FINANCIAL MANAGEMENT REPORT

MICROSOFT CORPORATION
ANALYSIS, 2023
I. Overview of Microsoft Corporation’s Business
I.1. Overall Introduction
Microsoft Corporation is an American multinational technology corporation headquartered in Redmond,
Washington whose history started 4th April 1975.

Microsoft ranked No. 13 in the Fortune 500 rankings of the largest United States corporations by total
revenue (updated to Oct, 2023) . It is considered one of the Big Five American information technology
companies, alongside Alphabet (parent company of Google), Amazon, Apple, and Meta Platforms.
I.2. Operating Segment
Microsoft is engaged in developing, licensing and supporting a range of software products and services
and hardware catering to different requirements. The company offers a comprehensive range of operating
systems, cross-device productivity applications, server applications, software development tools, business
solution applications, desktop and server management tools, video games, and training and certification
services. It also designs, manufactures, and sells hardware products, including PCs, tablets, gaming and
entertainment consoles, and other intelligent devices. The company provides a broad spectrum of services,
including cloud-based solutions, solution support, and consulting services. The company operates data
centers in the Americas, Europe, and Asia-Pacific.
Overall, the company operates business and report financial performance covering three core segments:
Productivity and Business Processes, Intelligent Cloud, and Other Personal Computing:
- Productivity and Business Processes is designed to increase personal, team, and organizational
productivity through a range of products and services, primarily comprising:
• 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, Microsoft Viva, and Microsoft 365 Copilot.
• Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises,
and other Office services.
• LinkedIn connects the world’s professionals to make them more productive and successful and
transforms the way companies hire, market, sell, and learn, including Talent Solutions, Marketing
Solutions, Premium Subscriptions, and Sales Solutions.
• Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based
applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and
on premises ERP and CRM applications.
- Intelligent Cloud consists of public, private, and hybrid server products and cloud services,
primarily comprising:
• 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.
• Enterprise Services, including Enterprise Support Services, Industry Solutions (formerly Microsoft
Consulting Services), and Nuance professional services.
- Other Personal Computing primarily comprises:
 • Windows, including Windows OEM licensing 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 IoT.
• Devices, including Surface, HoloLens, and PC accessories.
• Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party
content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox
Cloud Gaming, advertising, third-party disc royalties, and other cloud services.
• Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft
Edge, and third-party affiliates.
I.3. Distribution & Sales
Microsoft markets and distributes its products and services to customers including individual consumers,
small and medium organizations, large global enterprises, public-sector institutions, Internet service
providers, application developers through the three main channels: OEMs (Original Equipment
Manufacturers), direct, and distributors and resellers:
- OEMs: Microsoft OEM means a manufacturer of computer hardware (e.g., computer systems,
hard disk drives, CD-ROM drives or players, or peripheral hardware) that is licensed by Microsoft
to distribute Licensed Products with such hardware under either Microsoft's or the OEM's
trademarks. The largest component of the OEM business is the Windows operating system pre-
installed on devices. OEMs also sell devices pre-installed with other Microsoft products and
services, including applications such as Office and the capability to subscribe to Office 365. There
are two broad categories of OEMs. The largest category of OEMs are direct OEMs including
virtually all the multinational OEMs, such as Dell, Hewlett-Packard, Lenovo, and with many
regional and local OEMs whose relationships are managed through a direct agreement between
Microsoft and the OEMs. The second broad category of OEMs are system builders consisting of
lower-volume PC manufacturers, which source Microsoft software for pre-installation and local
redistribution primarily through the Microsoft distributor channel rather than through a direct
agreement or relationship with Microsoft.
- Direct: Many large organizations that license Microsoft's products and services transact directly
through Enterprise Agreements and Enterprise Services contracts. In addition, Microsoft also
offers direct sales programs targeted to reach small, medium, and corporate customers including
commercial and consumer products and services such as cloud services, search, and gaming,
through digital marketplaces and online stores.
- Distributors and Resellers: Microsoft also offers customers its licenses of products and services
indirectly, primarily through LSP (Licensing Solution Partners), distributors, Value-Added
Resellers (VARs), and retailers. Although each type of reselling partner may reach organizations
of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to
VARs, and VARs typically reach small and medium organizations. Enterprise Agreement
Software Advisors (ESAs) are also typically authorized as LSPs and operate as resellers for other
volume licensing programs. Microsoft Cloud Solution Provider is main partner program for
reselling cloud services. Retail packaged products are primarily distributed through independent
non-exclusive distributors, authorized replicators, resellers, and retail outlets. Dynamics business
solutions are also licensed to enterprises through a global network of channel partners providing
vertical solutions and specialized services.
 Figure 1. Microsoft’s Business Model
Notably, Microsoft licenses software to organizations under volume licensing agreements to allow the
customer to acquire multiple licenses of products and services of cloud services, on-premises software,
and SA (rights to new software and upgrades for perpetual licenses released over the contract period),
including Volume Licensing Programs and Partner Programs.

II. Software Market Overview

The technology industry has not just weathered the pandemic-driven disruptions of the past few years but
has flourished. The crisis accelerated digital transformation and changed work models dramatically. The
case for digital transformation has never been more urgent. In a dynamic environment, digital technology
is the key input that powers the world’s economic output. According to a report of Microsoft in 2022, in
the coming years, technology as a percentage of GDP will double from 5% to 10% and beyond, as
technology moves from a back-office cost center to a defining feature of every product and service. But
even more important will be technology’s influence on the other 90% of the world’s economy. People and
organizations in every industry are increasingly looking to digital technology to overcome today’s
challenges and emerge stronger. Digital technology is infused into every business process and function so
they can do more with less. Hence, it is considered key force that will make the difference between
organizations that thrive and those that get left behind.
According to the latest forecast by Gartner in July 2023, worldwide IT spending is projected to total $4.7
trillion in 2023, an increase of 4.3% from 2022. The software segment will see double-digit growth in
2023 as organizations increase utilization and reallocate spending to core applications and platforms that
support efficiency gains, such as enterprise resource planning (ERP) and customer relationship
management (CRM) applications. IT projects are shifting from a focus on external facing deliverables
such as revenue and customer experience, to more inward facing efforts focused on optimization (John-
David Lovelock, Distinguished VP Analyst at Gartner). Meanwhile, devices spending will decline 8.6% in
2023 due to the ongoing impact of inflation on consumer purchasing power.
Table 1. Worldwide IT Spending Forecast (Millions of U.S. Dollars)

2022 2022 2023 2023 2024 2024

Spending Growth (%) Spending Growth (%) Spending Growth (%)

Data Center
221,223 16.6 217,880 -1.5 235,530 8.1
Systems

Devices 766,279 -6.3 700,023 -8.6 748,150 6.9

Software 811,496 10.7 922,745 13.7 1,052,956 14.1
IT Services 1,305,699 7.5 1,420,905 8.8 1,585,373 11.6

Communications
1,423,075 -1.9 1,461,662 2.7 1,517,877 3.8
Services

Overall IT 4,527,772 2.8 4,723,215 4.3 5,139,886 8.8

Source: Gartner Report, Jul 2023
Being an attractive market, the technology industry also witnesses fierce competition in every segment,
not only by Big Tech giants but also by a large density of small and medium-sized players. Notably, after
hiring aggressively to meet demand during boom years, IT companies are now aiming to right-size their
workforces leading to hiring freezes and layoffs sweep. But right-skilling continues to be just as critical.
The workforce reductions may have an upside for smaller, growing tech companies by providing
opportunities to acquire newly available talent.
Digital technology is constantly changing and evolving day-to-day. Staying up to date with trends and
innovation are essential in an ever-evolving field. Hence, it’s overwhelming to think about where else this
industry could possibly go. In recent years, top dominant technologies can be named Cloud Computing,
AI, 5G, AR-VR,...
 Figure 2. Top Software Development Trend in upcoming years
III. Microsoft Competitive Analysis
Microsoft faces intense competition across all markets for our products and services.

Figure 3. Microsoft’s Porter Five Forces Analysis

 Competitive Rivalry
The results of this Five Forces analysis of Microsoft put focus on competitive rivalry as the strongest force
affecting the Microsoft's business. Operating on the global scale, the company faces various competitors
ranging in size from diversified global companies with significant research and development resources to
small, specialized firms whose narrower product lines may let them be more effective in deploying
technical, marketing, and financial resources.
The main company’s competitors in three segments can be named:
- Productivity and Business Processes
• Competitors to Office include software and global application vendors, such as Apple, Cisco
Systems, Meta, Google, Okta, Proofpoint, Slack, Symantec, Zoom, and numerous web-based and
mobile application competitors as well as local application developers. Apple distributes versions of
its pre-installed application software, such as email and calendar products, through its PCs, tablets,
and phones. Cisco Systems is using its position in enterprise communications equipment to grow its
unified communications business. Meta offers communication tools to enable productivity and
engagement within organizations. Google provides a hosted messaging and productivity suite. Slack
provides teamwork and collaboration software. Zoom offers videoconferencing and cloud phone
solutions. Okta, Proofpoint, and Symantec provide security solutions across email security,
information protection, identity, and governance. Web-based offerings competing with individual
applications have also positioned themselves as alternatives to Microsoft's products and services.
• LinkedIn faces competition from online professional networks, recruiting companies, talent
management companies, and larger companies that are focusing on talent management and human
resource services; job boards; traditional recruiting firms; and companies that provide learning and
development products and services. Marketing Solutions competes with online and offline outlets that
generate revenue from advertisers and marketers, and Sales Solutions competes with online and
offline outlets for companies with lead generation and customer intelligence and insights.
• Dynamics competes with cloud-based and on-premises business solution providers such as Oracle,
Salesforce, and SAP.
- Intelligent Cloud
• Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, VMware,
and open source offerings. The company's AI offerings compete with AI products from hyper scalers
such as Amazon Bedrock, Amazon Code Whisperer, and Google AI, as well as products from other
emerging competitors, many of which are also current or potential partners, including Meta’s
LLaMA2 and other open source solutions. Enterprise Mobility + Security offerings also compete with
products from a range of competitors including identity vendors, security solution vendors, and
numerous other security point solution vendors. Server products face competition from a wide variety
of server operating systems and applications offered by companies with a range of market approaches.
Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle offer their
own versions of the Unix operating system preinstalled on server hardware. Especially, nearly all
computer manufacturers offer server hardware for the Linux operating system, and many contribute to
Linux operating system development. The competitive position of Linux has also benefited from the
large number of compatible applications now produced by many commercial and non-commercial
software developers. A number of companies, such as Red Hat, supply versions of Linux.
• IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that
competes with Microsoft's enterprise-wide computing solutions.
• Commercial competitors for the company's server applications for PC-based distributed client-server
environments include CA Technologies, IBM, and Oracle.
• Web application platform software competes with open source software such as Apache, Linux,
MySQL, and PHP.
 • In middleware, Microsoft compete against Java vendors.
• Database, business intelligence, and data warehousing solutions offerings compete with products
from IBM, Oracle, SAP, Snowflake, and other companies. System management solutions compete
with server management and server virtualization platform providers, such as BMC, CA
Technologies, Hewlett-Packard, IBM, and VMware.
• Products for software developers compete against offerings from Adobe, IBM, Oracle, and other
companies, and also against open source projects, including Eclipse (sponsored by CA Technologies,
IBM, Oracle, and SAP), PHP, and Ruby on Rails.
• Enterprise Services business competes with a wide range of companies that provide strategy and
business planning, application development, and infrastructure services, including multinational
consulting firms and small niche businesses focused on specific technologies.
- Other Personal Computing
• Windows faces competition from various software products and from alternative platforms and
devices, mainly from Apple and Google. Besides that, the company faces significant competition from
competing platforms developed for new devices and form factors such as smartphones and tablet
computers. Users are increasingly turning to these devices to perform functions that in the past were
performed by personal computers. Even if many users view these devices as complementary to a
personal computer, the prevalence of these devices may make it more difficult to attract application
developers to Microsoft PC operating system platforms.
• Devices face competition from various computer, tablet, and hardware manufacturers who offer a
unique combination of high-quality industrial design and innovative technologies across various price
points. These manufacturers, many of which are also current or potential Microsoft's OEMs which
may affect their commitment to the company's platform.
• Xbox and cloud gaming services face competition from various online gaming ecosystems and game
streaming services, including those operated by Amazon, Apple, Meta, and Tencent. The gaming
platform competes with console platforms from Nintendo and Sony, both of which have a large,
established base of customers. The company also competes with other providers of entertainment
services such as video streaming platforms.
• Search and news advertising business competes with Google and a wide array of websites, social
platforms like Meta, and portals that provide content and online offerings to end users.
 Threat of new entrants
Barriers to entry in many of the company's businesses are low. The technology industry is known for its
rapid pace of innovation and new players can rapidly enter the market with innovative products or
services. Especially, the emergence of open-sources technologies and cloud computing has allowed new
entrants to create viable alternatives to Microsoft’s products and services at low costs.
Not only that, Smaller and new entrants compete with the company based on a growing variety of
business models. Currently, some smaller companies compete with the Tech Giants by modifying and
then distributing open source software at little or no cost to end users, using open source AI models, and
earning revenue on advertising or integrated products and services. These firms do not bear the full costs
of research and development for the open source products. Some open source products mimic the features
and functionality of Microsoft products. Meanwhile, other competitors develop and offer free
applications, online services, and content, and make money by selling third-party advertising. Advertising
revenue funds development of products and services these competitors provide to users at no or little cost,
competing directly with our revenue-generating products.
 Bargaining Power of Suppliers
Microsoft sources various inputs for its hardware, software, and services from different suppliers,
including component manufacturers, independent software vendors, and cloud infrastructure providers.
Some of these suppliers are very qualified ones may have significant bargaining power, which can affect
the company’s costs, quality and innovation such as AMD or Nvidia whose certain supplied components
cannot be replaced by others and extended disruptions at these suppliers could impact Microsoft's ability
to manufacture devices on time to meet consumer demand. But, for the majority of products, the company
has the ability to use other manufacturers.
 Bargaining Power of Buyers
Microsoft operates in a competitive market where customers have many options. The company’s
customers range from large enterprises to individual customers, and each segment has a different level of
bargaining power. Large enterprises have a higher bargaining power as they have more purchasing power
and can negotiate better deal with Microsoft. In contrast, individual consumers have lower bargaining
power as they have limited purchasing power and are more likely to accept the price set by company.
Besides that, switching cost is a considerable factor in power of buyers. It really makes sense to
understand that individual customers have low switching cost and thanks to are abundantly available
options in the market, they can make decisions to leave based on price comparison. Meanwhile, large
enterprises show more loyalty due to high switch costs, and the availability of products for this segment.
Notably, the external factor of the high quality of information further empowers buyers in terms of
adequate information that they can use to compare the Microsoft’s services and products to competitors.
 Threat of Substitutes
Substitutes, such as non-online or manual-mechanical processes can reduce Microsoft’s market share.
However, while moderate switching cost help facilitate substitution, the global adoption of increasingly
advanced technologies reduces the availability of substitutes.
Besides these five competitive factors mentioned above, many of the areas in which the company's
competing evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent
introductions of new products and services. Hence, to compete effectively Microsoft must also be
responsive to technological change, potential regulatory developments, and public scrutiny that will
causes significant development and operational costs.
The competitive pressures described above may cause decreased sales volumes, price reductions, and/or
increased operating costs, such as for research and development, marketing, and sales incentives. This
may lead to lower company's revenue, gross margins, and operating income.
 Figure 4. Microsoft’s SWOT analysis
In such a fiercely competitive market, Microsoft possess many admirable advantages of a leading Tech
Giant and benefits from massive demand unfolded by digital transformation trend. The commitments to
provide powerful, flexible, secure, integrated industry-specific, and easy-to-use productivity and
collaboration products and services; R&D and innovation capacities; cloud infrastructures; brand
reputation and financial strengths will be the key-driving forces for Microsoft's success.