Microsoft Business Model

Microsoft is one of the most famous and successful tech companies worldwide – just as well-known as its founder Bill Gates. However, since its foundation, more than 45 years ago, Microsoft business model has changed over the years. Let’s understand how the business has grown for the third-largest company in the United States.

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A brief history of Microsoft business model

Microsoft was created in 1975, by Bill Gates and his friend Paul Allen. The computer was nothing like what we know today, and the internet was a strange network limited basically to academic institutions.

But Gates and Allen decided to produce something like an operating system for the Altair 8800, the first “personal computer”. Some years later, MS-DOS would become the regular operating system for computers. But the turning point would come when Windows was launched in the market, with its innovative interface.

In 1986, Microsoft got in the stock market, thus making money to build its empire of PCs’ operating systems. Nowadays, besides those, Microsoft line includes Microsoft Office, Azure (cloud and AI), Xbox Games, LinkedIn, GitHub, productivity applications, management tools, browsers, and more.

Bill Gates still owns some shares in Microsoft, but he sold or gave away most of them. He also dropped out of the board in 2020, in order to have more time for philanthropy projects.

What is the Microsoft Business Model?

Since Microsoft provides systems and software for both entertainment and business, its core operations involve sale, distribution, and support for those solutions. But its business model actually encompasses few types, in order to sustain all products and services, which include:

Razor and Blade: apps, software, and Xbox games work specifically for each operating system, and they don’t run in different ones.
Lock-in: due to high switching costs, customers keep using Microsoft software and apps.
Freemium: LinkedIn, for example, is a free business social network, but some resources are only available for premium subscribers.
Subscription: besides LinkedIn, Microsoft applies this business model to Office 365 and cloud services, just to mention a few.
Hidden Revenue: for instance, both LinkedIn and Bing (Microsoft search engine) show the users ads on their platforms.
Ingredient Branding: despite being just built into computers, Microsoft brands are flagrantly shown in the products.

How does Microsoft make money?

Microsoft makes money through three core business segments:

Productivity and business processes

The segment consists of products and services developed for productivity and information and represents about one-third of Microsoft’s revenue. Its flagship is the Microsoft Office software suite. Besides, there are LinkedIn, the professional social network, and Dynamics, the cloud-based solutions for business apps, such as ERP or CRM.

Intelligent Cloud

The other third of Microsoft’s revenue is made up of its public, private, and hybrid cloud services, such as Microsoft SQL Server, Windows Server, and Azure. Besides, there are enterprise services, like Microsoft Consulting, to help customers plan and implement Microsoft products.

Personal Computing

The final third comprises the products and services created to improve users’ experience. The main example is, of course, Windows, with the licenses in devices. Other solutions include Xbox games and consoles, advertising in Bing (the search engine), and sales of devices and PCs.

Risks in Microsoft business model

Competition: Microsoft faces some strong competitors, with a great variety of business models. Some of them provide users free apps and/or content and make money from advertising. Others distribute open-source software at little or no cost, and these products are very similar to Microsoft’s.
Cloud computing: Microsoft has to afford high costs in building and maintaining the whole infrastructure to support its cloud computing services, and seeks a sufficient market share in order to achieve a profitable scale. All of that against brands like Amazon and Google.