Windows Insider

The Wide Demographic Reach of Microsoft’s Billions

If you ask people who aren’t IT pros what they know about Microsoft, they’ll probably start by mentioning Windows.

While Windows once drove Microsoft’s cash flow and growth, that’s no longer the case, as I discovered while reading through Microsoft’s most recent quarterly report.

Microsoft now has eight separate product lines that contribute at least $1 billion per quarter in revenue to the company’s coffers -- with a ninth unit nearing that magic number.

Office Commercial
Always a cash cow, Office has replaced Windows as the 800-pound gorilla of Microsoft business units, accounting for more than 20 percent of the company’s total revenue. It includes volume licensing and subscriptions for Office 365 commercial products and services.

The most important fact: Office 365 Business and Enterprise subscription revenue is growing rapidly, while revenue for licensing of on-premises products is declining slowly. One key driver is the ubiquity of Office apps across platforms. It’s quite telling that new Office features often appear on iOS and Android before they arrive on Windows devices.

Server and Cloud Services
This is the other twin colossus that’s driving Microsoft. The on-premises stalwarts that power most big businesses today, including Windows Server, SharePoint, SQL Server, Visual Studio and System Center, grew a healthy 12 percent over the previous year, but here, too, the cloud is the biggest driver of growth. Revenue from Microsoft Azure grew 93 percent, with Azure compute usage "more than doubling year-over-year."

Microsoft doesn’t provide exact revenue figures for each of its cloud-based products, instead highlighting the "annualized run rate" of more than $14 billion.

Gaming
The Xbox division has drained resources for years but it’s now a big business, responsible for more than $3.3 billion in revenue in the most recent quarter.

For years, the Xbox had a reputation as a money pit, but it’s emerged in recent years to claim third place among Microsoft’s businesses. And the platform is now big enough to derive more revenue from Xbox software and services, which are growing rapidly.

Windows OEM and Windows Commercial
Windows is really two businesses, with very different customers. A little more than 10 percent of Microsoft’s revenue in the quarter came from sales of Windows licenses to PC makers for installation on new PCs (Windows OEM). A slightly smaller slice of revenue came from volume licensing agreements for Windows Pro and Enterprise editions (Windows Commercial).

Despite the declining PC market, both Windows divisions managed to increase revenue by about 5 percent. That level of growth is probably unsustainable, but for now, at least, it’s a bright spot.

More Billion-Dollar Businesses
The next four categories on the list generate an average of well more than $1 billion per quarter in revenue each and collectively they account for about 20 percent of total revenue.

Search advertising revenue was up 10 percent. Microsoft long ago abandoned any dreams of becoming an advertising company, but this business pays for several of its consumer services and is fueling its next-generation cloud services.

The Surface line has become a steady performer. A refresh of the flagship Surface Pro line this year should accelerate growth.

Enterprise services, including Premier Support Services and Microsoft Consulting Services, are also in the billion-dollar club.

And then there’s the Office Consumer business, which is a tiny fraction of its commercial cousin, but represents nearly 25 million Office 365 Home and Personal subscribers.

When you put all those pieces together, Microsoft has transitioned from a one-product monopoly (Windows) into a software and hardware company with a surprisingly broad range of revenue streams.

About the Author

Ed Bott is a Microsoft MVP and an award-winning tech journalist who has covered Microsoft for 25 years. He's written numerous books on Windows and Office, including the best-selling "Inside Out" series from Microsoft Press. Bott delivers outspoken advice on a wide range of technology topics at his ZDNet blog, "The Ed Bott Report."

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