Apple, Google, Microsoft: Where does the money come from?

Apple, Google, Microsoft: Where does the money come from?

Summary: If you want to know why big tech companies act the way they do, follow the money. Based on the latest SEC filings, Apple's still a successful hardware company, and Google's still in the advertising business. Meanwhile, how's that "devices and services" shift working for Microsoft?

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Three companies dominate the tech landscape in 2014: Apple, Google, and Microsoft. Although they compete directly and indirectly in various segments, each company has its own distinct financial personality.

The best way to understand the differences between these three publicly traded companies is to look at the detailed reports each is required to file every quarter. I did this two years ago, but since then the landscape has shifted. Google tried to diversify into hardware with its acquisition of Motorola Mobility, and Microsoft announced that its goal was to focus on "devices and services."

How much have the three companies changed in the past two years? For the answer, I looked at the sources of revenue each one reported in their quarterly reports for the second half of 2013. Here's the breakdown, using the segments that each company uses to define how its business is organized:

Apple

Apple is a hardware company first and foremost, with the overwhelming majority of its revenue coming from products that didn't exist seven years ago: the iPhone and the iPad. If you were to spin the iTunes, Software & Services business off, it would be impressive on its own. What's even more impressive is how that business has transformed from mostly music sales to mostly apps as the iOS market has grown.

AAPL-revenue-H2-2013

Google

Two years ago, Google was a one-trick pony, with its revenues coming almost entirely from advertising. According to its 2011 annual report, "Advertising revenues made up 97 percent of our revenues in 2009 and 96 percent of our revenues in 2010 and 2011." That picture changed slightly with Google's attempt to move into hardware manufacturing via its acquisition of Motorola Mobility, as you can see in this chart. But the pending sale of Motorola Mobility to Lenovo will shift things back to nearly the way they were. The "Other" category, which includes digital content and non-Motorola hardware products, is still a tiny fraction of the company's revenues. After the Lenovo transaction closes, Google's advertising revenues will go back to being more than 90 percent of its total.  

GOOG-revenue-H2-2013

Microsoft

Beginning last summer, Microsoft changed the way it reports revenues, making it nearly impossible to do a direct comparison of how its business has changed over the past two years. The old reporting segments broke revenues down mostly by software product, with Windows, Office, and Enterprise software dominating. The new structure requires a little explanation.

MSFT-revenue-H2-2013

In 2014, Microsoft's business is dominated by enterprise software and services, as shown by the two orange slices. Commercial Licensing, which makes up nearly half of Microsoft's revenue, covers Windows Server products, Volume Licensing editions of Windows, and Office for business. Commercial Other is dominated by the company's rapidly growing enterprise services, notably Windows Azure and the commercial editions of Office 365.

On the consumer side (those three blue slices), Consumer Licensing encompasses OEM Windows licensing, Office for home and small business users, and Windows Phone. Consumer Hardware consists of Xbox hardware and Xbox Live subscriptions, Surface products, and PC accessories such as keyboard and mice. The Consumer Other category rolls up the Windows and Windows Phone online stores, the brick-and-mortar Microsoft Stores, Xbox games and services, online advertising (mostly from Bing), and Office 365 Home Premium subscriptions.

Those two giant licensing slices still generate the bulk of Microsoft's profits, with the other divisions all profitable in the aggregate despite having segments that are either losing money or breaking even. If you want to measure the success of Microsoft's devices-and-services shift, you'll want to watch the gross margins for those other segments in future quarterly reports.

Topics: Microsoft, Apple, Cloud, Enterprise Software, Google, Hardware, Software

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  • There is a problem with pie charts...

    You can't show a negative slice of the pie...

    As I understand, Google had a net loss in the Motorola section. Even with the sale completed, it will remain a loss though smaller (something around 1.2 - 2 billion).

    Granted "income" doesn't mean what they lost - even if the total income is a lot less than the cost.

    And that makes the pie charts nearly useless.
    jessepollard
    • This is revenue, not income

      If you do a chart based on income by segment you get a different story. There's a reason companies break out revenue first, because that shows where they're actually collecting money from customers.
      Ed Bott
      • So which ones are the loss leaders?

        It is only HALF the story.

        Now I realize that Microsoft is trying hard to hide the losses, so it is possible they have hidden it behind things that are really doing well. And I know others try that as well... but the reshuffling has only made it worse.
        jessepollard
        • Maybe you should read the last paragraph again.

          The part where I explain exactly that.
          Ed Bott
          • I bet he just glanced the piecharts and talking

            n/t
            Ram U
          • How do I read?

            Sometimes it's just better to let "readers" flounder. They'll eventually figure it out.
            CPT_Underpants
        • I just did a double facepalm

          standard facepalm was not enough
          Jean-Pierre-
        • Mary Jo Foley gave a nice report on Earnings

          Suffice it to say that MS made a very nice overall profit. True somethings do lose money but it may have and overall value in that it promotes the sale of other products. This is difficult to define or report.

          Bottom line though the company is quite profitable with a very healthy cash flow and deep pockets. This enables the company to maneuver.

          Besides this, like Intel, MS creates a huge cottage industry. People make a lot of money consulting and providing support. And corporations leverage this heavily. When people make money they tend to promote the thing that makes them money.
          DevGuy_z
      • Thanks Ed

        You beat me to it!
        robradina@...
    • By the way, you are right, and then wrong, Jesse...

      "Granted "income" doesn't mean what they lost - even if the total income is a lot less than the cost."

      You are right in that the pie charts are not showing what the "net" profit is of the respective companies, however you have your terminology wrong here. "Income" is net profit (revenue minus costs). "Revenue" is the measure being used here, not income.

      "And that makes the pie charts nearly useless."

      Only if you're trying to measure something other than Revenue. There are reasons for using one measure over others - the problem with net income, for example, is that it can be affected by non-operational factors such as depreciation, asset write downs, income tax, and other business transactions that have nothing to do with the product itself. Costs can also be controlled better by one company than another, which can also skew the measure.

      For the purpose of Ed's article ("Where does the money *come from*?), revenue is more appropriate, as it shows the comparison of where each company's product development and marketing focus sits.

      Granted, though, it does make a disappointing comparison for fanbois who like to focus in on the net loss of one very narrowly-defined product line in order to cheer the impending doom of their much reviled "evil" corporation.
      daftkey
    • Beside the issue of Revenue vs Profit & Pie charts

      Even IF the pie chart were showing profit and loss data. What really matters is that the company turn a significant overall profit. MS did.

      It is the same way in investing. Some investments in some years don't do very well, others do extremely well. The next year may show a reversal. I do not need to react if some of my portfolio is not doing well, if there is a reason to believe that the tide will turn in that area. Plus in business, keeping a losing business around might be a good idea if it helps the other businesses do better.

      IOW looking for the holes is not that meaningful, what you need to do is look at the big picture. The big picture is looking good for MS. Not only are core businesses doing well they are consistently growing. That is the significant data.
      DevGuy_z
  • I think you to show similar groups

    For example;
    1. consumer products
    2. commercial products
    3. consumer services
    4. commercial services
    5. consumer licensing
    6. commercial licensing

    Calling out specific gadgets like iPod, etc, is not a good way to group. But nice attempt, I like this column.
    Sean Foley
    • Sigh

      This is how the companies themselves break out their revenue.

      I can't magically go in and reallocate the numbers so that everything is identical.

      Capisce?
      Ed Bott
      • However

        I can easily see that Apple is nearly 100% consumer dependent, Google is nearly 100% services dependent, Microsoft is 50/50% split consumer/commercial. Amazing that they between them the revenue streams don't overlap that much. Very interesting.
        Sean Foley
        • Apple and Google are

          two companies that are big and making money BECAUSE they have had success in area Microsoft has succeeded in. Microsoft USED to just try and buy anyone that looked like they were going to be taking that much money away from them. Hard to do with companies that are as Big/independent as Apple and Android. You have to chip away at competitors that are that big and it doesn't hurt when a competitor stumbles, doesn't listen to customers, etc
          jkohut
          • Don't read too much into basic news and blogs....

            I wish it were that simple. Fact is there are so many reasons for acquisitions, much of it private due to competition, that you'll never know why any company does what it does. Get over it.
            Narg
          • Not true. MS has historically not used acquisitions.

            MS has made key acquisitions, but comparatively it really hasn't made many big ones. Historically they have been extremely conservative in the area of acquisitions compared to other companies. And most of the acquisitions they did make were to acquire technology or a customer base (nokia). And most of these businesses were relatively small.

            Saying that MS bought their competitors out really isn't accurate. Most of the big ones they simply beat (legally or not). Lotus (1-2-3), Ashton-Tate (Dbase), Wordperfect, Netscape, even Apple on the desktop. Linux on the desktop.
            DevGuy_z
        • Not sure how you can know Apple's split

          it isn't broken out like that? Certainly some things on this list are known to see business use (iPhone and iPad.)

          Plus their SEC filings indicate that they have sizable receivables from enterprise and business customers. That suggests at a minimum 20-25% revenue from the non-consumer sectors.
          Mac_PC_FenceSitter
          • Actually, no

            If you read the most recent 10-Q, you will see that between 48% and 68% of accounts receivable are from cellular network carriers. The rest is divided among wholesalers, retailers, value-added resellers, and some government/education/commercial customers. It's a stretch to think that Apple has a significant amount of enterprise business, and most is BYOD.
            Ed Bott
          • Carriers aren't strictly B2C

            We have a B2B carrier arrangement here.... we're not a BYOD shop.

            And even those companies that are BYOD have 'official' device enrolment procedures (be it with BES or whatever) with endorsed phones.

            Apple is definitely in business and it isn't marginal. A glance around an airport at rush hour will confirm that.
            Mac_PC_FenceSitter