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Microsoft Profit and Loss by Business Area
Posted by
michael
on Sun Nov 17, 2002 08:26 PM
from the learn-economics-in-an-hour dept.
from the learn-economics-in-an-hour dept.
An anonymous submitter writes "The Register is reporting in this article striking new evidence of what in my opinion can only be described as abuse of their monopoly position. A recent SEC filing shows that they lose money in every business area except Windows (86% profit) and Office (79% profit)." Another notes that the Financial Times has a story on the same subject - Dr. No writes "According to the Financial Times, Microsoft's Windows division has a profit margin of 85%. This is the first time this figure has been made public." The full version of Windows XP costs about $300.00. Microsoft could sell it for $45 and still make a profit. The difference between the $45 price and the $300 price is what economists call "monopoly rents".
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Monopoly! (Score:5, Insightful)
Re:Monopoly! (Score:4, Insightful)
High profit margins don't make you a monopoly. Let's put aside for a moment the fact that a significant portion of that $300 price per unit (the store purchase price) is going to various middlemen. Windows costs $80 as often as not. [pricewatch.com] Not intended as an advertisement, it is just the first quote I grabbed. Also, I'm sure that MS could charge less than $45 and still make a profit - since they'd sell more copies. We'll put all of that aside.
Are their prices out of line for software, generally? Higher than the cost of Linux doesn't count. Is their profit margin out of line for successful software makers in other areas? How much could Blizzard sell Diablo II for and still make a profit? What about other business software bendors - GraphPad software, say? Has anyone examined them to see if they're making too much money on their $400/desktop prism software?
MS has priced their product (successfully, I'm sure) to maximise their profit - which is NOT the cheapest price they could charge, any more than the same is true for Coca-Cola. This is a feature of our modern "capitalist" society; competition only goes so far in the face of advertising and consumer apathy. It has nothing to do with being a monopoly.
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Re:Monopoly! (Score:5, Insightful)
People feel they don't have a choice with windows and so will pay a lot for it. If say an equaly compatible operating system with as much consumer awareness and (percieved) ease of use as windows came along and sold for 40 bucks, microsoft would have to slash it's prices for people to continue buying their product. Same with Office (yes I am aware of StarOffice ect... see consumer awareness)
Just look at the XBox/PS2 thing.... Microsoft can't charge what it would like to charge for XBox; it has to keep it's prices in line with playstation. This forces ms to sell their boxes at a loss!
The bottom line is, if Microsoft had serious competition who was selling it's product for less than MS, microsoft would have to cut prices to remain competitive. Since it does not have serious competition (yet) they can charge whatever they like!
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Re:Monopoly! (Score:5, Insightful)
Remember that a whispering campaign by Microsoft alowed them to kill the first competing GUI OS for the PC (merit of competitor's product beside the point) while getting the market to wait for Windows 1.0. Hey, MS didn't even have a product to compete with.
I refuse to buy the concept that some utopian Free Market is better than a regulated one. It all falls apart when you accept that in today's day and age a truly informed consumer that is swayed by hard fact and unmoved by corporate propaganda doesn't exist. Even the Christian Right could not effectively boycott Disney and its byzantine array of subsidaries(sp.)And the only good monopoly I've seen so far has been the NFL.
And btw, MS didn't have a patent in its pocket to become a monopoly. I may hate software patents and think they are an abomination but they aren't the one true reason of why monopolies are bad.
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Re:Monopoly! (Score:5, Insightful)
Again, having a monopoly is not illegal. Abuse of a monopoly, either through anti-competitive behavior or through price gouging, is illegal. Why? Because it makes for inefficient markets and lowers the excess utility for everyone (except the monopolist of course). And it looks like Microsoft has been screwing the market in more ways than one.
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Re:Monopoly! (Score:5, Interesting)
The research that Microsoft does is not the issue. The jobs and software that Microsoft creates is not the issue. At issue is the fact that Microsoft is abusing its monopoly position to charge excessively in markets which it holds dominance (namely operating systems for the main OEM manufacturers of PCs and office suites). At issue is the fact that Microsoft is using the profits it gains from this abuse to extend its monopoly to other markets. At issue is the fact that Microsoft is effectively DUMPING their products in markets in order to gain market share. (This of course does not touch on their other abuses: API abuses, forced upgrades, fake deals, stealing trade secrets, coersion, forced bundling etc etc etc).
EnkiduEOT
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Re:Monopoly! (Score:4, Interesting)
Hold on for just a second. A can of coke costs about a nickle to make, can, ship and refrigerate and I just payed 0.75$ for it out of a vending machine.
High profit margins don't make you a monopoly.
Hang on, now to make this analogy more correct, you'd have to make sure that you almost never saw a vending machine for anything but Coke. Certain companies would make cups that could only contain Coke, and would be threatened if their cups were able to hold anything else. Everytime you wanted to take a sip, it would go flat, and you'd have to open a new can. Everytime that you wanted to buy a new can, you'd have to also buy a new cup.
get real, when people go to a computer store, and the salesperson asks them "What kind of computer would you like to buy?" they're looking for an answer like: {Dell|Compaq|Gateway|IBM}, -- Not linux, Mac OSX, FreeBSD, OS/2, etc.
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Re:Monopoly! (Score:5, Informative)
According to the field of Microeconomics no firm will be able to maintain high profit margins in the long term unless they are a monopoly (or similar things like oligopoly w/ collusion.) In a real competitive market with low costs of entry, other firms will see Microsoft with such high profits and have incentive to enter the market, undercutting Microsoft. As the result of new firms entering, prices go down to a point of "normal or zero economic profit." This is how the competitive market works.
Microsoft is able to maintain such high profit margins because of their monopoly market position. Little other market factors would allow sustained high profit in the long term.
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Wouldn't want to abuse that monopoly position (Score:5, Insightful)
Re:Wouldn't want to abuse that monopoly position (Score:5, Informative)
There is something wrong with abusing that monopoly to shut out competition (denying people choice) or leveraging that monopoly to compete in other markets (eg, using the DirectX and Win32 API to compete in the games console market).
It also suggests that Microsoft could get hammered under various nations' anti-dumping laws, since it would appear they're selling goods at well under the cost of manufacture.
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Re:Wouldn't want to abuse that monopoly position (Score:5, Interesting)
This is the kind of thing that can be considered an abuse of monopoly power.
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Office suite wars (Score:5, Interesting)
File formats! (Score:4, Informative)
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and if id ever got to the point (Score:5, Insightful)
Re:and if id ever got to the point (Score:5, Insightful)
I've paid zero for Windows (came with computers) but have paid over 500$ for various Linux distributions in the last years.
Was it worth it?
Sure it was, I can be more profitable using a real GUI than using Windows' single-desktop excuse for a GUI. (Windows XP's 4 measly desktops are too little, too late, sorry. I have barely enough space on KDE's 16 desktops. KDE1 was better but uglier than Windows. KDE3 is better and prettier.)
I now don't have to manage different versions of .docs
I no longer have to download, manage and install various add-on software because from office-suite to ICQ-client, everything is included in a decent distro.
I don't have to worry about worms, viruses and don't have to waste that much time on applying patches. (Sure I have to do it, but I waste much less time than I would using Windows.) I also don't have to care about virus scanners.
I can quickly solve any problem that arises. For example I have a script to prefix files with a given string. (simple shellscript) With Windows, it's of course possible, but it's much harder because I would have to learn VBscript which is different to normal commands.
Money is not the reason why I use Linux. Time is.
With Linux I am a much happier computer user than I was with Windows. I regained the ability to let the computer do exactly what I want, not just what some programmers thought of.
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Profits? (Score:5, Interesting)
Of course we are becoming more pessimistic. When any one company can afford to loose billions of dollars running other companies out of business while creating inferior products, of course we are going to have less innovation.
what about 10 years ago? same story...not news (Score:5, Interesting)
Go back 15 years. Microsoft's main revenue drivers were DOS and ummm Word for DOS. Languages contributed more then too (although I'd argue that MS has much more dominant share of DOS/Windows development tools today than they did 15 years ago)
We're not talking monopoly rents. We're talking about how some parts of your business become cash cows and support other parts of your business that they believe are worth investing in and will one day become profitable.
Bashing party! (Score:5, Insightful)
1) The server applications are also strongly in black.
2) These numbers do not reflect the cost of MS Research. MSR is costing Microsoft a hefty sum every year, and they actually do provide many interesting things, especially for Windows internals.
3) All the segments that are in red are relatively new (except MSN). In the tech industry it is very common for new products to produce a loss for the first few years. Why should be any different for MS?
But hey, don't let a few insignificant facts distract you from waging a holy war
Re:Bashing party! (Score:5, Insightful)
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Re:Bashing party! (Score:5, Insightful)
This only means that you don't pay income tax on that particular amount. It most certainly doesn't mean that R&D is free, it is just discounted by some small percentage. If your claims were true then everybody would spend all the tax money on R&D, and not pay taxes at all.
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So in theory... (Score:5, Funny)
What about warez items? (Score:4, Interesting)
The implicit Microsoft / Pirate partnership (Score:5, Interesting)
Actually, Microsoft should be paying the Pirates!
With extra copies of the software out there in use, the value of the software (which is proportional to its user base) is increased. Therefore, Priates are actually helping the monopoly along. For early adoption software, I'm sure Microsoft is very happy to have Pirates spreading copies to friends or anyone else in the market. More copies is less sales for competitors and greater chance that their file format will become the standard.
However, once a product hits 60% or some other magic number of market dominance, the software is ubiquitious and the Pirate isn't helping to "spread the word". At this point, the Pirate is a net loss for Microsoft, and they are actively hunted down. Further, all of those "non-prirate, good customers" who have, unfortunately, illegally installed copies; well, Microsoft will be very nice to them with their payment plans.
Moral: If you want to hurt Microsoft, don't use or help spread the use of their products.
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High margins != monopoly (Score:4, Interesting)
What if people just EXPECT windows to cost more?
I know, it's faulty logic on MS's part; I recently bought licenses to all my illegal MS software because the university was selling them cheap. Before, I couldn't afford office and windows XP and vis-studio.net, so I stole them. Then I paid about 50 bucks and got licenses.
If they would just acknowledge that lower prices = less piracy and greater market penetration (esp. in poorer countries), then we'd all live in a happier world, wouldn't we?
They try to hide true stats from the employees too (Score:5, Interesting)
It was always embarrassing to here people talk about how great their product was doing according the the VPs. Anyone who'd been there long enough knows the truth, but dont rub it in peoples faces. Bad for moral.
Microsoft Profit (Score:5, Funny)
MS should be worried (Score:5, Insightful)
Creative accounting (Score:5, Informative)
Of course, the SEC filing is not a lie, but Microsoft could choose any gross income they wanted for any given division, and it would be just as accurate, because it doesn't actually reflect any measurable difference in the world outside.
An extremely atypical profit margin (Score:5, Insightful)
The profit margins at Mcdonald's, jewelry retailers, and vending machine companies are very low. You have to take into account all the costs in calculating profit. Mcdonald's only pays $0.03 for the coke they are selling you, but they paid over $1 million for the building in which they are selling it to you, and over $200k/yr for employees in that building, plus costs for managers and benefits, to say nothing of corporate expenses, advertisements, and so on. Retail jewelry stores fail more often than any other kind of store. Sure, they charge a 100% markup, but they get like 2 paying customers per day, for which they must pay rent on a store and employees' salaries, etc.
An 89% profit margin is extremely unusual. IIRC, the average profit margin in American business is around 4%. The only other large companies that take anywhere near that profit are drug companies, right after marketing a "blockbuster drug" where there few competitive alternatives.
The Slashdotter's Paradox (Score:5, Funny)
Linux is a viable alternative to Windows.
Re:I wonder (Score:5, Informative)
Post-Enron SEC filings.
B) If we can trust this data?
Gates had to personally vouch for this. The board faces personal (not corporate) liability if it's false. I don't think Billg wants to go to jail.
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Re:I wonder (Score:5, Informative)
From the U.S. Securities and Exchange Commission:
http://www.sec.gov/Archives/edgar/data/789019/000
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Re:Been There, Done That (Score:5, Informative)
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Re:uhhh... (Score:4, Informative)
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Re:85%? (Score:5, Informative)
It sell for $300, and the cost to produce it is $45.
That means the profit is $255 and the gross margin is $255/$300 * 100 = 85%.
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Re:You all could stand to learn some economics (Score:5, Insightful)
I've found that most Americans remain quite apathetic to anything and everything, in general-- until you make it blindingly obvious that something will hit them in the wallet.
Saying "Windows is made by a monopolist" doesn't get them riled up.
Saying "Windows will now cost $1,000 a version" does.
Why? Simple. Since they feel that Windows is great, and therefore "worth" $300-- but $1000 gets it to the point where it's seriously impacting their finances. And that is where most Americans put their collective foot down.
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Re:You all could stand to learn some economics (Score:5, Insightful)
Microsoft charges a price they believe the market will bear. They don't charge $1000 a copy because people wouldn't stand for that. That isn't to say the price could creep up to close $1000 in a few years (provided they will still be in the OS business). Actually, this issue is already covered in Judge Jackson's finding of fact in 1999. See this [albion.com].
Notice in particular the first sentence (emphasis mine):
And this is all from 1999! How much have they (not) changed in three years?
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Re:How can the OSS socialists argue against that? (Score:5, Insightful)
First of all, MS isn't "acting like a capitalist"-- you're right on that accusation-- but they are certainly not acting like a welfare agency. Depending upon which aspects of MS's business plan you dislike the most, they are acting like "a software racket" (think of the Mafia's control of certain industries-- like that, only without all the guns and cement shoes and stuff
The free market. It's not free if one company runs the show (almost) by their lonesome.
Competition. (See above)
Competing on quality and price, not marketing.
At least, that's how the "classical capitalists" would have it-- people like Adam Smith and whatnot.
In any case, MS's behavior in the past decade or so has been sort of a twisted mockery of what capitalism is "supposed to be". Look at what ths Soviets did to socialism-- twisted it into a monstrous nightmare. MS is doing roughly the same thing to capitalism-- wrecking it.
They are most certainly not anything to do with welfare...
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Re:Huh? (Score:4, Insightful)
1) One small good deed does not cancel out many large bad deeds.
2) IE is actually not a buggy piece of anything-- I personally think it's quite nice. I merely dislike it because of the morals of the people making/pushing it.
3) Putting words in my mouth does not mean I agree with them. There will always be situations where companies will release some things at a loss or for free-- it's the concept of the "loss leader". Look at how many video game companies routinely lose GOBS of money underselling their consoles. They make their money on the cartridges/CDs. That's a very common and acceptable course of action.
Do you really think your cell phone company (assuming you have a cell phone) makes money off of the sale of cell phones?
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Re:Huh? (Score:5, Insightful)
Boy. You don't even kind of get it, do you?
Giving away software isn't what makes MicroSoft a monopoly. Using their leverage as THE MAIN supplier of household Operating Systems to distribute this software, to the exclusion of others, with a toehold in the OS that other browsers will not have and then, ultimately, claiming that the browser is INEXTRICABLY intertwined with the OS -- all of these things are what make MS a monopoly.
Repeat after me: It's not giving away software, it's unfairly using an advantage and obstructing others that makes MicroSoft a monopoly.
I don't think most people would care if MS kept to standards, but that's another story.
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Re:This profit subsidizes the rest... (Score:5, Insightful)
Of course, because the video game arena was profitable and easy to get into BEFORE MS entered. Well, except for Sega, they lost too much on the hardware and had to leave that part of the business. But, that must have been for some other reason. Neo-geo has done great in the US. Well, I guess they've failed before MS got into the market. There have been a LOT of companies over the years that have tried to get into this market before, and most all have died. Even veterans like Sega have had problems pre-MS.
In fact the only company in recent times that I can think of to successfully break into the video game business was Sony. Why was that? They had the money to make a great product and keep it afloat untill it really took off. MS is doing the same thing. For all the MS bashing here on /. (which I'm usually part of) you have to admit that the XBox is a great piece of hardware compared to the other consoles on the market. And being MS, they can afford to entice publishers and devote resources to helping them make the games look/run better.
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All of you are wrong (Score:5, Interesting)
Without doing research, I can pretty reasonably put this in two words -- "bull" and "shit".
I'll be willing to be that two years ago, three years ago, all those markets were reported as profitable. And it isn't because of a "tech downturn" that dropped *everything* into red ink without managers doing any cost saving. No, you'd hear about divisions being cut, layoffs, everything if there were real losses.
It's pretty obvious what's going on. MS is making money, just as usual. A while ago, a big company went belly up because of "loss hiding" -- our old friend Enron. As a result of this, lots of laws were passed making executives and auditors legally liable for hiding losses, inflating profits, and tucking them into future good years. Perhaps more importantly, the current public opinion is to crucify execs doing this, and not to let the government let them off the hook easily.
What's happened is that our buddy MS has, like most large companies over the past few years, has been tucking away a few too many losses under the rug and artificially jacked up reported profits.
Now, all of a sudden, Bill G. and Co. could be doing hard jail time (to say nothing of their auditing firm) if they can be shown to be deliberately hiding losses for another year. So they want to get rid of their losses *now*. It can't wait for another year -- they have to show all those unreported losses and inflated profit immediately. Well, they can't say that Windows is losing money -- 2k to XP migration is critical right now, Linux is a threat, and looking less than stable would be an awful idea. They can't say that Office is losing money -- for the first time in years, competitors have just sprung up, including Open Office and even WordPerfect pulled a comeback. The Office product also has to be rock solid. So where are all those losses going? Right into these non-core markets. Everything else loses money to clear up the balance sheets.
This isn't just MS, either. You're going to see a *lot* of big companies doing this, and a *lot* of negative filings, as companies have to avoid giving away past reporting falsehoods.
Now, I haven't looked at their past sheets. If this is consistent with past filings, I'm wrong. But I'd quite confidently bet that I'm not.
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Re:Microsoft's profit, our loss... (Score:4, Insightful)
The courts did not fail-- by their current definition of failure.
A more pro-Microsoft administration succeeded the previous one in the Federal government. Their idea of "failure" would be if MS did suffer.
When Bush took the white house, one of the first things I thought (after "Oh, shit!"
Which was, by most observers' assessments, just what happened...
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Re:Sour Grapes, Troll (Score:5, Insightful)
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Wrong. (Score:4, Insightful)
When you're a monopoly, yes it is.
Again, when your entire multi-billion-dollar monopoly which has widespread penetration in many markets is being supported by two out of thousands of products... that's abuse.
The key is that this isn't just any company. Sure, a normal company might choose to try their hand at a new market, supporting it with profits from another. But this is a monopoly, and they're using their monopoly to gain marketshare in other markets. All the other markets! This is the definition of such abuse.
Summary: do not compare this to "any other company". Whey we're dealing with a monopoly, the rules are different.
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Re:Wrong. (Score:4, Insightful)
And arbitrarily changing numbers... that's lying.
First, MS does not produce thousands of products. If you consider Office to be one product (although it actually consists of more than ten different apps) then by this logic the number is way less than one hundred.
Second, Windows servers (quite different from your home windows) are profitable.
SQL Server is profitable.
Exchange server is profitable.
Most of the other server apps (Biztalk, SharePoint etc.) are also profitable.
All the development tools are profitable.
MS Press is profitable.
Hardware (other than XBox) is profitable.
PC Games are profitable.
etc. etc. I don't remember all the different products.
You may dislike Microsoft, there's nothing wrong with that but lying is just plain childish and unethical.
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Common Slashdot error: (Score:5, Funny)
...just because you know how to type in bold, it doesn't mean you're right.
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Re:Wrong. (Score:5, Insightful)
What? What would the world be like if there were nested "if" statements? Wait. The world is like that. You just forgot.
There are qualifiers, checks, and balances for a reason. Otherwise there would be unchecked chaos.
This is tripe. "Lady Justice" is hardly blind to begin with. If you kill someone in self defense, is that the same as cold-blooded premeditated murder? The system sees circumstance as important. Being a monopoly is one of these circumstances.
Monopolies are an imbalance in the system. The system cannot be perfect, so it tries to correct for its imperfections. In a perfect system, there would never be a monopoly. However, an imperfect system with corrections is better than a blind system which refuses to acknowledge a problem.
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Re:Anti-Microsoft Squad Strikes Again (Score:4)
Ximian, unlike microsoft, has to deal with market pressure. Microsoft is in such a position to not succept itself to market pressure as easily.
duh.
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Re:It is called Venture Capital (Score:4, Insightful)
Microsoft's playthings like XBox and WinCE will never be profitable.
Or to put it in words you understand:
ALL divisions at Microsoft are dependent on Windows and Office. With people refusing to upgrade and/or migrating to OpenOffice and Linux, ***** ALL ****** Microsoft products are endangered. - Sooner than you might think.
Expect the MSFT-shares to drop a bit in price over the next days. Shareholders don't like being lied to - they also don't like a company that is picking up losing ventures one after another (most recently and most serious is XBox. Sold about half as many units as Microsoft expected and promised - at a higher loss than expected.)
It's no coincidence that Bill Gates sells thousands of shares each week. He knows that even after all the beating the MSFT-stock received, it's still overpriced.
Microsoft's problem is that without happy shareholders, all their tax-stock-option loopholes don't work anymore. And without them, they would make losses - RIGHT NOW.
Always remember: The most profitable product Microsoft sells is not Windows and not Office, it's MSFT-stock.
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