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Microsoft

Microsoft Profit and Loss by Business Area 970

Posted by michael
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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Microsoft Profit and Loss by Business Area

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  • Re:I wonder (Score:5, Informative)

    by sconeu (64226) on Sunday November 17, 2002 @08:31PM (#4693503) Homepage Journal
    A) Where on earth they get this data?
    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.
  • by JessLeah (625838) on Sunday November 17, 2002 @08:34PM (#4693524)
    Not quite... the first story focused on one specific set of losses associated with the XBox, and featured a link to a story on the Beeb [bbc.co.uk]. This one is about all of MS's earnings (and lack thereof, as applies to the Xbox etc.) sheet-- and centers around a story on the Register [theregister.co.uk]. Also, have you ever noticed how sites headquartered overseas seem a lot more likely to make statements, or write stories, critical of MS? The mindshare MS has in the US is simply phenomenally huge...
  • Re:uhhh... (Score:4, Informative)

    by Binarybrain (253017) on Sunday November 17, 2002 @08:34PM (#4693526)
    Difference being that Microsoft is selling software and Redhat is selling service and support.
  • Re:85%? (Score:5, Informative)

    by Jason1729 (561790) on Sunday November 17, 2002 @08:36PM (#4693536)
    This is basic Economics 101.

    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%.
  • Necessary (Score:3, Informative)

    by man_ls (248470) on Sunday November 17, 2002 @08:36PM (#4693537)
    Microsoft OS division has a profit margin of 85%.

    That's great.

    Microsoft's X-Box division has a profit margin of -300%.

    The OS division is where MS gets the cash to pour into products that will never turn a profit, or at best break even; the services they're providing (even for a charge) that are good to have but aren't really marketable, or are only marketed by MS for the sole purpose of having a presence in that market, without hope of actually taking over.

  • Re:uhhh... (Score:2, Informative)

    by deadhammer (576762) on Sunday November 17, 2002 @08:40PM (#4693569)
    Thing is, Microsoft has distribution centres worldwide, as well as dozens of manufacturing centres with manufacturing equipment that can stamp out hundreds of WinXP and OfficeXP CDs a second. Red Hat doesn't. Basic rule of manufacturing: Manufacturing/purchasing in bulk costs less per item. So the final cost per WinXP CD is far less than the final cost of the latest Red Hat distro. Thus, by all logic, Microsoft could sell WinXP for less money than Red Hat. The reason they don't is because, by looking at the article, it seems they need all that extra cash to support all those failing, yet competition-stifling ventures.
  • Re:85%? (Score:2, Informative)

    by azpenguin (589022) on Sunday November 17, 2002 @08:43PM (#4693587)
    Actually, $45 is 15 percent of $300. If the cost is $45, then that means that 85 percent of the $300 is profit. That's how they do it in business. When they say to sell something at 30 percent profit, they mean that 30 percent of the total price is profit.
  • by rodgerd (402) on Sunday November 17, 2002 @08:43PM (#4693589) Homepage
    That's the whole point, though: under US law, there's nothing wrong with having a monopoly per se. That just means you're wildly successful and everyone wants your products.

    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.
  • Re:uhhh... (Score:1, Informative)

    by Anonymous Coward on Sunday November 17, 2002 @08:48PM (#4693627)
    Are you saying Microsoft does not support it's products?

    that's not true.
  • Re:I wonder (Score:5, Informative)

    by vinsci (537958) on Sunday November 17, 2002 @08:54PM (#4693658) Journal
    A) Where on earth they get this data?

    From the U.S. Securities and Exchange Commission:

    http://www.sec.gov/Archives/edgar/data/789019/0001 03221002001614/d10q.htm [sec.gov]
  • Re:I wonder (Score:1, Informative)

    by Anonymous Coward on Sunday November 17, 2002 @09:00PM (#4693696)
    It is called segment reporting.

    A company with multiple lines of business must report the total picture of what happened. HOWEVER, they must also along with that provide a snapshot of their various business goups if they are "material".

    Management gets to decide what the business groups are, and what is "material".

    Material is anything a shareholder would consider important. The management and auditors must come to terms with what makes that cut. Auditors have been a LOT more stringent on that count these days, bad calls (like enron) can kill their company and they are reminded of it.
    BTW, to become partner in an audit firm you genrally BUY into things (with the company loaning the money) and if you go put you still owe.

    The SEC has gotten a lot tougher on having companies report better and more segment data, what we are seeing is most likely a result of their efforts. Also, wallstreet has most likely been asking for this information and with the antitrust lawsuit gone it isn't as dangerous for the company to divide thins up in a better manner
  • File formats! (Score:4, Informative)

    by zapfie (560589) on Sunday November 17, 2002 @09:04PM (#4693715)
    Microsoft is very aware of this. They also know that at this point, an office application that can't reliably import/export/work with with Microsoft Office documents isn't worth beans. Hence why their file formats are so thoroughly undecipherable.. they want to make sure that others are unable to work effectively with MS Office documents (crack open a MS Word document with a plain text editor, and you will see what I mean).
  • Re:uhhh... (Score:1, Informative)

    by Anonymous Coward on Sunday November 17, 2002 @09:10PM (#4693739)
    Difference being that Red Hat took an existing OS (linux) and mac'ed it out.

    Windows wrote theirs from scratch...
  • Re:I wonder (Score:1, Informative)

    by Anonymous Coward on Sunday November 17, 2002 @09:13PM (#4693757)
    Incorrect.

    Bill Gates did not personally vouch for this; that is the responsibility of the CEO (Steve Ballmer) and the CFO (John Connors). You can find their signatures at the bottom of the reports.
  • by rufusdufus (450462) on Sunday November 17, 2002 @09:41PM (#4693905)
    I worked in Windows and NT for many years, and then MSR for a couple after that.
    MSR provides nothing to the Windows internals. What a ridiculous statement.

    MSR is a prestige organization only, and MS pays huge for that 'prestige'. Every so often you will hear about something from MSR getting into a product, but let me assure you its all hype. Most things that actually do get into a product were built by people from the product team who changed orgs to MSR after the idea was already proven. And those are very rare too.

    No, MSR is a worthless academic sideshow that will be cut off the day MS profits are unable to hide its wasteful useless bloat.

  • Re:uhhh... (Score:3, Informative)

    by Scudsucker (17617) on Sunday November 17, 2002 @09:41PM (#4693915) Homepage Journal
    Windows wrote theirs from scratch...

    Wrong! Windows 9x came from DOS, which Microsoft bought [about.com] from Tim Paterson. Windows XP came from Windows 2000 which came from Windows NT which came from a joint project [os2bbs.com] between IBM and Microsoft.
  • by Sex_On_The_Beach (621587) on Sunday November 17, 2002 @09:47PM (#4693943) Journal
    Personally if I was an MS stockholder I would like to see this profit in my hands as a dividend of some sort, where I can decide to invest it myself, rather than let MS invest in non-performing projects (negative NPV) or donate away.
  • by shiflett (151538) on Sunday November 17, 2002 @09:48PM (#4693952) Homepage
    Actually, this is incorrect.

    Whether the public thinks the product is worth a certain amount or even willing to pay a particular price is irrelevant.

    It is also a fallacy to consider a monopoly necessarily illegal.

    Let me make up an example. I think we can all agree that Microsoft is a monopoly. They basically have an enormous and guaranteed flow of cash because of this monopoly.

    Now, what if they use the profits gained from this monopoly to open a coffee shop beside every Starbucks in the USA. No problem, right? What if they paid each customer who walked in the door $1.00 as a thanks for visiting? What if they also gave away all of their coffee products for free?

    Apparently many readers (or MS astroturfers in disguise) believe that it is perfectly fine to sustain serious losses in a new market in this way. Some even go so far as to claim "this is Economics 101" or some other such rhetoric.

    The fact is, Microsoft could afford to starve out Starbucks, using the profits from their monopoly to balance out the severe losses brought about in their attack on Starbucks. They could basically eliminate Starbucks. This is illegal, regardless of what they do with their new monopoly on coffee shops or what they charge for their OS. This seems to be where your confusion lies.
  • Re:File formats! (Score:3, Informative)

    by Monkelectric (546685) <slashdot@[ ]kelectric.com ['mon' in gap]> on Sunday November 17, 2002 @09:49PM (#4693958)
    XML is a "meta langauge" -- a language used to describe a language. The language they describe could still be hopelessly obfuscated.
  • by lordsutch (14777) <chris@lordsutch.com> on Sunday November 17, 2002 @09:55PM (#4693981) Homepage
    Microsoft's corporate customers aren't paying $300/seat for Windows XP Professional; they're on some bulk licensing program, or it was built into the cost of the systems they bought. Only an idiot would pay full retail for XP Pro when you can get an OEM copy plus a 120GB hard drive for less money.
  • Re:I wonder (Score:4, Informative)

    by Zeinfeld (263942) on Sunday November 17, 2002 @10:00PM (#4694004) Homepage
    A) Where on earth they get this data?

    By not reading the article.

    According to the article itself the parts of Microsoft that lose money are the parts that everyone already knew lose money. MSN, XBox, Windows CE and the Business Solutions division, all of which are in 'start up' mode, apart from MSN where the loss is narrowing.

    Microsoft sure ain't losing money on Visual Studio, Money or their games. They probably make a profit on their keyboards and mice. They are just taking an expected loss on XBox until they can build a sufficient market share - which is likely to take until XBox 2 comes out

    Also note that these are operating profits and not GAAP earnings. There is a big difference between the two. Basically operating profits only show one quarter of cash flow, to get a sense of whether the company as a whole is making or losing money you need to take into account how much it cost to build the product they are selling - which would have been billed in previous quarters as a 'loss'.

  • Re:I wonder (Score:3, Informative)

    by enjo13 (444114) on Sunday November 17, 2002 @10:09PM (#4694039) Homepage
    Correction, Balmer (being the CEO) is responsible for the data... not Gates.
  • Creative accounting (Score:5, Informative)

    by iabervon (1971) on Sunday November 17, 2002 @10:09PM (#4694040) Homepage Journal
    Really, the incomes of different Microsoft divisions are entirely fictional. Most of their sales come from package deals to OEMs, which they could account for in any sort of way. After all, the number one computer game for a long time was the solitaire version that came with Windows. If Microsoft wanted their entertainment division to make more money, they could charge for solitaire and include windows with it for free. Since most people get them both via an OEM, nobody sees them itemized, so MS could change the pricing around, and the only effect would be that the division split on the SEC reports would be different.

    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.
  • by Anonymous Coward on Sunday November 17, 2002 @10:39PM (#4694179)
    What crap is this. I don't like Windows and dislike MS incredibly more, but I hate purposeful, outlandish inaccuracies.

    Full version of Windows XP Home, not the upgrade, full retail, and the version most people opt for, is no freakin way close to $300 at most online outlets. I picked mine up for $150+tax, shipped from a retail office outlet, at the end of September, sealed in its oversized blister pack with box inside, all legit, all receipts and packing slips, CUA, and all. Again, full retail, not the OEM stuff.

    Even the Pro version, full retail, is $250 if you have a brain and freakin shop around. Obviously, the editor is so flush with cash after laying off all those fellow workers at OSDN.

    By and far away most of MS's products ship out through the OEM channel. You know this, but silly /. editor decides to ignore this (how exactly do you ignore this and then whine about how Dell et al. dropped Linux installs, aka the OEM channel?)). And I can tell you Dell is not paying $300 a box for XP Home. They aren't even paying $80.

    And, while it's not $45, a company can charge whatever the hell they want. So, while I'm on this rant, any car produced today doesn't have $2,500 worth of parts in it, but you aren't going to find a car for that price. But I don't see you bitching and whining about the labor unions driving up car prices, or, more substantially (as workers really just try to get what they believe is fair with the rest of society), the health profession (an enormous part of a car's expense is actually to pay for the outrageous sums the doctors and pharmaceutical industry "requires" for their income and profit margin, which gets passed on as health benefits, aka company cost, to the autoworkers).

    As if the doctors and pharmaceutical industry don't exercise state monopoly power via "professional" ties, aka the state laws that requires medical licensure which, while justifiable, are not justified because they are leveraged to cap the number of people trained, since they control the academic channel.

    Gee, those billions MS costs us are really hurting us, as compared to the trillion dollars getting thrown around behind your back with medical expenditure, worsening by the day as profits rise, generics get put out of business, and our population ages (typically requiring more care).

    I applaud /. for bringing the blatently obvious forward; we all know MS are screwups. After all, this "news for nerds" has been hammered at for 5 years now. Get a new soapbox. Why don't you freakin form a PAC and go after representatives that piss you off, since obviously you aren't happy with that vote you get, since you feel more special than your neighbor.
  • by Anonymous Coward on Sunday November 17, 2002 @10:45PM (#4694219)
    Microsoft is doing LARGE investments for upcoming products and _then_ they get returns. When you look at profit margins the way you did (and it is showing in the Home, Business, and other divisions) they are having huge upfront costs and then they harvest. So when you look at the profit margins that MS is enjoying today for Office and Platforms, think again, go back in history and have a look at the upfront costs, the bets that Microsoft made in the past.
  • Monopoly (Score:2, Informative)

    by Idou (572394) on Sunday November 17, 2002 @11:00PM (#4694322) Journal
    "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."

    Profit Maximization:

    Perfect Competition Case
    Price = Marginal Cost

    Perfect Monopoly Case
    Price = Marginal Revenue

    It has EVERYTHING to do with being a monopoly. If Ford were to decide to raise their prices, people would buy less Fords (not less cars). If MS decides to raise their prices, people buy less Operating Systems, Computers, mice, etc (add any compliment good). The effect on the economy is devasting. Furthermore, optimal output for a monopoly != optimal profit, since they control the price (optimal profit is at much lower output). So, you get much less (maybe half) the purchases of computer related equipment than you would in a competitive market.
    So, you see, it has EVERYTHING to do with being a monopoly.
  • Re:Monopoly! (Score:5, Informative)

    by Laven (102436) on Monday November 18, 2002 @01:11AM (#4694853)
    High profit margins don't make you a monopoly.

    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.

  • by Hyped01 (541957) on Monday November 18, 2002 @01:18AM (#4694887) Homepage
    MS loses BILLIONS a year. The cost of WinKludge development is enormous. MS has been amortizing those costs over periods far in excess of the earnings each product will bring in.

    Thus, let's say a product generates a certain revenue stream for 2 years, but you amortize the costs over 10. It looks great on paper, but year 3-10 you have no way of recouping it... "Sure you do... other products!" Yeah... like the next version, with the same problem due to the same faulty accounting.

    The time frames MS used are large enough that they will show a profit for another half decade or more - but the money isnt real. The SEC was convinced to drop the investigation (plenty online about it... simply go to Google) - and no, not because MS wasnt guilty of doing so - the SEC decided they were guilty on a number of counts and told them "dont do it again...".

    Now, knowing that only the Win/Office divisions are (falsly) profitable, that means the true MS losses must be staggering.

    Simply do a Google Search [google.com] and check it out - now, the hard part is reading about a dozen (no joke) stories to actually see all of what the SEC accused them of and told them to stop doing. Most of the articles downplay it as simply forgetting to list a few accounts and other BS. Keep reading and you'll see it's a long long list of violations.

    Rob

  • by runenfool (503) on Monday November 18, 2002 @01:21AM (#4694897)
    What cave have you been in? The decision was simply an approval of the agreement that the Bush administration made with Microsoft.
  • Re:Well, now (Score:3, Informative)

    by Fulcrum of Evil (560260) on Monday November 18, 2002 @01:28AM (#4694927)

    But if you read Sherman, et al. you'll find that monopolies are illegal because they COULD lead to abuse.

    No, monopolies are illegal when abused. One example would be leveraging a monopoly position to force entry into another market. Another would be taking actions specifically designed to discourage competition. The rules change when you become a monopoly, but it's still legal.

  • by eatdave13 (528393) <davec@lepertheory.net> on Monday November 18, 2002 @03:20AM (#4695283)

    So, basically... If they charge more on a product (Say $300 instead of $130 for Mac OS X) they're evil. And if they charge less, they're evil. And if they charged exactly the same amount, they'd be copying, and thus... Evil.

    I hope I'm not getting trolled my an MS fan(boy|girl)...

    The problem isn't necessarily what they are charging. The problem is that their prices and placement are tailored to prevent other companies from competing.

    Windows and Office, MS's cash cows, are priced far, far above what they would be priced if there was any competition in those two markets. The lack of competition is not due to their products being superior (in which case I wouldn't have a problem with them charging whatever they felt like charging), but special mob-style deals that they have made with the OEMs. At first, before the computer manufacturers were tied hand and foot to Windows, MS charged next to nothing to bundle their OS with the computers. As Windows became the one-and-only consumer OS out there, MS has raised the price because the OEMs had no choice but to pay. They have done the same thing with Office and will do the same thing with any product they have the opportunity to do it with.

    Then you come to the products that MS uses as nothing more than a hammer to crush their competition. No company in the world that was not a monopoly would have been able to give away IE for free like they did. They used the money generated by Windows to crush Netscape. MS was never in the browser business until it began to threaten their OS business. Their OS business was threatened because Netscape was becoming a platform for other applications, and if Netscape became the dominant platform and decided to be available on another OS, then MS would have lost (their monopoly). So, they bundled IE with Windows for free, while Netscape was charging. Most people went with the free browser, and the threat was eliminated.

    That is what is wrong with MS's pricing. It is used to choke out companies that are making a better product. Once the threat is gone, MS raises its prices. We, the consumers, end up paying more for an inferior product. Although at the end IE ended up being superior to Netscape, this is only because MS choked the living shit out of them and forced them to give away their product for free. It's kind of hard to pay developers when you're not making any money. Just look at what Netscape has done now that AOL/TW is pumping money back into the project. Mozilla is already on par with IE, and will soon pass them up. Unless MS has grown too fat and stupid to see what's coming, they are going to attack Mozilla in the near future. They should have done it sooner.

    When MS wants to break into a new market, all it has to do is choke out the competition and walk in unopposed. If it was not a monopoly, it would not be able to do this. A company that needs to make money on its product to stay alive cannot afford to give it away for free. A company that does not give its product away for free or nearly free cannot choke out the competition. A company that does not choke out the competition cannot overcharge for its product. A company that does not overcharge for its product cannot afford to repeat this over and over again, muscling its way into whatever market it wants, ad infinitum.

    Although there is a lot of mindless MS-hating here on Slashdot, there are tons of valid reasons to hate them. I guess I should congratulate you for being able to think for yourself and not hate MS just because everyone else here does, but I'll save that for when you're more than a dumb animal that can't tell when it's getting screwed.

  • by theBrownfury (570265) on Monday November 18, 2002 @12:25PM (#4698262)
    Just got this email from my CS department:
    "The Computer Sciences Department has opened a new lab facility. The lab features Dell Optiplex GX110 computers running Windows XP. The computers feature 2GHz Intel Pentium-4 processors, 1GiB RAM, CD-RW drives, and 18" LCD monitors. The installed software includes MS Visual Studio .NET, Borland JBuilder 7 Personal Edition, MS Office XP, and Adobe Photoshop 7, as well as a variety of internet-related applications.
    An HP laser printer is available in the lab for printing. This lab was made entirely possible by a very generous donation from Microsoft Corporation.
    This in a CS department which lives and breathes Debian and Solaris. Money talks and MS has a lot of it to make people talk.

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