This Silicon Alley Insider chart of the day, via Tim O’Reilly, caught my attention. While Microsoft reports operating profit by division in their quarterly SEC filings, the chart does a much better job of telling Microsoft’s business story over the past 3 years.
When the chart was first posted, the date range spanned September 2006 to September 2009. Silicon Alley Insider added the December 2009 data after a comment on the blog post. As a result, you’ll notice that the y-axis doesn’t actually span the size of Microsoft’s roughly $10 billion operating profit in the December 2009 quarter.
It’s no surprise that Office and Windows make up the overwhelming majority of Microsoft’s profits. The Entertainment and Devices division (E&D) seems to be oscillating between profitability and loss, with profits being highest ahead of and during the holiday season. However, as a commenter, Se7en, writes on the post:
“Wow. E&D still isn’t even making a dent. All the great press, accolades, bragging about the Xbox360 and how it won the console wars, took the war to the living room, and rejuvenated the company, and that’s what we get? A little blue smudge on the bottom of the graph?”
To which, ex-Wall Street analyst Henry Blodget writes:
“@Se7en: Yes. At least it’s not subtracting $2 billion a year, though. (See: Online)”
Entertainment & Devices and Online Services are two important investment areas for the company, made possible by Microsoft’s impressive profits in the Office and Windows divisions. Whilst Microsoft has had some success attracting the hearts of users in these market areas, there’s a long road ahead before claiming success versus Apple and Google respectively. Frankly, one has to seriously ask if these investments will ever amount to being the profit engine(s) for the company. Note, I’m not suggesting that Microsoft abandon or minimize these investment areas. Rather, I’m asking whether these divisions stand poised to replace the profits from Office & Windows in the face of open source and cloud-based competitors.
This brings us to the Server and Tools business. With a healthy $1.5 billion in quarterly operating profit and growth over the 3 year analysis window, this division that could potentially offset erosion to the Office and Windows cash cows. Keep in mind that Microsoft’s cloud, Windows Azure, recently moved into the Server and Tools division. With the industry emphasis around cloud computing, and Microsoft’s success with .NET middleware, Microsoft likely its future linked heavily to the growth and profitability of the Server and Tools division.
Time will tell.
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PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”