Microsoft discussed its growth strategy with financial analysts yesterday. It was all about the cloud and the enterprise – and how its consumer market lessons will fuel enterprise growth. There was no update on the search for the new CEO.
The revenue breakdown is: 55% enterprise, 20% consumer, 19% OEM and 6% SME’s. As to where the revenue comes from: 32% Office division, 26% Server and Tools, 25% Windows, 13% Entertainment and Devices, and 4% Bing and Online. What that tells us is that it is firmly in the enterprise camp but the consumer segment is a major part of its future – although not always in the most obvious way.
It believes focussing on consumer devices and services will help the core enterprise business. According to COO Kevin Turner, because it has online services in the consumer area it is “able to deliver world class business services, at scale, which we could not do otherwise.” This refers to Bing, MSN, Xbox Live, Skydrive, and Skype. He said Microsoft has used its consumer market experiences to inform the development of enterprise services like Office 365 which is now at a $1.5bn run rate and rising fast, Azure, Yammer, Dynamics CRM and some ERP cloud functionality. Learning from the consumer world can be effective – Salesforce.com still bases much of its business on this concept – and many of the products Microsoft cites are more than credible. But this approach benefits from a strong online presence and this is still at small part of the overall business.
Then there is the question of revenue potential and margins from services. According to the FT, Microsoft revealed service revenue growth of 13% last year to $12.3bn (16% of the total) but the gross profit margin on services was 24% compared to the corporate average of 74%. The drop in margin is inevitable, the question is whether Microsoft – and its investors – are ready to accept it.