Microsoft Searches For New Revenue Sources - InformationWeek

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5/20/2005
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Microsoft Searches For New Revenue Sources

The software maker is heavily invested in future markets, but they haven't yet generated much in the way of profits. And then there's that $60 billion pile of cash.

Microsoft makes most of its profits on the Windows operating system and the Office suite of desktop applications, but the company also is heavily invested in future markets. Several of them, including business applications, are barely profitable at the moment but may pan out big for the Redmond, Wash., vendor, Gartner analyst Thomas Bittman said last week.

In addition, Microsoft is sitting on a hoard of $60 billion in cash, which puts it in a position to make as many small acquisitions as it wants, or perhaps a large one. "The talks with SAP indicate that they're open to a large acquisition, an acquisition that could take them in an entirely new direction," Bittman said at the Gartner ITxpo in San Francisco.

But a new direction might or might not enhance what's already "a great cash engine," Bittman said. Moving into a broadened offering of applications, both desktop and enterprise, would be logical. At the same time, Microsoft's ability to make a big acquisition could plunge it in some new direction, such as a major enterprise applications vendor or a security and anti-spam powerhouse.

Last year, Microsoft's client, or Windows desktop, revenue was $11.5 billion, up 11%. Windows Server and tools generated $8.5 billion, up 19%; its information worker products, primarily Office and Outlook, generated $10.8 billion, up 17%.

Meanwhile, its foray into online information and home entertainment, the MSN portal and the Xbox game machine, generated little or no profit. Microsoft's business applications aren't profitable yet but are gaining traction, particularly with small and midsize businesses. Business applications are "a business that will start making a profit for them" in its next fiscal year, Bittman predicted.

Microsoft is serious about fighting security problems, but the widespread use of its software makes it a big target for attacks. Its security will improve, but so will the attacks, pitting Microsoft in a perpetual race with cybercrime. "The fact that Windows is on both the client and the server makes the dangers greater. By design, they have a shared code base," Bittman noted, and a breach of one may lead to an invasion of the other.

Bittman said the debate over total cost of ownership between Windows advocates and Linux supporters will continue. "Linux is limiting their growth," but Microsoft is effectively countering its open-source appeal with arguments on Windows' greater ease of use and lower cost of management. "We think server management and tools will be a big battlefield," he noted.

Revenue may slow at Microsoft as sales slow with the approach of the Longhorn version of Windows, which Bittman expects to be delivered in the "September-October-November" period. He said Microsoft doesn't want to put up with any more jokes about "Longhorn being delivered on Dec. 34."

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