Microsoft's ambitions are anything but small. The world's #1 software company develops and sells a variety of products used by consumers and businesses. Its core products are the ubiquitous Windows PC operating system and the Office business productivity application suite that are sold in part through PC makers such as Acer, Lenovo, Dell, Hewlett-Packard, and Toshiba, who pre-install the software on devices. Microsoft also sells directly online and through resellers. Other products include enterprise applications (Microsoft Dynamics), server and storage software, video game consoles (Xbox), and digital music players (Zune). The company also makes mobile phone software (Windows Phone 7).
The current iteration of the company's PC operating system software is Windows 7. Introduced in 2009, it follows Windows Vista, which was plagued by criticism and negative reviews when it was released two years prior. While Vista was largely portrayed as a failure, it exceeded Microsoft's sales projections and became the second most widely used OS in the world. Windows 7 went on to claim that honor while largely avoiding the bad press heaped on its predecessor, and, in 2012, surpassed Windows XP as the most used PC OS, with about 42% of the market share. Meanwhile, enterprises, large organizations, and some consumers continue to hold onto the now 11 year old Windows XP platform to avoid costly upgrades and potential compatibility issues that arise when migrating to a new version. Combined sales of the company's Windows products accounted for 23% of revenue in 2012.
Microsoft operates from subsidiaries in more than 100 countries, but the company makes more than half of its sales in the US.
Microsoft reported a 5% increase in sales for 2012, pushing total revenue to $73.7 billion. Aside from a dip in 2009 that the company attributed largely to the global economic downturn, the 2012 sales results continued the upward trend of the preceding decade. The company cited robust sales of Microsoft Office and its Servers and Tools applications as key contributors to growth. Gains were offset by a decline in sales of Windows caused by a deferral of $540 million in sales related to an upgrade offer. Meanwhile, the company's income decreased by about one-quarter as operating expenses rose 13% during 2012, particularly in the areas of research and development and general and administrative functions; Microsoft also took a $6.2 billion goodwill impairment charge from its online services division for the year.
While desktop applications and platforms, as well as enterprise software (cloud computing systems, customer relationship management tools, network server management tools, and developer tools) remain the cornerstone of its operations, Microsoft continues to invest in other businesses (mobile products, video game consoles, and its MSN division) to diversify. The company is striving to make its operating systems, software, and services as the de facto standard for accessing, communicating, and doing business over the Internet using both wired and wireless devices.
Microsoft continues to devote more than 10% of its revenue to R&D for enhancing existing products and creating new ones. It is targeting cloud computing, Web search and other online services, mobile computing, entertainment, and new technologies, such as natural user interface, for future software products. The company is looking to industries such as health care and education to create opportunities for new products and enhancements. It is also eyeing emerging international markets for growth.
Some of these R&D funds have gone toward adapting the company's widely used Microsoft Office suite of business software (which accounts for 30% of total sales) for use over the Internet. Introduced in 2011 as Microsoft Office 365, this version of the product is offered as a paid subscription service to address the broader industry trend toward cloud computing, which enables the online hosting and access of enterprise software and data rather than maintaining locally installed applications. Like many products in this category, Office 365 targets businesses with a need to outsource the management and upkeep of their software as they seek ways to cut costs and increase operational efficiency.
Despite its efforts to gain traction as a developer of software for cell phones with its Windows Mobile product, Microsoft has made little headway into a mobile OS market dominated by Google's Android, Apple's iOS, and Research in Motion's Blackberry platform. To make a greater impact in the mobile space, Microsoft agreed in 2011 to power the smartphones of Nokia with Windows Mobile, following Nokia's decision to abandon its Symbian platform. The partnership came on the heels of the appointment of Stephen Elop, the former head of Microsoft's Office division, as Nokia's first non-Finn CEO in late 2010. Nokia, a longtime global dominator of basic feature phones, has struggled to maintain its grip on the market as consumers opt for smartphones made by its rivals.
Mergers & Acquisitions
As part of an effort to add social networking to its expanding stable of cloud services, in 2012 Microsoft bought social networking start-up Yammer for $1.2 billion in cash. Yammer enables businesses to create their own private social networks, where co-workers can post status updates, news, links, and share what they are working on. The company became a unit within Microsoft's Office division, and is being integrated into other of its collaboration and communications offerings, such as SharePoint, Office 365, Dynamics, and Skype. Established in 2008, Yammer claims more than five million corporate users, though only about 20% of those pay for premium services, with the remainder using the basic free service.
Also that year, Microsoft bought Perceptive Pixel, a company with expertise in multi-touch display technology. That purchase played to one of the highly-touted new capabilities that Windows 8 is meant to bring to market.
In late 2011 the company paid $8.5 billion in cash to acquire Internet video calling software maker Skype, giving it a leg up in the booming Internet communications market, where it goes head to head with Google. In addition to using Skype's voice and video technology to enhance products such as the Xbox, which could exploit more robust communications features for its multi-player online gaming service, Microsoft was keen to tap Skype's user base, which totals about 100 million users a month. The acquisition of the Luxembourg-based company is Microsoft's largest ever; it has typically avoided pursuing huge deals in favor of smaller, selective purchases.
The company got back to that model that year, picking up California-based video search technology company VideoSurf. The company's technology makes the video, instead of just text, in videos searchable. Microsoft has been exploring search innovations for its Xbox 360 console, and VideoSurf will be a part of expanding those capabilities for the platform, particularly as Microsoft grows its entertainment partnerships, signing vendors such as HBO, Bravo, and the BBC.
In 2010 Microsoft bought Canesta, a designer of semiconductors tailored for gesture recognition applications, as part of an ongoing effort to redefine how people interact with their computers. When combined with a digital camera, the company's chips enable depth perception for devices that can then be controlled by moving hands and other body parts. Prior to its acquisition, Honda invested in Canesta as part of its effort to put 3-D sensors in cars to help detect obstacles. Microsoft sees additional applications for gesture technology in TVs, cell phones, and other devices, as well as in its PCs and gaming devices. The deal complemented technology acquired in 2009 with the purchase of digital 3-D camera specialist 3DV Systems.
Even before the Canesta deal, Microsoft had developed a motion-sensing technology called Kinect for its Xbox 360 video console. Released late in 2010 (just in time for the holiday buying season), Kinect houses small cameras in a thin set-top bar that enables people to use hand and body movements to manipulate certain computer games without using a controller. The 3-D technology in Kinect is from PrimeSense, a Canesta rival.