The Microsoft Machine Keeps Chugging Along
Erick Schonfeld
49 comments »
Microsoft’s cash-cow businesses are kicking into high gear, as evidenced by its most recent blow-out quarter. Sales of Vista was one of the main drivers, despite the issues that led Microsoft to extend the shelf life of Windows XP. More than 80 percent of Vista sales were through sales of new PCs, which shows how powerful that franchise continues to be.
Here are some numbers to think about: Sales for just the Windows PC business alone were up 25 percent to $4.1 billion (with $3.4 billion of that as pure operating profit). Incidentally, Microsoft’s old-school client software business alone is about the same size as all of Google’s (which reported $4.2 billion in total revenues for the same quarter). Another way to put this into perspective is that Microsoft reported about the same total net profit ($4.3 billion) as Google did revenues, and higher net profit margins overall (31 percent versus 25 percent). For a company with $13.8 billion in total revenues last quarter, Microsoft’s 27 percent growth is very impressive. Although Google grew revenues at a much faster 57 percent clip last quarter, in absolute terms, Microsoft added more money to both the top and bottom lines (revenues rose $3 billion for Microsoft versus $1.5 billion for Google, and net income rose $811 million for Microsoft versus $337 million for Google).
But how did Microsoft do in its new businesses that actually compete directly with Google? Not so good. Revenues for online services grew 25 percent to $671 million, but operating losses more than doubled to $264 million. Microsoft’s new advertising business aQuantive, which it acquired in the middle of the quarter, contributed about $80 million of that revenue. For the full year, aQuantive is expected to add $500 million, or one percentage point to revenue growth. So Microsoft still has a long way to go on that front.
Microsoft’s entertainment and devices business nearly doubled its revenues to $1.9 billion thanks mostly to Xbox and Halo 3 (which accounted for $330 million of that). Nevertheless, the division eked out only $165 million in operating profits. Other tidbits from the conference call: Display advertising grew 23 percent, and 400 million people now have a Live ID (up 19 percent)
The most telling exchange on the conference call was between Sanford Bernstein analyst Charles Di Bona and Microsoft CFO Chris Lidell. You really get a sense of how serious Microsoft is about search and online advertising, committing half of next year’s $3.2 billion in capital expenditures to the data centers it needs to compete (via Seeking Alpha):
Charles Di Bona - Sanford Bernstein
I guess no surprise here, but I’m going to go back to the well on OSB [Online Services Business]. It was probably the only division that didn’t really outperform significantly, only about 10% growth, excluding aQuantive, and the comScore share is back down to sort of the lows that they were in your fiscal Q4.
Especially in light of yesterday’s announcement around Facebook, maybe you can give us a little insight into the strategy and execution here, and is there any shift towards sort of buying traffic and community rather than building it internally? And in general, how do you go balancing those two alternatives and valuing those two alternatives?
Christopher P. Liddell
First thing to note obviously is we met expectations, so it wasn’t a beat, I agree, but it was a meet, so start with that.
Underlying business growth or revenue growth, you mentioned the 10%, which is correct. Clearly in this case it’s a negative from the Access business going away, so — if you look at underlying revenue growth, underlying advertising revenue growth, it grew in the mid 20s, around 25% for the quarter year on year, which we think is acceptable. It’s not certainly stellar. We’d like to see it higher but it’s acceptable and it is higher than where we guided at the start of the year, roughly speaking. So I think reasonable progress on the organic side of the business.
In terms of putting the building blocks in place and how we trade off organic growth through inorganic growth, it’s both. The strategy has been both and will continue to be both, so we are investing heavily in the organic aspects of the business, so a lot of investment in particular has gone into the search product itself, and we clearly are extremely happy with the improvements we are seeing on aspects like relevance, which are critical going forward. We are putting a lot of investment into things like data centers, which are creating the platform of the future and the experience, so we are increasing CapEx quite considerably there. We are looking at CapEx overall for the year of $3.2 billion to $3.3 billion, about half of which is going into the OSB area. And we are putting investment in some of the verticals that I talked about on search organically and all the other areas as well, content on the display side.
So there’s a strong organic side, there’s a strong inorganic side, but clearly aQuantive is the most obvious representation of that and we’re particularly happy that we not only closed aQuantive but we’ve retained all of the employees. We think that integration has gone extremely well and we believe that’s going to generate some significant benefits going forward.
We also did some other smaller acquisitions, ones which we think are important for the ad platform, like AdECN during the quarter, and then the announcement yesterday on Facebook, which is a willingness on our part to make a commitment to a multi-year agreement with a partner who we think has got some tremendous growth opportunities.
So we are willing to do both. We are quite clearly willing to suffer an operating loss in that position as a result of those commitments, and we’ll share that there I think both in our financial analyst meeting and in our guidance.
But to date, in terms of underlying financial metrics, we’re on track. In terms of some of the other things that we wanted to do, if anything we are slightly ahead of where we would like to be.
Microsoft seems to be really getting after google. With google coming out with new services and all that and microsofts decreasing popularity I am not sure how well microsoft is going to do in this bout.
With the partnership with facebook, plus microsoft’s vista, microsfot is regaining it’s superpower.
this is just inflation. how is microsoft doing RELATIVE to its competitors? it is underperforming apple and google. apple is still taking marketshare, google is in no danger of losing search and/or ads dominance.
and to be sure, microsoft lost the facebook bidding war. anyone paying that much for so little can hardly be seen as a winner. kudos to yahoo and google for forcing the bids up so high before bailing. i like to do this on ebay too…when i see someone bidding against me who clearly “has to” have the item, i bid up until the last five minutes and then let them win just to watch them waste money fighting me.
microsoft’s major problem remains - no one seeks out their products. they are the cafeteria food of the tech industry. people use windows because it comes on their computers. no one is buying a new mac and asking how to put vista on it.
Another prospective - Microsoft is projecting $23B in profit this year, which is nearly DOUBLE Google’s REVENUE - if one uses Google’s valuation on Microsoft, Microsoft would be worth over $1 Trillion.
It’s about time Microsoft stops competing with Google and focuses on their core competency. There’s nothing wrong with accepting the fact that Google is #1 in online searches.
Microsoft should continue to build their operating systems and game consoles; something they are successful at doing. Why chase Apple’s iPod and Google’s search engine and maps? The company needs to create their own product that comes to market before Google and Apple. We’re still waiting, Microsoft.
Google OS and web 3.0 are going to kill the Windows 95 franchise, and let’s get real here, that IS the windows franchise. People may not switch to Linux if it’s just as good on the Desktop, but they WILL switch if it’s better on mobile and if it’s branded with something they trust.
That will in turn kill office and send MS sailing updraft into the abyss.
I bet Google even turns it’s OS mobile device OS into thin client servers for LCD monitors to finish off Windows completely. That way people can just plug a thin USB to vga cable from their mobile running Google OS to their monitor and forget about booting a machine altogether.
Neither Windows nor Apple can win at this game because they want licensing costs and Google’s linux OS will be free to use.
Executive summary: The Windows franchise will be all but dead in 10 years time as it gets devoured by the mobile revolution. Apple will not win because it doesn’t play nice with OEMs.
That should read: “I bet Google even turns it’s mobile device OS into thin client servers for LCD monitors to finish off Windows completely.”
and I also wanted to speculate that Office will die with Windumbs.
Done.
It’s funny how the consensus today is “all those booing Vista were wrong”.
Vista still is a nightmare, but customer satisfaction and market success have little do do with each other in a monopoly. Vista sells, because we’re buying computers, and have no choice. It’s clear from their 10-Q.
Microsoft is not a pureplay web 1.0/2.0 company like Google. The threat to Microsoft is not from Google , but from :
1) Infosys
2) Tata Consultancy Services (TCS)
3) Wipro
And if they come together, then they can give Microsoft run for its money.
http://www.meetingflex.com
Oh, as per my comments, and how far fetched they sound, where were we 10 years ago with the 286 and where are we now?
In 3-4 years a computer you have at your desk with a core duo and 512 mb graphics card/gpu will fit into an iPod nano. Literally. Google OS will power 90% of those nano devices, and all they need is one mini to VGA port, and say goodbye to windows. They’ll have bluetooth, GPS ect.. all built in.
#3 and #5 - You are both great. The best comments I’ve read so far.
More than 80 percent of Vista sales were through sales of new PCs…
to retailers. and how many of the remaining almost 20% are just boxes on shelves or in warehouses? representing, or misrepresenting sales in this case, is one thing, adoption and marketshare penetration is another. yes, ms made money, big whoop, the fact remains vista is still nothing short of craptacular and anything that comes out that shows a shred of decency from a competitor could squash vista completely.
Erick,
This was a well-thought and informative analysis on Google and Microsoft, and if this is the quality I can expect, it will make me a long-term contributor to TechCrunch. I especially like how you highligted Microsoft’s diversified approach to their operations and how their core business — operating software puts them ahead of Google. Having a diversified strategy allows Microsoft to generate income from their cash cows to support the business, while putting their excess capital to good use and invest in the next business line. For the same reasons that MSFT could lose out in the OS and Productivity Software game, Google can lose out in the search game. Nothing in a capiltalistic global market is guaranteed and you must constantly look behind your back to make sure you have a healthy distance between you and your competitors.
@whoopie
“microsoft’s major problem remains - no one seeks out their products. they are the cafeteria food of the tech industry. people use windows because it comes on their computers. no one is buying a new mac and asking how to put vista on it.”
It’s brand recognition, something that cannot be bought. The general consumer (outside of the technology early adopters) trusts Microsoft Windows. It may not function perfectly, but they can surf the web, play their games, watch their movies, be productive, and etc just fine with it. There are complaints about Windows coming on all new PCs, but I don’t see Apple offering to bundle OSX with Dell, Compaq, or Gateway computers. Perhaps it’s because OSX works well with Apple hardware and not necessarily PCs across the board. The way I see it, Windows’ flaws don’t come from a lack of computer engineering, but the difficult task of making software that runs efficiently across computers with numerous variables. Give Microsoft some slack, they have been doing something right if they are still the top dog even with competitors such as OSX and the open operating systems.
@Chris (6)
“Google OS and web 3.0 are going to kill the Windows 95 franchise, and let’s get real here, that IS the windows franchise. People may not switch to Linux if it’s just as good on the Desktop, but they WILL switch if it’s better on mobile and if it’s branded with something they trust.”
Facebook, it’s not just a “social utility”, it’s a webOS. That’s why it’s valued at $15bln.
“Facebook, it’s not just a “social utility”, it’s a webOS. That’s why it’s valued at $15bln.”
You don’t know what an operating system is. I am a systems programmer. Don’t mess with my prediction.
An OS distributes resources on a hardware system. Facebook is merely a high level interface to a SQL database. Dime a dozen programming. BIG difference.
The programmers that work at facebook would not have a prayer if called upon to do systems programming. They are mere web devs…. so sad.
In other words, in less than a week Microsoft made enough to pay for its Facebook investment.
http://www.internetnews.com/xS.....hp/3487041
Google was it’s own OS hacking the Red Hat kernel from the get go.
Remember this?
techcrunch.com/2007/08/11/facebook-source-code-leaked/
This is not operating system code. mmmmmkay….
geeknewz.com/content/view/268/2/
Calling something a rock and it actually being a rock are 2 different things.
As #8 suggested vista sale is the ongoing effect of microsoft monoploy (with hardware companies in collusion to sell more memory etc.).
My brother wanted to buy a laptop in Toronto and didn’t have a choice but to buy vista although he wanted XP.
Most of the laptops I saw in JFK airport on a recent trip were running windows. Saw an elderly couple using macs and turned out they were from Berkeley.
For the vast majority pc/laptop still equals to windows and are forced to buy whatever MS decides to sell.
They will continue to ride this monoploy wagon till macs/ubuntu makes more inroads in mainstream.
Apple needs to do more to break into mainstream (lower prices, ads targeting the common folks to break this general notion that apple is for the fashion conscious and windows for the masses )
Google is enjoying huge marketshare in PPC and CPC advertising, also it has been unfair to its Adsense publishers who bring one third of all Google’s revenue. Most of publishers are pissed off but dont leave Google not having a better choise, Microsoft could really make use of that gap, and adding competition to the industry would make things better.
hahahahahahahahaha …..
You haters out there, EAT MY STAINED SHORTS!
http://fakesteveballmer.blogspot.com
hahahahahahahahahaha ……
@Chris:
It seems that this article made you fired-up!, Hooray!.
Anyhow, get back to your job, programming systems, embedded and stuff like that. I want a longer-lasting battery for my devices mkay? Not something that can be used in merely 3 hours.
“It seems that this article made you fired-up!, Hooray!.”
It’s not the article. Facebook wasn’t in this convo??
Facebook is PHP and SQL. How can you compare that to systems code and Google. If it were slashdot instead of facebook, the same guy would be comparing CommanderTaco to Bill Gates and /.’s comment reply system to Google search results. You know it’s true.
This is Zuckerberg: en.wikipedia.org/wiki/Mark_Zuckerberg
This is Torvalds: en.wikipedia.org/wiki/Linus_Torvalds
One is 80 kibilliongillion times smarter than the other. Guess which? Money does not translate into technical superiority.
Something like facebook will never influence or change the IT industry. They don’t have the code to back it up. Google has the code to back up the hype. Microsoft has the code to back up the hype. They are not paper tigers.
And who said Microsoft wa sin decline?….No sign of that based on these numbers. Pretty impressive.
Stats would get more interesting once Gphone is out.
Take this TC Editors and leave Apple, Google and FB behind you…
To Chris
a 286 ten years ago?..is your calender broken?…try 20 years…..and a core duo with 512 graphics card in a ipod sized box….you have but the shakiest grasp of physics my friend…back to the doc for some meds, and while there, get a reality check
@David Litsky:
“It’s brand recognition, something that cannot be bought. The general consumer (outside of the technology early adopters) trusts Microsoft Windows.”
how long did they beat you with a rubber hose to get you to say this?
“Windows’ flaws don’t come from a lack of computer engineering, but the difficult task of making software that runs efficiently across computers with numerous variables”
i get better performance on any given PC from any modern linux distro or even freebsd (as a desktop system no less). and these groups are operating against hostile hardware vendors and with basically no budget. indeed, given their resources, microsoft does a terrible job relative even to semi-organized open source hackers.
“a 286 ten years ago?..is your calender broken?…try 20 years”
Somewhere between there. Is your turbo button on?
http://en.wikipedia.org/wiki/Moore’s_law
Most of what takes room are cooling elements and sinks. Drives are no longer a problem with high capacity flash. Maybe 5 years. PC’s as we know them and the AT/XT BIOS based devices will be gone. At least in the first world.
What’s to stop apple from putting a VGA/DVI mini-port in an iPhone or one of the new iPods?
That’s something that could be implemented right now. It’s not really that far fetched. It’s the future. The future where our small mobile devices double as the drivers for our LCD monitors, not big boxes. In that world Microsoft will not succeed if Google gets the OS done better and first. CE really, really sucks.
There is such thing is Facebook OS powered by Microsoft. More college student will buy low cost operating system. You will see massive waiting line…
Google need operating system fast. Google need operating system that can connect PLAN9.
As long as I am on a 5 years from now prediction rampage. I predict there will be a docking bay and a standardized port config on the bottom of all phones and mobile devices that double as PCs.
You will remove a bottom cap from your X, Y, Z brand Google OS using mobile device, simply snap it down on a docking bay next to your monitor, and BOOM, your keyboard, mouse and monitor are all being driven off your Goog phone. This device will have a standardized docking port config, and available in many different brands, all powered by free Google OS.
Steve Ballmer will have pulled out the rest of his hair by then and die of skin cancer from too much sun on his baldness.
The PC will finally be the personal computer it was supposed to be 30 years ago and we will all forget nasty Microsoft ever existed.
In the future you see angry engineers and fireball rivals.
Facebook OS
Google OS
I had strange dream about three years. I saw web 3.0 OS patent problem. Facebook guy throw punch at Google engineers face for stealing trade secret. I also saw Facebook/Google gang fight at podium stage.
It’s almost like jerry springer. They throw chair too, soda, etc..
23 Google got arrested
54 Facebook got arrested
I don’t know if I believe in prophecy.
My prediction. Micheal Arrington will have black eye and nose bleed. I won’t tell who punch Mike.
apple.com/ipodtouch/
+
geekstuff4u.com/product_info.php?manufacturers_id=&products_id=630
Looks like this but a kvm port config(VGA+USB) + RJ45 jack) where the mobile phone or device plugs into the top instead of an IDE hard drive. The bottom of the device has eth0, display and other mini-ports that route through to the full sized ports on the dock.
+
monitor, keyboard, mouse and ethernet cable all plug into the dock
Right now as a reader, you don’t know whether I’ve seen this thing or not. I’ll leave that up to you. I wouldn’t invest in MSFT though.
Does anybody care what Chris has to say, other than Chris?
He is just trying to get exposure for himself and his company.
Responding to his posts only gives him more reason to dump his shallow opinions on us.
Don’t fall for our good buddy Google’s “revenue” numbers. Everyone’s favourite “good corporate citizen” doesn’t have “traditional revenue”:
(From its most recent quarter)
“In the third quarter of 2007, traffic acquisition costs totaled $1.22 billion”
Sounds a lot like what the telecoms were doing (paying each other with funny money) back during the “dot com” days…
Take that out and $4.23B in revenue looks a heckuva lot like $3B to me…
@whoopie
“i get better performance on any given PC from any modern linux distro or even freebsd (as a desktop system no less). and these groups are operating against hostile hardware vendors and with basically no budget. indeed, given their resources, microsoft does a terrible job relative even to semi-organized open source hackers.”
Hey, I agree with you that modern linux distros are a better overall product than Windows, but they are a niche market. Microsoft’s closest competitor is Apple but they harm themselves by selling OSX as a Mac-Only product.
(BTW, I use a MacBook)
@Rintoul
Don’t forget to watch A/R growth:
Increases to assets = an undocumented use of cash; decreases to assets = an undocumented receipt of cash.
Increases to liabilities and NW = an undocumented receipt of cash; decreases to liabilities and NW = an undocumented use of cash.
Google is the most incredible company, how they mange to be So overvalued and get away with it is beyond me.
I guess there will be many big strategic alliance in near future and google, yahoo and microsoft all this companies will emerge out only big players competing each others.
i dont think google or will have any lead in the innovation for future products/services. other than search, google hasnt done much impressive. maybe maps, ..m…. mm…. wat else?
the problem with google or yahoo is that most web services and products dont need much technology and are cheap to build and are mostly built by startups spreading thin…
the recents web success stories like wikipedia,youtube,myspace,facebook etc all never came from any lame big corp.
In other news, Halliburton has doubled its earnings and it’s planning to tripple them with their new endeavour, the war in Iran.
So different bu yet so similar…
Many bloggers say start interview with microsoft executives saying “I haven’t been kind to you guys…”
Example : Gigaom show episode with Dan Lewin, Mike Arrington with Ray ozzie in Mix 07..
Microsoft has just one answer to these retarded bastards..
Bloggers : “I haven’t been kind to you guys…”
Microsoft : “Does it fu#### matter?”
Hey, Haters! - MS Profits up 35% for the Quarter!
What kinda job do you iTards, lame-brains, nitwits, Linux fans, mormons, liars and MS-Bashers think I’m doing now? I am being heralded, regaled, praised, congratulated and cheered all over the Internet! You people who still doubt me can “eat my stained shorts!”
I don’t mean to gloat, but this has been a looong time coming!
They public has vindicated me and my management style and philosophies; to you all I say thank you, you will be rewarded for sticking with us and our innovative, leading edge products and services!
I pledge to use these extra billions in a holy war against our competition and to reign in those companies that support them and their disruptive technologies!
It has been my humble pleasure serving you and our partners!
FSB
http://fakesteveballmer.blogspot.com
I believe the problem for Linux and other free operating system is simply this:
Microsoft has spent the last 20 years building up a brand that simply IS your operating system, at least in the mainstream punlic concencus. Sure, Linux may outperform MS anyday with free software, but that doesn’t make 99% of the PC users out there go and buy it.
Why? Because it’s never been marketed seriously in the mainstream channels and mainly attract hardcore and enthusiast users. Unless someone steps up and put some serious marketing money on Linux software in the mainsteam channels (TV, newspapers, subways etc) we’ll never see that change.
Never underestimate a strong brand - this report proves that.
Quoting: “Sales of Vista was one of the main drivers, ”
This is nonsense and plain Microsoft propaganda. Windows Vista is a spectacular failure and Microsoft does its best to hide this dirty secret. The reason why Windows Vista sells is because Microsoft has a bullying dominance in the operating system arena and imposes it’s might on hardware developers to bundle this horrendous operating system with their PCs. As far as I know the overwhelming majority of the OEM installations are eventually scrapped by the end user who prefers to go back to plain good old WindowsXP. I hope the truth be told!