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Microsoft (MSFT)Stock (Media & Entertainment Industry, Internet Advertising Industry, Computer Software Industry, Video Games Industry)
 Until recent months, news outlets had been saturated with coverage of Microsoft's unsolicited bid to buy out the internet services company Yahoo! for $44.6 billion. Three months after its initial offer, and after increasing the offer to $33 per share (a $5 billion increase), Yahoo declined the offer, leading Microsoft to withdraw its bid. The acquisition of Yahoo! would have given Microsoft a greater presence in internet search through Yahoo's portal, and more importantly would have created a new revenue source with sales of online advertising through Yahoo's network. Internet advertising is a rapidly growing industry, but one which has been dominated by the juggernaut Google. After walking away from its second offer, Microsoft talked with a number of different companies about potential deals. Microsoft spoke with News Corporation, AOL, and Facebook.com[1] [2] In May 2008, billionaire investor Carl Icahn made a threat to take over Yahoo's board of directors and coordinate a merger deal with Microsoft leading the two companies to discuss a potential merger yet again.[3] Because of Microsoft's massive size, the company all but inevitably experiences considerable difficulty in maintaining a meaningful growth rate. Management's reported dysfunctional decision process seems to have also hindered the company's ability to both quickly detect and capitalize on innovative technological and market opportunities. The company has exhibited a pattern of coming late to the party and using cash to buy its way into a developing market, with the added handicap of then integrating the acquired entity into the Microsoft family and culture. The company will continue to face an imperative to extend its reach into new sectors of technology. Hence, its current push to develop its Entertainment, Devices and Online Services divisions, and its interest in Yahoo. Although some of its efforts in these areas struggle to match the performance of established industry giants, Microsoft's massive pool of ready capital provides some buffer to correct early missteps and overpower competition in the product initiatives it chooses to pursue. Whether it can achieve respectable returns on its investment in these initiatives is inherently difficult and a very open question. Microsoft acquired travel Web site Farecast, gaining technology that predicts whether air fares will rise or fall. Farecast Chief Executive Officer Hugh Crean announced the purchase Thursday on the company's blog. He didn't disclose a price or other terms. Microsoft added the Seattle-based company's prediction and planning services to its MSN Travel Web site in July. Microsoft is making acquisitions to attract more Web users and boost online ad revenue. After buying AQuantive for $6 billion last year, Microsoft made an abortive attempt to acquire Yahoo. The moves are an effort to catch up with Google in the $40.9 billion global online ad market. "We look forward to working closely with the Farecast team to incorporate and apply its technology in new and interesting ways," Whitney Burk, a spokeswoman for Redmond, Wash.-based Microsoft, said in an e-mailed statement. She declined to comment further. A dramatically changing computer industry landscape is also affecting Microsoft, especially in its core software business. Microsoft must learn to adapt nimbly in order to effectively combat software as a service (SaaS) offerings, the reinvigoration of Linux and Open-Source, and declining PC sales worldwide. Increased competition in its lucrative servers business must also be addressed.
[edit] History and Business OverviewCo-founded in 1975 by Bill Gates and Paul Allen, Microsoft Corporation began to dominate the computer industry with its 1992 introduction of the Windows 3.1 operating system. In following years, the highly successful releases of Windows 95 and 98 consolidated this lead, as did warm receptions of updated Microsoft Office software. Today, multi-national Microsoft remains at the head of the industry, its desktop operating system market share exceeding 90% and its global annual revenue of more than $44 billion. While the bulk of Microsoft’s profits derive from corporate contracts, a significant minority of its profits come from the pockets of private individuals, and Microsoft is a common name both at home and work. In recent years, Microsoft has found itself inevitably struggling to sustain strong growth rates. Like any extremely large company, it is difficult to continue significant percentage gains in revenue; as company worth and total income grow, revenue increases must become ever greater to “move the needle.” To combat this, Microsoft has been expanding into much-needed new markets, introducing a variety of new products and service offerings. Among these are gaming industry phenomenons Xbox and Xbox 360 consoles, as well as the rather less well-received Zune portable media player. Microsoft is also bulking up its Online Services offerings, and it has made multiple attempts to acquire internet search portal Yahoo!, an acquisition that would have significantly enhanced Microsoft's presence in the online services sector. [edit] Products and Service OfferingsCurrently, Microsoft’s products and service offerings fall into five divisions or business sectors:
Of these divisions, the highest earners by far are Client, Business, and Server and Tools. However, the strongest rates of growth are in are Entertainment and Devices, with Server and Tools placing a far second. The table below shows revenue breakdown by division for the last two quarters of 2006, percent change between those quarters, and percent change between years (2005 and 2006).
Source: Company Data [edit] Earnings for Fourth Quarter 2008Microsoft reported earnings for its fourth quarter of FY2008 on July 17, 2008. The company earned $15.84 billion in revenue, barely missing analysts estimates for the quarter and as a result shares fell over 6%.[4] For the fiscal year 2008, Microsoft reported revenues of $60.42 billion, an increase of 18% over 2007. The earnings results for the fourth quarter signaled to investors that the major technology companies, including Google and Yahoo!, are also susceptible to weak market conditions. [edit] Trends and Forces[edit] Antitrust risksMicrosoft has a history of running afoul of anti-trust laws. As recently as July of 2006, the company was fined US$356 million by the European Union in response to a 2004 antitrust ruling. Given its monopolistic prominence, Microsoft is always under a slew of lawsuits, and the damage this does to the company's profitability, business strategy, and public image is significant. Potential legal problems can have a variety of impacts, from negative publicity to fines to possible forced reorganization of the company. [edit] Losses from PiracyMicrosoft loses a staggering US$18 billion every year from pirated Windows operating systems alone. With a total piracy rate of about 30% and the number even higher in some countries, Microsoft suffers massive losses from the distribution of pirated Windows. For instance, in China, 90% of all Windows operating systems are pirated. Worst of all for Microsoft, the countries with the highest rates of piracy are exactly those with the fastest-growing number of PC purchases. Thus the opportunity cost of piracy to Microsoft is huge: the software giant finds itself unable to tap into these burgeoning PC markets just when it needs them the most. In fact, fast-growing PC markets Latin America and Asia/Pacific account for about 1/3 of total PC shipments, but only 1/10 of total PC software spending. Microsoft has repeatedly stated that cracking down on piracy will be among its main goals in the coming years. In addition to its direct approach of petitioning for governmental crackdown and legal modification, Microsoft is also pursuing more creative anti-piracy methods. Its current push for "Genuine Windows" promises a host of special features, additions, and online services for those with non-pirated versions of Windows. If this two-pronged attack on piracy succeeds, Microsoft could reclaim as much as US$ 3 billion by reducing piracy a mere 8%. Software piracy is so widespread in South Africa, it’s almost thought of as commonplace rather than illegal. A 2006 piracy study by IDC - a technology and telecommunications advisory firm - found 35% of the software in South Africa is illegal, costing software publishers more than $150 million a year in that country alone. "Piracy remains one of the major hurdles to realizing the potential of the information economy in South Africa and on the continent," Business Software Alliance SA Chairman Alastair de Wet told IT Web. "There is great concern for our local economy that over a third of software in use is illegal." "We want to protect legitimate computer businesses and resellers who do the right thing in selling genuine software," Microsoft’s Reynolds told IT Web. "Microsoft won’t stand by and allow unscrupulous vendors to destroy the businesses of our channel partners or the jobs of their employees." Earlier in April 08, Microsoft settled out of court with 21 South African computer dealers that were selling computers loaded with unlicensed Microsoft software. And last week in China, police broke up a piracy ring in Shenzhen, seizing programs worth upward of $750 million on a tip from the Federal Bureau of Investigation. [edit] Shift towards web-based software servicesDue to a strong trend of shifting towards web-based services and away from traditional desktop software offerings, it may well be the end of an era for Microsoft and other tech companies. This doesn't mean that Microsoft is "finished"--indeed, it is highly unlikely that Microsoft will be in a position of jeopardy any time soon. But in order to retain its strong position, Microsoft will have to make some nimble adjustments in its business/development strategy and product offerings. Microsoft may have to invest significantly in appropriate acquisitions to bolster its position as it tries to shift gears.
[edit] New focus on internet servicesMicrosoft's recent rebranding of its Hotmail, MSN, and LiveJournal offerings under the name of Windows Live marks an important company decision to focus more intensely on expansion into the internet service market. Microsoft has a number of interesting advances up its sleeve, including the MSN search toolbar, a new graphics-heavy "digital human" search interface, and adCenter, Microsoft's first totally self-developed advertising platform. But Microsoft will have rough competition to subdue, and remains several steps behind internet services giants Google (GOOG). Google alone currently accounts for 60% of world market share in internet searches. This stands to change if Microsoft is able to acquire Yahoo!, currently the world's second-largest online search company. The combination of Yahoo! and Microsoft has potential to create serious competition for Google, and Microsoft's existing base of consumer and business customers will open up new users to Yahoo's portal, and vice versa. A merger of the two companies will create amjor revenues for Microsoft in online advertising sales, a market sector that Microsoft desperately wants to enter and one where Yahoo! has an existing infrastructure and track record of success (although, not on the level enjoyed by market leader Google). [edit] No more big rollouts?The new product cycle includes a near-simultaneous introduction of Windows Vista, the Microsoft Longhorn server, and Office 2007. Because the changing tech markets makes it possible (some even say likely) that this will be the last large product cycle rollout of its kind for Microsoft, the performance of Vista and its companions will be especially important, as they may have to drive earnings for some years to come.
[edit] Xbox hopeful, Zune notEntertainment and Devices is currently Microsoft's fastest-growing division in terms of revenue generation, and its two most visible products are the Xbox gaming platform and the Zune mp3 player. Both products have received a large amount of media coverage (not always positive), and their eventual or continued profitability with have an important impact on Microsoft's overall performance as the E&D division continues to grow.
Microsoft announced in May 2008 that it would be expanding the content offerings in the Zune marketplace. The new content includes television shows from Viacom's Comedy Central as well as from NBC.[7] [edit] CompetitionMicrosoft's involvement in many different aspects of technology and computing result in competitive pressure from a number of different sources:
Source: Company Data
Other competitors include SAP (servers), Red Hat (Linux software), Symantec (Internet Security) and Cisco (internet telephony).
 Microsoft2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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