What Microsoft gets for $2 billion

As a follow up to my post on Microsoft and Creative Destruction, it’s worth looking at this chart (from Silicon Alley Insider).

It shows the quarterly operating expenses for Microsoft’s Online division. This last quarter, Microsoft lost $466 million. That’s 3 months.

Over the last year (4 quarters) Microsoft has lost nearly $2 billion.

And from what I remember, you’d see losses for the period before what’s shown on the chart, as the division has always struggled with profitability.

It’s an unbelievable chart. I’ve had to stop writing several times just to look at it again.

I’m not arrogant enough to claim I can fix an entire division. But I can ask some questions:

  • Who in senior leadership has earned promotions or raises during this time? I’m not saying this is impossible, but it does deserve some serious explaining.
  • What fundamental assumptions are at work here that someone is still protecting?
  • How would things be different if this division were operating as it’s own company? Clearly whatever leverage and resources it’s getting from the rest of Microsoft hasn’t been of use to the bottom line. If it were it’s own company one of two things would have happened by now: 1) It’d be out of business or 2) It’d be doing things very differently.
  • What are the counter examples in this division that are profitable? And are their other groups rallying around their success and trying to learn/leverage/borrow from them?
  • In the last 50 years how many corporations have run entire divisions with this level of operating loss over four years or more? And what was the outcome?

If history is a judge, Steve Sinofsky, the VP from Office who took charge of Windows 7, might be the only weapon Microsoft can use to tackle Online.  Other VPs have been in charge, including David Cole who was my VP for a time in the IE days. But they’ve been ineffective at things other than spending lots of money.

In spirit of my last post (Microsoft and Creative Destruction), the better question is what did Sinofsky do to the Windows team to turn Vista into Windows 7? Why isn’t there a case study on this, that’s stapled onto the forehead of every manager until it’s read? And how can that be emulated in the Online division? My suspicion is this case study has not been done, and if it has, it’s either not being shared widely or it’s being ignored.

26 Responses to “What Microsoft gets for $2 billion”

  1. Maxim

    I think MS only recently realized all seriousness of letting Google to be alpha-specie on the web (may be couple years ago?). As for profits/losses – their gaming division was loosing money for quite some time before starting to generate profit.

    All their attempts before Bing were pretty pathetic in my opinion, Bing brought something fresh and showed that MS does want to be player online. Would be interesting to see same kind of chart in let’s say 2-3 years. I think it will be very different from what we have right now.

  2. Sarath

    Microsoft left anymore balls left in their hand I guess especially online business. If you watch over the other successful companies, there are two things make them successful 1. A killer Idea 2. A passionate team who want to achieve it.

    MSFT is more like a govt organization now. They don’t left anymore killing instinct now. Ballmer sucks all the time. He has handful of products to take the company to a great level. The BillG effect is no more left in Microsoft. People are not serious about business instead they’re copying/inventing something and leave the shit to the users.

    Internet is free and open. Microsoft way of business cant be worked out. I think they’re better concentrating on their OS and Office Business.

    If you know the fact, Most of the companies still works with Visual C++ 6.0 which is an unsupported product from Microsoft. The made the Visual Studio and Entire crap. The company going suck big all time.

  3. Daniel Howard

    Someone’s got to stimulate the economy! We certainly pay enough in taxes to the OS monopoly.

  4. Byong Yu

    I’d be very careful about assuming that Sinofsky’s success in Office and Windows would traslate into financial success for Microsoft’s Online Services Division. It will be interesting to see what Qi Lu, Microsoft’s new President of Online Services, can do with that Division. I’ve heard that Qi Lu is a far superior breed of leader than most MS execs. Time will tell.

  5. Mark H.

    To answer the question, MS gets to keep a whole bunch of mediocre people employed, which I suppose is good for the local economy. Add to the annual $2 billion loss the $6 billion aquisition cost of aQuantive a couple of years ago and the losses go from unbelievable to, well, my command of the English language fails…

    Almost all the top talent from aQuantive has apparently bolted from MS, my guess being due to the arrogant, stifling, and yet chronically underperforming leadership. If it hasn’t already, I’m sure it won’t be long before MS has run the aQuantive business into the ground.

  6. Thomas

    Scott — do not fall into the trap that Steven’s success (which I acknowledge) translates into every circumstance. His system works in businesses that are established and churning along. I have yet to see it work for a “come from behind victory” situation. He has Windows Live, which is an online service, and it’s not profitable either (it’s covered by the windows budget, so nobody notices), and he ran search for a time and nothing moved then either and he let it go.

    Online is broken for a few reasons:

    – Chasing Google at the expense of everything else
    – Sitting on collective behinds relying on IE defaults instead of building compelling product
    – Trying to be a media business at the same time as you are trying to be a software company and therefore doing neither very well.
    – Devs (particularly in MSN) who know more about C++ coding than they do anything for the web, and who, in large part, are disdainful of the web.

    And the list goes on. If OSD had to operate as an independent company things would be VERY different. No IE to rely on, no “hey, let’s use silverlight to help the company”, and a greater emphasis on design and devs who understand the web rather than old boxed product minds that don’t. OSD has an *army* of PM’s. An ARMY. I think you could fire half of them (at least), convert them into web designers and your results would be better.

    Or we should just give up and move on.

  7. Rob Grant

    It’s worth bearing in mind that Sinofsky took a reasonable product that wasn’t ready for prime time (Vista) and bug-fixed it into Windows 7. He had the advantages of:

    a) a product to polish
    b) thousands and thousands of users bug-testing that product
    c) Vista being the world’s easiest product to beat

    There’s little new ground that was dug; if they’d delayed the Vista release date for 2 years they’d have probably ended up with Windows 7 anyway.

  8. jon

    It is about maintaining monopoly, Scott. Microsoft would loose much more without an online presence.

    1. Scott Berkun

      Jon: that might be a valid motivation, but there is no defense for this level of expense for the results they’ve achieved.

  9. Annie

    Since a picture is worth a thousand words, here is a thousand words that explains my take on MSFT’s strategy :)


    [note from Scott: it’s safe for work to view :) ]

  10. Rrr

    how do I run windows updates on my Mac? Pls help.

  11. Bryan S

    From my understanding, Sinofsky ran the Windows Live division since Q4-2006.

  12. t-shirt master

    The only product I know which belongs to this divison is the Windows Live Messenger. I think if you spend a day trying to use it’s base functionality(IM) you’ll realise what a bad product it is.

    A company which releases a product that steers the user away from it’s core function by distracting them using ads, social feeds, profiles, status updates and other stuff isn’t really serious about it’s users.


    I only use Windows Live Messenger because it’s corporate policy. Which isn’t saying much about where I work. I know.

  13. Don B.


    I loved your picture… and it is worth a thousand words. I totally agree w/you that MS is in a very precarious position of having to foster growth beyond its Win/Off products, and when you’re that size, you MUST go for the big payday since nothing else will move the needle. However, I think focusing on what Steve S. can or can’t do – or for the matter how much $ was lost last qtr – somewhat misses the bigger point.

    If I were MS top-brass, I would re-evaluate the wisdom of going after Google with $2Billion/year vs. doing something totally revolutionary and dominating it. I know its not in MS’s DNA to do this… but I think everyone would agree with two things:

    – Microsoft MUST show growth beyond Win/Off, and soon
    – And, even if Bing started to matter, it’ll NEVER go beyond 25% mkt share.

    So the question to me is: what is the opportunity cost here? What else can I do with 12 months and 2 billion dollars?

    If I were Steve Balmer, I would divest Bing ASAP (possibly to those Yahoo losers) and refocus my company on ten technologies that are coming down the pipeline in the next 3-5 years.

    Sure it would be painful in the short run, but it would have the following advantages:

    – One or two would hit.
    – I would DOMINATE that space
    – And, something else no one is talking about here… Goog is gonna give MS a great run for their money. Goog doesn’t care about Office… but they offer Google Docs just to play offense. Domainating the next upcoming technologies would give MS the ability to stick it back to Goog indirectly, as Goog is doing to MS today!


    Sorry to be so verbose!

    Happy Holidays Everyone.

    Don B.

  14. Arve Systad

    Am I the only one thinking this is in no way comparable to companies like Google which base their entire business model on online products?

    Microsoft’s main income comes from selling software, not from providing online services. The online services they provide are mostly for support. Support itself brings no money.

    That being said, MSFT really has improved in all areas the last years. The same chart in a few years would be interesting.

  15. Mike

    I honestly think thats small potatoes for MS considering they do around 62 Billion yearly revenue. This would be equivalent to a few thousand dollars spent. “It takes money to make money”



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