate answers. The technology has also been troubled by questions about whether the data that supported the models infringed on copyrights.

(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to A.I. systems.)

Many investors point to Microsoft’s rapid sales growth as evidence of A.I.’s business potential. In its most recent quarter, Microsoft reported an estimated $1 billion in sales from A.I. services in cloud computing, up from essentially nothing a year ago, said Brad Reback, an analyst at the investment bank Stifel.

Meta, on the other hand, doesn’t expect to make money for years off its A.I. products, even as it increases its infrastructure spending by up to $10 billion this year alone. “We’re investing to stay at the leading edge of this,” Mark Zuckerberg, Meta’s chief executive, said during a call with analysts last week. “And we’re doing that at the time when we’re also scaling the product before it is making money.”

A.I. start-ups have been challenged by that gap between spending and sales. Anthropic, which has raised more than $7 billion with backing from Amazon and Google , is spending about $2 billion a year but pulling in only about $150 million to $200 million in revenue, said two people familiar with the company’s financials, who requested anonymity because the figures are private.

Like OpenAI, Anthropic has turned to partnerships with large, established tech companies. Its chief executive, Dario Amodei, has been courting customers on Wall Street, and it recently announced that it was working with Accenture , the global consulting company, to create custom chatbots and A.I. systems for companies and government organizations.

Sally Aldous, a spokeswoman for Anthropic, said that thousands of businesses were using the company’s technology and that millions of consumers were using its publicly available chatbot, Claude.

Stability AI, which does image generation, announced last month that its founding chief executive, Emad Mostaque, had resigned , just a week after the resignation of three researchers who were part of the five-person team that built the company’s original technology.

It was on track to generate about $60 million in sales this year against about $96 million in costs from its image generation system, which has been available to customers since 2022, a person familiar with its business said.

Stability AI’s financial position looks better than those of language-model makers like Anthropic because developing image generation systems is less expensive, A.I. investors said. But there’s also less demand to pay for images, so the sales prospects are more uncertain.

Emad Mostaque, wearing a blue sweater, is viewed from his right side as he sits in a brightly lit room,

Stability AI has been operating without the support of a tech giant. After raising $101 million from venture capitalists in 2022 , it needed more funds last fall but was struggling to show investors that it could sell its technology to businesses, said two former employees, who declined to speak publicly because they were not authorized to do so. It raised $50 million from Intel late last year but still faced financial pressure, they said.

As the start-up grew, its sales strategy shifted, these people said. At the same time, it was spending millions a month on computing costs. Some investors pressured Mr. Mostaque to resign, according to an investor, who declined to speak publicly about a personnel issue. This month, after his resignation, Stability AI did layoffs and restructured its business to put the company on “a more sustainable path,” according to a company memo reviewed by The New York Times.

Stability AI declined to comment. Mr. Mostaque declined to discuss his exit.

Inflection AI, a chatbot start-up founded by three A.I. veterans, had raised $1.5 billion from some of the biggest names in tech. But a year after introducing its A.I. personal assistant, it had almost no revenue, according to one investor. The Times reviewed a letter that Inflection had sent to investors saying additional fund-raising was “not the best use of our investors’ money, especially in the context of the current frothy A.I. market.”

In late March, it folded its original business and largely disappeared into Microsoft, the world’s most valuable public company.

Microsoft also helped fund Inflection AI, whose chief executive, Mustafa Suleyman, rose to prominence as one of the founders of DeepMind, a seminal artificial intelligence lab that Google acquired in 2014. Mr. Suleyman founded Inflection AI alongside Karén Simonyan, a key DeepMind researcher, and Reid Hoffman, a leading Silicon Valley venture capitalist who helped found OpenAI and is on Microsoft’s board.

Microsoft and Inflection AI declined to comment.

The company was steeped in talented A.I. researchers who had worked at places like Google and OpenAI.

But almost a year after releasing its A.I. personal assistant, Inflection AI’s revenue was, in the words of one investor, “de minimis.” Essentially zilch. It could not continue to improve its technologies and keep pace with chatbots from the likes of Google and OpenAI unless it continued to raise huge sums of money.

Now Microsoft is swallowing most of its staff, including Mr. Suleyman and Dr. Simonyan.

This is costing Microsoft more than $650 million. But unlike Inflection AI, it can afford to play the long game. It has announced plans for the staff to build an A.I. lab in London, working with the kind of systems the start-ups are hoping will break through.

Erin Griffith contributed reporting.

Cade Metz writes about artificial intelligence, driverless cars, robotics, virtual reality and other emerging areas of technology. More about Cade Metz

Karen Weise writes about technology and is based in Seattle. Her coverage focuses on Amazon and Microsoft, two of the most powerful companies in America. More about Karen Weise

Tripp Mickle reports on Apple and Silicon Valley for The Times and is based in San Francisco. His focus on Apple includes product launches, manufacturing issues and political challenges. He also writes about trends across the tech industry, including layoffs, generative A.I. and robot taxis. More about Tripp Mickle

Explore Our Coverage of Artificial Intelligence

News  and Analysis

As experts warn that A.I.-generated images, audio and video could influence the 2024 elections, OpenAI is releasing a tool designed to detect content created by DALL-E , its popular image generator.

American and Chinese diplomats plan to meet in Geneva to begin what amounts to the first, tentative arms control talks  over the use of A.I.

Wayve, a London maker of A.I. systems for autonomous vehicles, said that it had raised $1 billion , an illustration of investor optimism about A.I.’s ability to reshape industries.

The Age of A.I.

A new category of apps promises to relieve parents of drudgery, with an assist from A.I.  But a family’s grunt work is more human, and valuable, than it seems.

Despite Mark Zuckerberg’s hope for Meta’s A.I. assistant to be the smartest , it struggles with facts, numbers and web search.

Much as ChatGPT generates poetry, a new A.I. system devises blueprints for microscopic mechanisms  that can edit your DNA.

Which A.I. system writes the best computer code or generates the most realistic image? Right now, there’s no easy way to answer those questions, our technology columnist writes .

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Announcing the General Availability of GPT-4 Turbo with Vision on Azure OpenAI Service

Published date: may 10, 2024.

We are thrilled to announce the general availability of GPT-4 Turbo with Vision on the Azure OpenAI Service, which processes both text and image inputs and replaces several preview models. This multimodal model has already been used by customers in various industries to enhance efficiencies and innovate, with case studies to be featured at the upcoming Build conference. For deployment details and future enhancements, including JSON mode and function calling for image inputs, please refer to our Azure OpenAI Service resources and updates.

  • Learn more about  What's new in Azure OpenAI Service?
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business model for microsoft

US spies to use secretive AI service from Microsoft

U .S. intelligence agencies will soon be using a secretive generative artificial intelligence (AI) platform from Microsoft that will let America's spies safely use AI models in the process of analyzing sensitive data.

Microsoft's generative AI model for intelligence agencies aims to get around security issues that stem from large language models' (LLMs) connection to the internet, which typically is used as a resource for training those models. Bloomberg reported that the AI tool is the first major LLM fully separated from the internet.

William Chappell, Microsoft's CTO for strategic missions and technology, told Bloomberg the AI tool was deployed to an "air-gapped" cloud environment isolated from the internet and features a model based on GPT-4 along with supporting tools. The company announced the new product at the AI Expo for National Competitiveness this week.

"This is the first time we've ever had an isolated version — when isolated means it's not connected to the internet — and it's on a special network that's only accessible by the U.S. government," Chappell told Bloomberg.

AIR FORCE CONFIRMS FIRST SUCCESSFUL AI DOGFIGHT

The ability of generative AI to analyze massive amounts of data and recognize patterns to provide users with actionable insights has made such tools highly sought-after for intelligence agencies like the Central Intelligence Agency (CIA) and other agencies that make up the intelligence community.

READ ON THE FOX BUSINESS APP

While the CIA began using a generative AI tool last year for unclassified purposes, the need to isolate the platform from the internet to improve its security against cyberthreats and ensure sensitive national security information doesn't leak into a publicly-accessible model meant a new model would be required.

WHAT IS ARTIFICIAL INTELLIGENCE (AI)?

Chappell told Bloomberg the new AI platform from Microsoft is structured so that it can read files but not learn from them in a way that would impact its output or from the broader internet. 

"You don't want it to learn on the questions that you're asking and then somehow reveal that information," he told the outlet.

The new AI tool, which Chappell said could theoretically be accessed by about 10,000 members of the intelligence community who have access to top-secret data, went live Thursday and will enter a testing and accreditation phase before it can go into broader use by the intelligence community, according to the report.

"It is now deployed. It's live. It's answering questions. It will write code as an example of the type of thing it'll do," Chappell told Bloomberg.

Original article source: US spies to use secretive AI service from Microsoft

America's spies in intelligence agencies like the CIA will soon be able to use Microsoft's top-secret AI platform. Getty Images

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Experience new growth possibilities with Microsoft Advertising today >

Empowering small and midsize businesses for growth with generative AI

  • Kenneth Andrew,

Two people smiling looking at a cell phone. One person is holding a tablet.

AI has quickly become the next big wave of technology with the power to increase operational efficiency, improve sales and marketing, and improve customer and employee retention. For small and mid-size businesses (SMBs), these advantages are not just beneficial but also pivotal for growth. Despite the challenges of rising costs, and economic volatility, SMBs are well-positioned to navigate these uncertainties with AI as a powerful ally, paving the way for a future with greater growth.

Even prior to the introduction of generative AI innovations, Microsoft set out to understand the unique situation small businesses face by surveying over 3,000 SMBs across 10 countries. In examining the relationship between SMBs’ technology adoption, technology partners, and business results, a key finding was the connection between early adoption of technology with achieving business objectives.

Image of attitude to technology adoption on change in annual revenue.

Businesses identified as early adopters of technology are 1.9X more likely to have higher revenue growth over the past year, 1.3X more likely to have improved brand awareness and therefore grew their customer base, 1.5X more likely to have improved employee satisfaction. 1

Another key finding was the role and importance of technology partners. SMBs represent 17% of early adopters and they focus on trying to use the latest technology in their business. Unlike technology laggards, early adopters were 7X more likely to view collaboration with technology partners as essential to achieving their objectives. 1

If early adoption of technology and collaboration with technology partners is crucial, where do SMBs go from here?

At Microsoft Advertising, we’re keenly aware of the opportunity AI presents to small and midsized businesses. We've made investments to empower SMBs to exceed their business objectives. After all, we're in the business of empowering yours!

  • Reach new audiences you won’t find on other platforms – we’ve built an ecosystem to better fuel SMB growth and transformed into a global multi-channel advertising solution with a more robust Microsoft Advertising Network of audiences and placements.
  • Use generative AI to accelerate your creativity and insights – we are enabling advertisers to wield generative AI to improve productivity, performance and growth.
  • Receive support from an expert  – we’ve expanded how we support and partner with advertisers on their terms.

Reach new audiences you won’t find on other platforms

In case you missed it, Microsoft Advertising has undergone its own transformation. From a global search supplier to a multi-channel digital advertising solution to help advertisers of all sizes access their audiences as they search, work, stream and play across Microsoft properties – and beyond.

In fact, the Microsoft Advertising Network reaches over 1 billion high-spend, highly engaged consumers globally. We’ve built an advertising solution that helps you engage audiences with search, shopping, native, display, video, CTV, and retail media placements, across our owned Microsoft properties, exclusive partner sites, and the open web.

A pie chart showcasing all Microsoft Advertising Platform products and its features.

We’re also revolutionizing how people find answers and make decisions with Microsoft Copilot, our generative AI-powered chat. Earlier this year, we reached 5 billion chats 2  in Microsoft Copilot and the number of journeys including Microsoft Copilot have grown 4X faster than traditional search alone. 3  And during our recent earnings call, we announced that Bing had surpassed 140 million daily active users. For small and midsize businesses, this means being able to reach customers in an innovative new engagement channel, with ads in Microsoft Copilot. Advertisers can easily extend popular search ad formats—such as text ads, shopping campaigns, and multimedia ads into the Microsoft Copilot experience. Advertisers are seeing a 30% lift in clickthrough rate when a journey included both search and Microsoft Copilot. 3

Use generative AI to accelerate your creativity and insights

We recognize that especially small businesses, but also midsize businesses, deal with certain barriers more acutely than larger enterprises, like access to finance, lack of time, skills shortages, and competing priorities. This is why we’ve made significant investments in the Microsoft Advertising Platform to help level the playing field with AI.

  • Simpler user experience for advertisers – We’ve launched a redesigned Microsoft Advertising Platform to be more intuitive and user-friendly, especially for small businesses. In addition to our simplified design and goal-based campaign creation flow, every user has access to Copilot in the Microsoft Advertising Platform , your AI companion for digital advertising. With Copilot in the Microsoft Advertising Platform, managing your advertising campaigns is effortless. Leverage tailored recommendations for your images, headlines and descriptions and easily access always available support.
  • All-in-one, multi-channel campaigns – With our expansive Microsoft Advertising Network, we wanted to make it easier for advertisers to launch and manage campaigns across a multitude of formats, placements, and customer journeys. Performance Max campaigns bring together our best automation and AI features to create a multi-channel campaign across search, shopping, audience placements that optimizes for conversions to maximize ROI.
  • Saves valuable time and effort – Microsoft Advertising has always offered import tools to quickly get an existing campaign up-and-running. But now, we’ve integrated generative AI into the campaign creation flow with Copilot in the Microsoft Advertising Platform to boost productivity when building a new campaign such as Performance Max. When you provide a website URL, Copilot in the Microsoft Advertising Platform automatically recommends image and copy assets for your campaign, so you never have to start from scratch again. Copilot in the Microsoft Advertising Platform also has built-in tools that help you refine recommended assets. For campaign assets, you can provide a text prompt to re-theme your recommendations. For copy, you can click a button to refine the tone, find similar copy, or generate re-written options.

Image of the Microsoft Advertising Platform asset creation interface.

  • Affordably amplify your creative capabilities – For small businesses, commissioning custom images for marketing campaigns can often feel out of reach, either from a budgetary standpoint or skills gap. With Copilot in the Microsoft Advertising Platform, any business can stand out in their marketing, because generative AI empowers anyone to create beautiful, custom imagery with a text prompt. Likewise, Copilot in the Microsoft Advertising Platform gives any team access to copywriting capabilities.

Example of Copilot generating an image of a couple enjoying a walk around Edinburgh.

  • Personalization powered by AI – Communicating the right message, visual, and call-to-action at the right time to the right audience is key to optimizing performance. These campaign settings let AI do the work for you. Predictive Targeting allows advertisers to target audiences based on audience intent. We use our audience intelligence signals to match your ads with relevant audiences, which also helps you find new audiences that you may not have considered targeting, who are more likely to convert. Performance Max campaigns in Microsoft Advertising are built with these predictive tools—in addition to the asset recommendations to help you personalize the right messages to show in your ads based on audience intent.
  • Unlock new opportunities – Your AI-powered Performance Max campaigns are designed to find the highest-ROI conversion opportunities for your business, but there are some additional tools to help you get the most out of any budget. You can look at Performance Max reports to see how your top assets are performing, and in the next few weeks, Copilot in the Microsoft Advertising Platform will also be able to provide a campaign performance summary in chat.

These are some of the AI-powered features we’ve been developing to enable growth for small businesses. At their core, they simply help advertisers take advantage of the Microsoft Advertising Network with more ease, efficiency, and effectiveness.

Quote from Temesgen Zerighaber: Overall I have been impressed with the way Copilot in the Microsoft Advertising Platform has helped with building ad copy that is both refreshing and relevant.

Receive support from an expert

While adopting new technology can feel like a leap of faith, early adopters have found value in collaborating with technology partners directly to identify and solve their business challenges. At Microsoft Advertising, we’re here to help all SMBs become early adopters by providing personalized support in several modalities to meet the needs of SMBs on their own terms.

  • Always-on support – Copilot in the Microsoft Advertising Platform is a 24/7 digital advertising assistant that provides real-time support. Accessible in the search bar, help section, and a standalone button in the navigation, Copilot in Microsoft Advertising Platform is always there to provide answers instantaneously.
  • Personalized Partnership – Our global team of experts are also available to provide personalized partnership and consultations at any time. We offer friendly, free-of-cost onboarding and optimization services. You can always reach out directly to discuss how to solve a marketing, budgetary, or technical challenge. We’re here to empower you. Contact an expert or sign up .

Discover new possibilities

Running a successful SMB in today’s digitally competitive world is challenging, especially when it comes to identifying the right solutions for achieving your advertising and marketing goals. That’s why we’re excited to announce our new Microsoft Advertising website , showcasing our full suite of solutions including Copilot in the Microsoft Advertising Platform , making it easier than ever to quickly identify and implement the tools that will most effectively reach your target audience, optimize your campaigns, and connect and grow your business.

This new more user-friendly, accessible experience streamlines the discovery process to quickly get you started with taking your advertising goals to the next level. Easily access the information you need to discover our full range of solutions, delve into educational resources to enhance your product knowledge, and access your campaigns—all from one easy location.

With enhanced support, expert guidance, and complimentary consultations, we're committed to empowering SMBs with both personalized assistance and advanced AI capabilities.

How will you embrace AI?

We’re deeply committed to helping businesses of all sizes embrace AI to drive growth. Our ambition is to be more than a technology provider to small and midsize businesses, but rather a growth provider. We encourage you to start or catalyse your journey with adopting AI by contacting one of our experts to map out your plan.

Please join us for our virtual event on May 15, ‘Embracing AI: Empowering growth for businesses of all sizes’, where you can get a live demo and best practices for some of our AI-powered features, including Copilot in the Microsoft Advertising Platform and Performance Max. Secure your spot today !

[1]  Microsoft study: Small and medium-sized businesses growing fast by embracing digital technologies - The Official Microsoft Blog [2] Microsoft internal data, FY24 Q2 earnings report, January 2024. [3] Proprietary Microsoft Advertising Source Data (US), Bing Chat vs. Traditional Search - Main Line only. Data from 2/07/23 – 7/19/23​

Stay informed

Sign up for the Microsoft Advertising Insider newsletter to keep up with the latest insights, product news, tips and tricks, thought leadership, customer case studies, and resources.

Kenneth Andrew

VICE PRESIDENT, GLOBAL SMB AND GROWTH, MICROSOFT ADVERTISING

Kenneth Andrew

SR. GROWTH MARKETING MANAGER, MICROSOFT ADVERTISING

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COMMENTS

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    Since Microsoft provides systems and software for both entertainment and business, its core operations involve sale, distribution, and support for those solutions. But its business model actually encompasses a few types, in order to sustain all products and services, which include: Razor and Blade: Apps, software, and Xbox games work ...

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    Microsoft has a diversified business model, spanning from Office to gaming (with Xbox), LinkedIn, search (with Bing), and enterprise services (with GitHub). In 2021, Microsoft made over $198 billion in revenues, of which over $67 billion came from Server products and cloud services, and $44.8 billion came from Office products and cloud services. Windows generated $24.7 billion, Gaming ...

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    How Microsoft makes money. 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.

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  15. How Does Microsoft Make Money: Business Model Explained

    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.

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    Microsoft has a diversified business model, spanning from Office to gaming (with Xbox), LinkedIn, search (with Bing), and enterprise services (with GitHub). In 2023, Microsoft made almost $212 billion in revenues, of which almost $80 billion came from Server products and cloud services, and almost $49 billion came from Office products and cloud services.

  17. Compare All Microsoft 365 Plans

    Everything in Business Basic, plus: Desktop versions of Word, Excel, PowerPoint, and Outlook. Webinars with attendee registration and reporting. Collaborative workspaces to co-create using Microsoft Loop. Video editing and design tools with Microsoft Clipchamp. Copilot for Microsoft 365 available as an add-on 3.

  18. Microsoft vs. Apple: Business Models Compared

    Microsoft has a diversified business model, spanning from Office to gaming (with Xbox), LinkedIn, search (with Bing), and enterprise services (with GitHub). In 2021, Microsoft made over $198 billion in revenues, of which over $67 billion came from Server products and cloud services, and $44.8 billion came from Office products and cloud services.

  19. What is Microsoft's business model?

    Microsoft business model canvas. Click to enlarge . Scroll Up Down . 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 ...

  20. What is the Microsoft Business Model?

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  21. What is the Microsoft Business Model

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  22. Microsoft 365 for Business

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  23. Enabling business model innovation

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  27. US spies to use secretive AI service from Microsoft

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  30. Empowering small and midsize businesses for growth with generative AI

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