When you hear the word “startup”, you most likely think of an Internet startup. Maybe it’s funded, maybe not, but its burn rate almost for sure puts it in the red each quarter. Obviously, Microsoft is not a startup. Nor have they been a startup for a long time. But what if you thought of their Online Division as an Internet startup? One funded by Microsoft. The thought it terrifying. Or it should be. To Microsoft.
Microsoft released their Q1 2011 earnings today. The results were very good except for one very big blemish: the Online Division. Last quarter, the division lost $560 million for Microsoft. That’s better than the previous quarter when it lost a staggering $696 million, but it’s much worse than a year ago, when it lost $477 million. In the past year, Microsoft has lost well over $2 billion from the division.
Let me repeat that: 1 year, a $2 billion loss.
Obviously, any startup that did that would have long since gone under — with that kind of burn rate, they probably would have gotten the plug pulled a few weeks into existence no matter how well-funded they were. But Microsoft keeps pumping money into the division. And they have to. Because even they realize it’s the future.
Of all the money Microsoft makes, the vast majority comes from two divisions: Windows & Windows Live Division (Windows) and Microsoft Business Division (Office). They make a good amount of money from the Server & Tools division too, but it’s less than half of those other two. And both of those two are under direct assault.
The web is making Windows (and every operating system) less vital, while at the same time coming up with free and/or cheap tools to replace the relatively expensive Office. And new devices like smartphones and tablets have created an ecosystem where Windows is essentially a non-player (though we’ll see what happened with the just-released Windows Phone 7). And Office is basically non-existent in these spaces.
As this past quarter has shown, Microsoft is fine for the foreseeable future still. People (mainly companies) are still buying Windows and Office licenses. But only a fool would think this is perpetual.
Microsoft needs to have a heavy presence online in order to maintain their power going forward. And that’s why they’re dumping so much money into it. And you could argue that this strategy has worked with products like Bing. But Microsoft needs more than just this presence, they need to make money here. And not only are they failing at that. They’re failing in spectacular fashion.
Five years ago, Microsoft’s Online Division was actually making money. Granted, it wasn’t a lot. But they were in the black. But for the past 19 quarters in a row now, Microsoft has lost money in this division. And as this chart put together last quarter by SAI shows, the losses have actually gotten worse over time. It’s a bloodbath being covered up by the profits from other divisions.
People talk a lot about Google’s failure to make money off of YouTube. But at least they’re not bleeding money to this extent. And they may actually be close to profitability. And while it’s true that Apple hasn’t been hugely successful online, they really haven’t tried much. They have MobileMe, which isn’t hugely popular, but they do make money on. Twitter is another company talked about a lot as not making money. They too seem much closer than Microsoft is at this point. I think it’s a safe bet that they’re not running $500 million in the red each quarter.
So can Microsoft turn this around? With Bing continuing to gain some popularity and Microsoft now in complete control of Yahoo’s search business, there’s some hope. But even with those, there doesn’t seem to be a clear cut way to start making real money without pouring a ton more in. Yahoo Search is in decline and while Microsoft is monetizing Bing, they’re also spending a huge amount advertising it to get the eyeballs they eventually monetize. 19 quarters of losses in a row is bad enough; the fact that the profit trend is going the wrong way is even more troubling.
Is it too late to buy Facebook outright (they own a very small stake)? Of course it is, but maybe they can head to SecondMarket and allocate at least some of the $2 billion a year they’re blowing to buy up some Facebook stock. That would be one way to make money online.
[image: Warner Brothers]
Microsoft, founded in 1975 by Bill Gates and Paul Allen, is a veteran software company, best known for its Microsoft Windows operating system and the Microsoft Office suite of productivity software. Starting in 1980 Microsoft formed a partnership with IBM allowing Microsoft to sell its software package with the computers IBM manufactured. Microsoft is widely used by professionals worldwide and largely dominates the American corporate market. Additionally, the company has ventured into hardware with consumer products such as the Zune and...