Microsoft Business Model

Microsoft has a diversified business model spanning across Office products, Windows, Gaming
(Xbox), Search Advertising (Bing), Hardware, LinkedIn, Cloud and more.
Microsoft is among the largest tech giants, which in 2018 made over $110 billion in revenues. While
Microsoft Office remains the most successful product. Other parts of the business related to advertising,
with the Bing search engine, has been growing fast in the last couple of years.
Also, the acquisition of LinkedIn has allowed Microsoft to enter the social media market. As a dominant
tech company, Microsoft tries to keep innovating and acquiring companies that allow it to enter new
markets, quickly.

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Micro-soft, the name
When Bill Gates and Paul Allen needed to pick a name, Paul Allen reported in his memoir “We
considered Allen & Gates, but it sounded too much like a law firm. My next idea: Micro-Soft, for
microprocessors and software. While the typography would be in flux over the next year or so (including
a brief transition as Micro-Soft), we both knew instantly that the name was right. Micro-Soft was simple
and straightforward. It conveyed just what we were about.“
So how did Bill Gates end up with the majority of the company? Still, according to Paul Allen's memoir
“From the inception of Microsoft, Bill insisted he got a 60-40, then 64-36 share of the money.”
While Paul Allen accepted – for some reason – the 60-40 deal, so that more shares would go to Bill
Gates – mostly on the basis that Bill Gates had contributed more on the code – Bill Gates tried again to
get hold of more shares of Microsoft. That attempt though wasn’t successful.
In a few years, Microsoft would become the dominant tech company in the world.
It is important to remark this is the side of the story told by Paul Allen, seldom mentioned Microsoft co-
founder. The accounts from Paul Allen reflect his perspectives on Microsoft in its first years.
What are Microsoft Segments?
Microsoft segments can be broken down into four main types:
Productivity and business processes
Productivity and Business Processes segment consists of products and services in the portfolio of
productivity, communication, and information services, spanning a variety of devices and platforms. This
segment primarily comprises:
• Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising
Office, Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access
Licenses (“CALs”).
• Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office
Consumer Services, including Skype, Outlook.com, and OneDrive.
• LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
• Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises,
and Dynamics 365, a set of cloud-based applications across ERP and CRM.
Intelligent cloud
Productivity and Business Processes segment consists of products and services in the portfolio of
productivity, communication, and information services, spanning a variety of devices and platforms. This
segment primarily comprises:
• Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual
Studio, System Center, and related CALs, and Azure.
• Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
More personal computing
More Personal Computing segment consists of products and services geared towards harmonizing the
interests of end-users, developers, and IT professionals across all devices. 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; Windows IoT; and MSN display advertising.
• Devices, including Microsoft Surface, PC accessories, and other intelligent devices.
• Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live
transactions, subscriptions, and advertising (“Xbox Live”), video games, and third-party video game
royalties.
• Search advertising.
Corporate and other
Microsoft develops most of its products and services internally through the following engineering groups.
• Office Product Group focuses on Microsoft business across productivity, communications, education,
and other information applications and services.
• Artificial Intelligence and Research, focuses on Microsoft AI development and other forward-looking
research and development efforts spanning infrastructure, services, applications, and search.
• Cloud and Enterprise, focuses on Microsoft cloud infrastructure, server, database, CRM, ERP,
management and development tools, and other business process applications and services for
enterprises.
• Windows and Devices Group focuses on Microsoft Windows platform, applications, games, stores,
and devices that power the Windows ecosystem.
• LinkedIn, focuses on services that transform the way customers hire, market, sell, and learn.
How does Microsoft really make money?
If we look at the operating income and operating margin of each segment, it’s interesting to notice how
while the More Personal Computing line of business is the segment that contributes most to Microsoft
revenues.
It also has the smallest operating margins at around 25%. While Productivity and Cloud have
respectively operating margins around 35% and 36%.
If we look at each Microsoft product, we can see how the Office products are the ones that most
contribute to Amazon revenues, together with cloud services. Windows licensing is also, at this stage,
still an important contributor to Microsoft's overall revenue.
The company’s pretty diversified and it also makes money in Gaming (with products like Xbox), search
advertising (with Bing), Devices and LinkedIn.