Know the Real Secret to Microsoft’s Success

Bill Gates and Paul Allen founded Microsoft in 1975, and it was incorporated six years later. The international firm is still a pioneer in software creation and was once among the largest IT firms in the world. Microsoft is best known for creating the Office suite of apps and the Windows operating system, but it also makes gaming consoles and tablets.

Some find it amusing to poke fun at Microsoft (MSFT). This is due to their perception of it as the progenitor of antiquated and sporadically bloated software: an operating system that was so hated that most users opted to wait for its replacement rather than upgrade from its predecessor. No longer is a browser the market leader in any nation, having once had 95% of the global share. And mobile phones that barely register in a universe dominated by the iPhone and Android. Having said that, what exactly makes Microsoft such a well-known brand in the sector?

Microsoft Matures Its Business

If you’re old enough, you might recall when Microsoft was regarded as a groundbreaking company. Its founders and their unconventional approach challenged the formal, understated business world that had limited understanding or use of computers.

In a landscape crowded with Apples, Goggles, and IBMs, Microsoft’s name can seem somewhat lost in the mix. Yet, the company remains a cornerstone of the Dow Jones Industrial Average (DJIA) even today. It might have seemed likely that the once-bold software upstart would have faded into obscurity, but that couldn’t be further from the truth.

The prevailing question about Microsoft is, “How does it generate so much revenue?” Despite not being the most innovative or agile company, critics often overlook some crucial aspects of the company’s success.

1. Microsoft stands as the world’s largest software maker.

2. Software offers significant utility to people.

3. Microsoft has evolved beyond just being a software maker.

These points highlight key factors behind Microsoft’s ongoing success, including innovation, strong leadership, a clear vision, trust in every employee, and resilience.

Microsoft’s Leadership

The company was in a rut for many years. This was mostly caused by a rise in competition and an inability to adjust to changes in the market as a whole. There was a moment when it looked like Microsoft would lose relevance.

However, after Chief Executive Officer (CEO) Satya Nadella assumed the position in 2014, things changed. At that point, he moved aggressively into cloud computing and services. Now, Azure, Microsoft’s cloud computing platform, is second only to Amazon Web Services in terms of global market share. It contributes significantly to the company’s entire revenue.

In 2022, Microsoft’s revenue exceeded $198 billion, with $8 billion in operating profitability. With a 33% profit margin, it is far higher than the profit margins of Apple (AAPL) and Alphabet (GOOG), two businesses that the general public believes have surpassed Microsoft.

Microsoft: Stalwart and Ubiquitous

The popular belief that frequent updates and new product lines are the key to success in the tech industry is based on a misconception. This isn’t necessarily the case.

Consider the Surface, Microsoft’s response to Apple’s iPad. It’s not a product that will make or break a company as large and influential as Microsoft. Instead, it serves to keep the company relevant in the consumer electronics market. While Surface aims to generate enough profit to cover its costs, the impact of a few million satisfied Surface users on Microsoft’s overall net profit is minimal.

Similarly, the Xbox, despite its appeal as a gaming console, has a relatively minor impact on Microsoft’s financial performance.

The reality is a bit more straightforward. Microsoft’s ubiquity means it’s a constant presence in the lives of its users. Whether you’re using a Windows PC or Microsoft Office on a Mac or Linux machine, the company’s logo is always visible. Given its extensive reach, one might expect Microsoft to be a business that continuously captivates and excites us, much like Google does with its youthful energy and flair for self-promotion.

In truth, over four decades after its founding, Microsoft remained as steady and disciplined as IBM, ITT, and other leading Fortune 500 companies from 1975.

The software giant’s primary focus is on generating profit, which may seem obvious at first glance. However, it’s important to note that Microsoft has moved beyond the experimental phase typical of younger companies. Its approach now centers on creating and sustaining profitable revenue streams, then working to maintain and grow them.

Microsoft’s Software as a Service

The division of Microsoft that is in charge of producing the incredibly lucrative Office goes by the moniker of Productivity and Business Processes Division, which may sound unhelpfully vague.

The suite began as an add-on, a way to highlight Microsoft’s ground-breaking operating system. However, since Office’s 1990 release, using its applications has become almost essential for anyone wishing to do business. With over a billion users, Word and Excel have become nearly synonymous with word processing and spreadsheets, respectively, because of the widespread use of Office. 

Multiply the number of users by $150 per license for the rudimentary Home & Student edition of Office, a product with nearly zero marginal cost, and it becomes evident why Microsoft exerts so much effort to keep Office profitable (and why rivals like OpenOffice and Google Docs are content to eat away at Office’s market share).

The Windows Division of Microsoft, whose most recent release is Windows 11, is the only significant rival to the Business Division for market supremacy. Over 25% of the global operating system market is accounted for by Windows.

Conclusion

While all-in-one entertainment systems like the Xbox One and free global audio and video conferencing through Skype are certainly exciting and enhance life in the 21st century, their financial impact on Microsoft is relatively small.

The real key to Microsoft’s immense wealth lies in its core business: enabling users to create and manage documents. The company also provides the essential software that facilitates data transfer from a computer’s hardware to its display. Though this may not be glamorous, it effectively drives Microsoft’s revenue, achieving financial success on a scale few companies in history can match.