(The following is exerpted from “Partnering With Microsoft: How To Make Money In Trusted Partnership With The Global Software Powerhouse” by CMP Books)
Microsoft’s enormous wealth and productivity are unparalleled in modern business industry. In fact, it rivals the gross domestic
product (GDP)-the gross earnings per employee-and the per-capita income of most nations.
That is, if Microsoft were a nation rather than a global corporation, its annual gross revenues would rank it 80th on the list of 227 nations-ahead of Uruguay, Costa Rica, Greenland, Iceland, Lithuania, Estonia, Croatia, Yugoslavia, Kuwait, Qatar, Bahrain, Mauritania, Turkmenistan, Mongolia, North Korea and 132 other nations. In fact, Microsoft’s gross annual revenues exceed the combined GDPs of the lower 56 nations on this list whose populations taken altogether exceed 10 million. Then, too, if Microsoft were a nation, there would be no rival for its per-capita share of its GDP: each of Microsoft’s 55,000 employees generates on average US$654,000 in revenues annually. By comparison, the 442,000 citizens of the world’s most productive nation-Luxembourg-generate on average US$35,894 per year, only five percent of their Microsoft counterparts’ productivity. Luxembourg is ranked 112th on the list of national productivity.
Microsoft’s global earnings power is indisputable regardless of the fact that only four of its seven profit-and-loss (P&L) product centers-Windows Client, Server and Tools, Information Worker, and Home and Entertainment-are profitable. In 2004, each of its business units grew by at least 11 per cent, comparing favorably to the US annual rate of growth of six percent. Imagine if Microsoft were hitting on all cylinders-if all of its P&L centers were profitable-how successful the company would be! Although only more than half of its business units are profitable, Microsoft’s peremployee ratio of net income wildly exceeds that of its competitors. In its FY04 results, on average, IBM employees generated US$23,804, HP employees generated US$17,606 and Oracle employees generated US$64,813 in net income. By contrast, each Microsoft employee generated on average US$149,091 in net income, more than 626 per cent greater than IBM, 847 per cent greater than HP and 230 per cent greater than Oracle. Consider, too, Microsoft’s continued financial strength in spite of inroads made by Linux. The threat is indeed of global proportions as developers and distributors worldwide refine and disseminate the Linux kernel and commercial distributions of the platform, the first major competitor to Windows on the Intel platform since Microsoft’s founding. The competitive pressure on Microsoft from open-source technologies- especially Linux-has chipped away at Microsoft’s historical competitive advantage of being the software price leader of the world.
Even so, low-cost or free Linux distributions-pushed by the likes of long-standing rivals IBM and Novell, among many others-have not substantially dented Microsoft’s share of revenues in consumer and enterprise markets. According to market researchers, Linux is the fastest-growing operating system, yet Windows Server shipments and revenues continued to outpace Linux by significant margins through 2004. While Linux server shipments grew 29 per cent during the fourth quarter of 2004, their total shipment value was US$1.3 billion, or nine percent of total server revenues for the period. By contrast, OEM partners generated US$4.6 billion of Windows Server-related revenues for the same period.
Open-source technologies have an immeasurable gap to close to overcome Microsoft’s product integration strategy, whose success is measured by strong growth of its desktop and server software. Windows Client software sales grew 23 per cent to US$2.9 billion in 2004, while Server and Tools sales grew 20 per cent to US$2.3 billion in the same fiscal year.
Moreover, Microsoft’s growth in multiyear licensing-agreement revenues increased to US$8.2 billion in FY04. While Linux is conventional-wisdom’s pick as the strongest competitor to Windows, its admittedly significant gains in server-units sold-eg, up 50 per cent in the third quarter of 2003, year over year-have yet to match Microsoft’s revenue.
In the US, for example, Linux sales reached US$743 million while Microsoft earned US$3.4 billion for Windows sales; nor has Linux approached Windows Server’s market share, which various analysts estimate to be between 60 per cent and 75 per cent. The introduction of several enterprise-ready Linux desktops from Linux distribution leaders Red Hat and Novell as well as Sun’s Linux desktop made headlines in 2004, as German and Chinese government agencies signed on as customers. But there is little doubt about Microsoft’s continued ownership of the desktop; it is estimated that between 95 per cent and 98 per cent of all personal computers worldwide run some flavor of Windows. Linux’s share of the desktop market remained in the low single digits through 2004, and is expected to rise only slightly by the end of the decade. There are several reasons to expect Windows’ continued dominance. The first is user reluctance to change. Unlike IT administrators, who are more open to experimenting with new technologies, users of PCs that have grown comfortable with the Windows operating system and user interface are far more reluctant to switch to a new operating system. Additionally, Microsoft’s desktop-to-data center integration strategy- which provides for tight integration between Windows and Office, on the front end, and server application data stored on servers, on the back end-will remain a strategic advantage for Microsoft. Additionally, the company’s push for multi-year licensing and software maintenance revenues all support Microsoft’s continued dominance for many years to come.
Moreover, with a vigorous marketing campaign behind Office Professional 2003 and Windows Server 2003, and advance marketing for the next upgrade of the Windows client and server platforms, code-named “Longhorn” and due in 2006-2007, Microsoft is sure to continue dominating the operating system market for the foreseeable future. Linux is a threat-and one that Microsoft has to come to complete competitive terms with-but Microsoft remains in the ascendant position in the market, relatively unassailed by open-source alternatives to its products. Open-source technologies introduce new pricing pressures and alternative business models that could threaten Microsoft’s wealth engine longer term, but there is no imminent threat to its power.
Governmental regulatory threats and competitive pressures notwithstanding, Microsoft remains the premier, most powerful software company in the world with earnings that rival those of many nations. And it remains unchallenged by less costly, globally distributed alternatives. In brief, Microsoft is successful and rich, a global market power.
Look out for more installments of Partnering with Microsoft later on this year in CDN This Week