Microsoft Business Model: Looking at The Blue Sky

Microsoft has transformed its centerpiece of growth from Windows to Azure, at least according to its publication. Unfortunately, you will not find Azure as one of the business segments in Microsoft’s official report. Today we try to bridge that gap, we will cover how Microsoft makes money today through our Microsoft Business Model.

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Too Long, Didn’t Read

On Premise as a Services

The motivation behind the company especially large enterprises to move from conventional servers (on-premise) to cloud technology is – as always – to cut the cost. To give you an illustration of how on-premise servers work, imagine a shoe factory that has a large machine that acts as a server. This machine is built on a shoe factory site. This is why it is called on-premise. Because it is located in your company or somewhere you can access easily.

The IT department could develop Operating System (OS) in this machine. Let’s call this OS Shoemaker 11, which is designed to help the employee work digitally. Each employee has a PC that is connected to Shoemaker 11. IT Department assigns that every employee has a certain level of authority,

For instance, The production worker could log in to Shoemaker 11 and check the salary database, their today task, and what shoe model they need to produce. The manager could access sales trends, workers’ productivity, and the development of new products.

The shoe factory control all aspect of this large Machine. The networking, how the apps work, who can access what, how it looks, how many Terabytes of data is needed and stored.

And,

This is all expensive. Buying this kind of large machine and maintain it in optimum condition is costly. Not to mention the security and reliability.

Intelligent Cloud Segment: Role in Microsoft Business Model.

Cloud technology or IaaS tries to offer another solution. For Microsoft, these services are done with Azure. It allows a company – or in our example – the shoe factory, to reduce the IT-related cost by taking care of the virtualization, storage, and server.

The shoe factory doesn’t need to buy expensive machines to build Shoemaker 11. Microsoft provides it through Azure. Shoe Factory’s IT Department could focus on building the OS, developing apps for work, managing the data. Moreover, IT doesn’t need to take care of the maintenance and the security, it is Microsoft’s.

This is what Azure does. A competitor like AWS and Google Cloud has the same role.

And since it is done on the cloud, the scalability is endless. The Shoemaker 11 can be streamed to all Shoe Factory’s employees all over the world, not only locally near the headquarter.

Take a real-life example is Netflix. The movie streaming services use AWS on their server-side to cast their movie to the world.

In its Annual Report, Microsoft includes IaaS in its Intelligent Cloud segment. In 2020, This segment generated 20 B revenue, contributing around 30% of Microsoft’s total revenue.

The Productivity Segment’s: Role in Microsoft Business Model.

There is a reason why Microsoft says that Azure is its new growth engine. One of them is almost all aspect of Microsoft business is related to Azure. The Productivity and Business Process segment is one of them. Office 365, the online Document editing tool, which is part of The Productivity and Business Process segment is powered by Azure.

Office 365 is the cloud version of its glorious Microsoft Office – Word, Powerpoint, Excel, and the gang. With Azure, Microsoft could scale it up massively. Now, customers have a choice. Instead of buying a new Office version every year or two, they can subscribe to Office 365 – get an update and maintained regularly by Microsoft via the cloud.

In the IT world, Office 365 is called SaaS or Software as a Service.

The Productivity and Business Process segment is not only about Office 365and its offline version. It also has a wide range of services and products for businesses like Skype, Microsoft team, Linked In, Dynamics 365, Sharepoint, One Drive, and Outlook.

In 2020, The Productivity and Business Process segment contribute 32.44% of total Microsft revenue.

More Personal Computing Segment: Role in Microsoft Business Model.

Finally, we come here.

This is a Microsoft segment whose product is familiar to us. Windows OS, Xbox, Bing, Microsoft Surface. This is the segment that serves ordinary people, unlike another segment that focuses on businessmen and IT geeks.

The Business Model is simple. Microsoft develops and sells that product: The OS, the console, the devices. We don’t think readers need an explanation about how Microsoft makes money from this.

In 2020, The More Computing Segment contributed 32.74% of total Microsoft revenue.

Azure is The New Windows.

You don’t find Azure in the business segment. Unlike Amazon that reports its cloud computing as a specific segment, Microsoft hides it. But surely we know Azure is everywhere in Microsoft business lines.

It is apparent in the Intelligent Cloud segment. It also set office 365, making it possible to stream via the internet. And when Cloud gaming kickstarts, the Azure role will become more vital to support Xbox’s cloud gaming.

All segments are Azure-related now. It was much different back then.

Before Satya Nadella takes the helmet, Microsoft relied its growth too much on Windows. That is why you see windows phones or Windows 8 that is designed for mobile that turns to be a flop. Though we don’t like the execution, the idea is impressive we think.

Once Windows is accepted globally as mobile OS, it is easier for Microsoft to monetize by selling its mobile version of Office. Unfortunately, a lack of collaboration with developers prevents this trend to happen. It can’t be Windows, Microsoft need to build something from scratch.

Final thought. Q&A.

Windows is not dumped – and it can’t be, but the spotlight now is on Azure. Especially, when the world migrates its on-premise infrastructure to the cloud. Nonetheless, we still questioning why Microsoft does not lay its cloud card on the table like Amazon and Google, even Alibaba does.

The investor needs to know how good and efficient Azure is – how much its operating margin, how rapid it grows?

To get informed more about Azure’s economic moat, we suggest readers visit here