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Microsoft Profits

I read somewhere (can't remember where) that Microsoft's profit margin on most of its products spans to around 80% of the products market value. Is this true?

EastIndian
Friday, April 11, 2003

No

Stephen Jones
Friday, April 11, 2003

Nope.

Closer to 90%.

pb
Friday, April 11, 2003

That's funny. The gossip that I've heard says that Microsoft loses money on most of their profits except Windows and Office.

Benji Smith
Friday, April 11, 2003

Actually, I seem to recall a recent article where *most* of their products were actually losers in the profit margin world. They have 2 products that KickSeriousButt as far as profit margin: Windows, Office. The huge profit that these make actually make up for the losses on most all of their other products.

I'll try to find the link and post it here later today.

Sergent Sausage
Friday, April 11, 2003

In a Fortune interview a few months back the new CEO of IBM said that their profit margin on software is 84%. In fact, his comment was something to the effect of "There is only one thing out there that has higher margins, and we're not in that - drugs.".

I was quite surprised by that margin number, and then a day or two later I read in another article that MS's margin on Windows and Office is 85-87%. As others have mentioned, the other products mostly break even or lose money.

  --Josh

JWA
Friday, April 11, 2003

So I guess that's why Microsoft puts so much effort into attempts to tie you to their platform.

MAX2000EXTREMEOHYEAH
Friday, April 11, 2003

Server software (mostly SQL Server and Exchange) is almost certainly a money-maker; it's certainly a significant chunk of MS' revenue these days. Not Windows or Office levels, but still bigger than most companies in the software business.

Dave Rothgery
Friday, April 11, 2003

Question:

Profit margin is what percent of a sale is profit. Calculated how? If I buy Windows for whatever it's selling for now, is that margin the sale price minus the cost of the box, manuals (yeah, right), shrinkwrap, etc.? Or is it those costs, plus the salaries of the developers for the time since they were added to the project until it was shipped?

In other words, are software margins calculated in terms of purely the manufacturing expenses, or in terms of manufacturing plus design expenses?

Mike Swieton
Friday, April 11, 2003

I used to work at Microsoft. I don't know about Microsoft's profit margins, but internally I heard that about 60% of Microsoft's sale revenue was from outside of the USA. That is why they spend so much effort on internationalization and localization of their products.

runtime
Friday, April 11, 2003

Mike Swieton:

Profit margin always takes into account all of the costs of producing the product: R&D, physical production, marketing, distribution, administrative management, pizza on Firdays, etc.

Benji Smith
Friday, April 11, 2003

It's also the case that if MS controls the server, they have better lock-in to the client.

Like Outlook.  If everybody uses Exchange Server for email, they'll most likely use Outlook.  It's much much much harder for the competition to make a client that is equivelent to Outlook enough to be useful, especially because MS can change some internal workings of Exchange and break the competition's clients.  If everybody uses an IMAP-based equivelent, they can use Outlook or any number of other applications, which reduces the value of an Office tie-in.

Much of the "other" things that MS is in, they "have" to be in to protect the Office/Windows lock-in.

flamebait sr.
Friday, April 11, 2003

"Profit margin always takes into account all of the costs of producing the product"

Not in this case. The margins in this case are the variable price of the good minus the variable cost. The margins are high since software has varaible costs nearing zero.

pb
Friday, April 11, 2003

pb -- I think you meant fixed costs rather than variable costs. Even so, you're wrong.

"Approaching zero" is a handy mathematical concept that has gotten incredibly abused by techies. Let's say it cost $3 billion to develop Windows XP. And lets say that they sold 100 million copies. Even though that's a lot of copies, it really isn't 'approaching infinity' and when you figure out the per-unit development cost, it figures out to $30 per unit, which isn't 'approaching zero' at all.

Add to the $30 development cost another $10 for packaging and $5 for marketing, and you've got a total cost for this product of $45. If you sell the product for $200, you make a profit of $155, which is 77.5%. That's where the 80% profit margin estimate comes from.

Of course, I made all of these numbers up, but I don't think they're that far off. And even if they're nowhere near correct, it still illustrates the principle that, even if you make lots of copies, the cost of the copies does not "approach zero" if the first copy cost a lot of money (proportional to the number of copies made).

In fact, I have raraly heard of a software engineering project where the effective per unit cost turned out to "approach zero." My own estimate is that, even with the most successful software, the per-unit cost is roughly $5 to $10. (Notable exceptions to this would probably be ubiquitous, but small, utilities like WinAmp or WinZip).

Benji Smith
Friday, April 11, 2003

Benji,
        You must have slept through that high school economics class. Pb was referring to variable cost, and he is quite right to say that they are close to zero if you take out the resellers cut.

          As IBM said, software is like the legal drug market; all the costs are fixed costs in the R&D and how many you sell later does not really affect them at all.

          Microsoft's net profits each year seem to be in the region of 27-45%; I don't have the exact figures to hand. I did read that one year Office provided 75% of the profits.

Stephen Jones
Friday, April 11, 2003

I meant variable costs.

pb
Friday, April 11, 2003

First off, do not forget that it costs hundreds of millions of dollars and takes decades to bring a new (legal) drug to market in the United States.  The second pill costs pennies to make.  That first one is a doozy though!  As mentioned above, marginal profit is almost entirely irrelevant in any industry with enormous fixed costs.

Second, we could continue to make random guesses about the makeup of Microsoft revenue, or we could just look them up at:

http://www.microsoft.com/msft/download/FY02/Q02_4_financials.xls

Microsoft's FY2002 revenues were $28B, which breaks down into:

desktop apps: 9.6B (almost all this is office)
consumer os: 9.3B (almost all this is windows)
enterprise: 5B
other consumer items:  3.5B
the rest: 0.7B

This revenue resulted in a net income of 7.8B.  Cost of revenue was 5B, R&D 4B, marketting 5B, 3.6B in taxes and 1.5B in "the rest" -- heating the buildings, etc.

Eric

Eric Lippert
Saturday, April 12, 2003

2002 after tax profits come out at 27.6% of revenue, and before tax profits at 42%

Stephen Jones
Saturday, April 12, 2003

Microsoft has recently started reporting revenue and operating income/loss on a product division (well, they call it "segment") basis.

Q4 2002 - the most recent for which numbers are filed broke down as follows (from their 10Q SEC filing for the "2003Q2" quarter - 9/2002-12/2002):

Client                                $  2,435        $1,965
Server Platforms                    1,665            498
Information Worker                2,411        1,883
Business Solutions                        139            (93)
MSN                                          569        (157)
CE/Mobility                                  21            (39)
Home and Entertainment      1,282          (348)
Reconciling Amounts                  19          (450)
Consolidated                      $  8,541        $3,259

Jason Hills
Saturday, April 12, 2003

Yowch...if I'm reading those numbers correctly, they're bleeding money at the moment.

In this case, it's a wooly mammoth with a paper cut, but still....

Brent P. Newhall
Monday, April 14, 2003

I apologize, but I'm not following you -- how is making a net profit of 7.8 billion dollars "bleeding money"?

Eric

Eric Lippert
Tuesday, April 15, 2003

It is "bleeding money" because the vast majority of its products and services are in the red. It may not be very noticeable right now because Windows and Office are still generating a lot of cash, but there is still cause for concern:

The goal of creating a product is to eventually have it make money - if a product consistently loses money, then it is a waste and a burden. Even if said product is gaining lots of market share, it still has to convert that market share to dollars at some point. For every financial quarter that a product is in debt, there are a couple of months where the company could have been researching or developing another product that *will* make money. It is important to pick out the winners and the losers quickly in order to give the winners as much resources as possible.

Shrugging off the fact that the other products are riding on the coat tails of Office and Windows is a Bad Idea because the revenue for both of these moneymakers plateaued years ago. Some day, the well will run dry, and while there is a good chance that the Microsoft desktop monopoly will never lose ground, it will not hold the same power as it does today. Microsoft needs to have a plan for that day. Right now, the plan revolves around a bunch of products that are bleeding money because no one is buying them.

ignore the man behind the curtain
Tuesday, April 15, 2003

> Right now, the plan revolves around a bunch
> of products that are bleeding money because
> no one is buying them.

Again I must apologize, because I am apparently still not following your train of thought.

> Home and Entertainment      1,282          (348)

I agree that a loss of $348M is a fairly large sum to lose -- obviously consumer products are extremely expensive to develop. 

What I don't understand is how you conclude from this that "no one is buying them". If no one bought them then where did the 1.2 _billion_ dollars of revenue come from?

Eric

Eric Lippert
Tuesday, April 15, 2003

Actually, there is one other thing that I'm confused about:

> the revenue for both of these moneymakers
> plateaued years ago.

"client" revenues for Microsoft (which are almost entirely Windows and Office) were:

FY01: 8.2B
FY02: 9.4B

That's a 15% increase in revenues last year. So when you say that revenue for Windows and Office "plateaued years ago", which years are you talking about?

Clearly I'm missing something here.  I know very little about accounting, so if you could enlighten me, I'd appreciate it.

Thanks,
Eric

Eric Lippert
Tuesday, April 15, 2003

Can anyone tell me how much profit microsoft get for the Xbox (if any). I heard it costs more to make the hardware, they get most their profits form the software. Could someone also tell me how much microsoft make a year overall. This informantion will be really helpful to me because i am a GCSE student, doing price wars of the Microsoft Xbox, the Sony Playstation 2 and the Nintendo GameCube. If anyone knows the same information except for the GameCube i would be really grateful.
Thank You

Alex

Alex Aylott
Tuesday, March 09, 2004

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