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 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.
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.
As per Microsoft’s 2021 Annual Report,