Foley on Microsoft

What Is Microsoft's Next Billion-Dollar Business?

Whether you're in the camp that believes that Microsoft is too dependent on its cash cows or the one that thinks that Microsoft is spreading itself too thin, it's worth considering which product will be the next billion-dollar baby in Redmond.

Microsoft officials say there are already a handful of businesses that have earned the company in excess of $1 billion annually -- beyond the always dependable Windows and Office franchises. In the current billion-dollar club (in no particular order) are: Xbox, SQL Server; System Center; Unified Communications; SharePoint; Developer Tools; Dynamics (ERP & CRM); and Online display and search advertising.

Caveats: Online advertising may bring in a billion in revenues, but it's also continuing to post millions in losses, so the net is kind of a wash. Meanwhile, SharePoint is well on its way to becoming Microsoft's first new $2 billion business.

At Microsoft's latest Financial Analyst Meeting (FAM) in late July, company officials attempted to respond to continued criticisms of how the company's execs are investing their money. Microsoft officials told the Wall Street analysts at FAM that Microsoft actually has eight core businesses now. There's some overlap with the already mentioned billion-dollar club, but there's also some differentiation. The eight are: Xbox and TV; Bing; Office; Windows Server; Windows Phone; Windows; Business users (enterprise software); and SQL Server.

Officials said there were a number of other businesses that they considered to be "extenders" of these eight cores. Those extenders include retail stores and marketplaces, services and support, MSN, mice and keyboards, MediaRoom (IPTV), Visual tools, Windows Live and Dynamics.

So, are any of these Microsoft's next billion-dollar-business targets? Some are, but not all. A more accurate list may be found in the handful of businesses that the 'Softies are actively incubating with their various partner and sales teams. Microsoft's incubation sales organization is focused more on enterprise products than on consumer offerings -- but that's really where Microsoft continues to make most of its money, in spite of its recent frenzy of consumer-focused spending at the company.

This active incubation list -- again -- looks different from the previous lists, though there is some overlap. On the active incubation list are: High-performance computing; Microsoft Online Services (particularly the Business Productivity Online Suite); Identity; Desktop virtualization (Microsoft Desktop Optimization Pack); Unified Communications: Office Communications Server, Exchange Hosted Services and Live Meeting and Voice; Storage (Data Protection Manager); Mobility; and Bing Maps.

It isn't news that Microsoft is looking to diversify beyond its traditional core businesses. Nor is it news that some disgruntled shareholders -- more than a few of whom are likely Microsoft employees -- disagree with the bets that the company brass is making in order to diversify. A quick review of the anonymously penned Mini-Microsoft blog makes it plain that many Windows and Office employees are sick of Microsoft's fledgling consumer businesses getting all the marketing and advertising love.

Microsoft execs, like many others in established companies, are trying to find a balance between the two groups. They're walking the tightrope between the tried and true and the new and potentially promising. They have sometimes erred and will continue to err on the side of conservatism, and at other times on the side of exuberance.

Whatever you think of Microsoft's senior leadership's investment picks, there has been a marked shift since Chairman Bill Gates relinquished his day-to-day duties at the company back in 2008. The company's willingness to make smaller bets that could play themselves out for a sustained length of time has disappeared. Ideas that can't and won't turn relatively rapid profits are out of favor at the empire, for better or for worse.

If you were helping Microsoft hedge its bets, where would your money be these days?

About the Author

Mary Jo Foley is editor of the ZDNet "All About Microsoft" blog and has been covering Microsoft for about two decades. She has a new book out, Microsoft 2.0 (John Wiley & Sons, May 2008), about what's next for Microsoft in the post-Gates era.

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Reader Comments:

Sun, Sep 12, 2010 MythicalMe

"As the XBox has already proved, that software piracy is minimized when the entire ecosystem is under lock and key. Apple knows this." Breaking locks and keys are a challenge to pirates, not a deterrent. Many Apple products have already been jail broke and many XBox titles have likewise been pirated. You're not going to stop piracy, it'll always exist. The reason that it's a problem is the price. No matter how much noise that software manufactures do about development costs, many people see software as a way of extracting cash for something they've already bought. Microsoft got popular by making DOS and later Windows a part of each computer sold. People knew that if they bought a computer that they wouldn't pay extra for the OS. Many people still buy a new computer whenever a new version of Windows is available because it's perceived as the less expensive option. More people will pay for software they want when the price is what they're willing to pay. If I have an opportunity to buy a popular title for $25.00 or obtain a pirated copy, i'll buy it. If the same title is $100.00, that's way to costly for my budget, so the pirated copy wins.

Wed, Sep 8, 2010 snarky nonamos

Used office furniture.

Wed, Sep 8, 2010 technogeist

MS should get into hardware more. As the Xbox has already proved, that software piracy is minimized when the entire ecosystem is under lock and key. Apple knows this. ;) How many more years do we have to put up with an easy target for the scummier elements of the web?

Tue, Sep 7, 2010 Ravi Gokulgandhi

I think BPOS is one of the contributor for the billion dollar club

Fri, Sep 3, 2010 Doug New York

Being an government IT worker for 20 years give you insight into developing tech trends. Today MS has sold cash strapped governments very expensive software. What new and hip in government (MS) means the end of that tech dominance.

Thu, Sep 2, 2010 Richard San Francisco

I really do not think Windows 7 on mobile will be a success until microsoft buys their way into that market by acquiring a cell phone company. RIMM (blackberry) has been in decline because of international problems (countries banning the phones) and microsoft could use this to their advantage and acquire blackberry/RIMM.

Thu, Sep 2, 2010 googleguy Seattle

Xbox Live has been a great success for MSFT. They have more subscribers than all the top 25 newspapers in our country combined.

Thu, Sep 2, 2010 Achal

Windows Phone 7 and the cloud (Windows Live + Bing), most definitely.

Wed, Sep 1, 2010 Mark

To: Clinton Gallagher --- "what happens when Halo boys grow up in 2-3 years?"... Well, what happens is the following - Halo boys will start earning their money and spending it on watching/playing different stuff on XBox since they are used to it... XBox + online streaming will become a huge thing.

Mon, Aug 30, 2010 Clinton Gallagher Milwaukee County, USA

XBox and TV? Pay several hundred dollars extra for a "set-top box" game console? That's a billion dollar market? What happens when the Halo boys grow up in 2-3 years? The new web-enabled HDTVs already have a GUI from the manufacturer complete with SDKs --and-- to cover their bases their products also support either Yahoo Connected TV or Google TV SDKs. Microsoft? TV? Hardy Har Har. Microfail strikes again.

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