Microsoft's lost eight years online: More than $6 billion down the tubes

Microsoft's lost eight years online: More than $6 billion down the tubes

Summary: Microsoft has recently touted its success with Bing with good reason, but the financial hit from the last eight years of the software giant's Internet follies is staggering.

SHARE:

Microsoft has recently touted its success with Bing -- and with good reason. The search engine is gaining share and will continue to as Microsoft's partnership with Yahoo kicks in. However, the financial hit from the last eight years of Microsoft's Internet follies is staggering.

How big of a hit? Microsoft's online unit has delivered more than $6 billion in operating losses on revenue topping  $19 billion over the last eight years. My adventure in Microsoft's SEC filings began with a simple question: Has the software giant ever made money online? The good news: Microsoft has delivered a profit here and there since it has been consolidating online results. The bad news: Those profits are few and far between.

Let's roll through the numbers.

In fiscal 2010 ending June 30, Microsoft reported an operating loss of $2.35 billion on revenue of $2.2 billion for its online services division .

Let's be charitable and note that Microsoft's online services division has been building out data centers for Azure. Microsoft noted in its annual report:

Cost of revenue increased $700 million or 82%, primarily driven by increased online traffic acquisition, data center and equipment, and headcount-related costs. Research and development expenses increased $153 million or 17%, primarily due to increased headcount-related expenses.

Fiscal 2009 may have had a similar story, but Microsoft still had an operating loss of $1.65 billion on revenue of $2.12 billion.

In fiscal 2008, Microsoft lost $578 million on revenue of $2.2 billion.

In fiscal 2007, Microsoft's online unit lost $732 million on revenue of $2.43 billion.

In fiscal 2006, Microsoft's online unit reported a $5 million profit on revenue of $2.3 billion. (Note that profit figure is in the fiscal 2008 report. The fiscal 2007 report has 2006 at an operating profit of $74 million.)

In fiscal 2005, Microsoft's online unit reported a profit of $402 million on revenue of $2.34 billion. The key point from the 10K, which may sound a bit familiar:

In fiscal year 2005, we launched a new version of our MSN Search engine, which is based on our own technology. This change will help provide the ability to innovate more quickly and the opportunity to develop a long-term competitive advantage in search. In addition to the launch of MSN Search, we introduced many new products and product enhancements in fiscal year 2005, including a new version of the MSN home page which provides a richer user experience, quicker load times, higher levels of end user customization, and fewer advertisements and links. MSN launched the clarity in advertising program in fiscal year 2005, which removed paid advertising from inclusion in search results and resulted in a reduced number of advertisements that are returned with search results.

In fiscal 2004, Microsoft's online division---then classified as MSN---reported a profit of $121 million on revenue of $2.21 billion.

In fiscal 2003, Microsoft's online unit (MSN) reported an operating loss of $567 million on revenue of $1.95 billion.

In fiscal 2002, Microsoft's online unit (MSN) reported an operating loss of $909 million on revenue of $1.57 billion.

For previous years, Microsoft lumped its online assets into a consumer software, services and devices division so the results aren't really comparable. Also note that some of the profit and loss figures in the SEC filings shifted from year to year, but not enough to move the needle too much.

The big question after losing more than $6 billion chasing Google---and AOL and Yahoo---around: Is Microsoft getting anything out of its Internet quagmire?

At Microsoft's financial analyst meeting last month, CEO Steve Ballmer talked about shareholder value and how it was important to the company. Given the dividends Microsoft pays out, it's hard to argue with Ballmer.

Ballmer said the company may make a few mistakes but always thinks about ROI:

It doesn't mean that we won't err sometimes on the side of either over- or under-investment in certain things.  But at the end of the day, really thinking about the return on the investments that we make, really thinking about where we're going strategically and doing that not only from a management point of view but from shareholder point of view.

But here's the disconnect. Microsoft has generated no return on its Internet ventures. It has been nearly a lost decade for Microsoft online. Looking at the profit and losses, you could make an argument that Microsoft would have been better off avoiding the Internet. Strategically, that argument is absolutely crazy. On the financial front, shareholders may just want a dividend.

Things could change. Perhaps Microsoft's online investment has helped it with the transition to cloud computing somehow. As things stand today, the Web is one big money pit for Microsoft.

Topics: Microsoft, Banking, Enterprise Software

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

53 comments
Log in or register to join the discussion
  • RE: Microsoft's lost eight years online: More than $6 billion lost

    Strange revenue never changed much since 2003. or is it too much shuffling.
    deep@...
    • Really, I am sure money has been moved around behind the scenes so that it

      does not look so bad. With all the shuffling, they still had to show 6 billion in losses over 8 years.

      To put it into perspective, that is 6,000 millions. Or, 14 million a week!!! 6,000 / (8 x52)
      DonnieBoy
      • I doubt it. Sure I understand

        that you want it to appear worse then it is, but then you could be onto something:

        I guess alot of companies move money around to hide their loses. I wonder how many billions did Google lose on failures like the Nexus One, Wave, Gears, Buzz that they hid by the use of "creative accounting"...
        John Zern
      • @John Zern: Even at what MS reported, that is 2 million dollars a day they

        have been losing. But, we all know that it was a lot more than what they are reporting.
        DonnieBoy
      • Likely an accurate assumption, Mr Zern

        as I would imagine that Google has indeed lost quite a few billion themselves or failed endevours.

        It appears there are a few here that dislike the fact that Google is no longer viewed as they once where, having to earn their way into organization, or now just overlooked in general as people search for something better.

        It would be a logical assumption to believe that Google has indeed used, as you called it, "creative accounting" to hide their loses from investors.
        Tim Cook
      • RE: Microsoft's lost eight years online: More than $6 billion lost

        @DonnieBoy I guess whoever oversees this collection will get the benefit of some intellectual stimulus (maybe ideas they can copy). I wonder what they'll be like if or when they think that an idea within one of the projects may infringe a company patent? Will they accept it and stay silent, or point out the problem right away? Time will tell, but I can't help feeling that Microsoft are on probation, and I'd steer clear. <a href="http://www.arabaoyunlarimiz.gen.tr/araba/fesbook-okey/"><b>fesbook</b></a>
        Arabalar
      • RE: Microsoft's lost eight years online: More than $6 billion lost

        @DonnieBoy Great informative post thanks for sharing.....
        <a href="http://www.pureresearchpapers.com/">Buy Research Paper</a>
        <a href="http://www.puretermpapers.com/">Buy Term Paper</a>
        <a href="http://www.pureessays.com/">Buy Essay</a>
        bynes69
      • RE: Microsoft's lost eight years online: More than $6 billion lost

        @DonnieBoy I just want to emphasize the good work on this , has excellent views and a clear vision of what you are looking for
        <a href="http://www.purethesis.com/">Buy Thesis</a>
        <a href="http://www.puredissertation.com/">Buy Dissertation</a>
        bynes69
  • RE: Microsoft's lost eight years online: More than $6 billion lost

    bit side track, if Ballmar can convince Shareholder to spend 1b to subsidize the price of WP7 and even the call plans, within six months the market share can go far ahead of anyone else. And then can recover easily many folds.
    deep@...
    • RE: Microsoft's lost eight years online: More than $6 billion lost

      @deep@... "Shareholder"? Which one? I think you mean "Shareholders"...

      With Microsoft's net pile of cash, Microsoft should be able to pull themselves up by thie own bootstraps...

      Or continue to use taxpayer-funded subsidy like they have for years... (a quick web search will give you plenty of sources I would otherwise cite.)
      HypnoToad72
    • Shareholders can't deposit 'market share'

      @deep@... Market share isn't the name of the game. Profit is the name of the game.
      HollywoodDog
      • RE: Microsoft's lost eight years online: More than $6 billion lost

        @HollywoodDog Mobile is a different game these days, the moment you have market share, advertisers will come, developers [for doing apps] will come and obviously profits will come.

        @HypnoToad72 Yes Shareholders. Why I said this because if they cold have done this for KIN, things could've been different. And they should not repeat the same mistake.
        deep@...
    • RE: Microsoft's lost eight years online: More than $6 billion lost

      @deep@... I am happy to find this post very useful for me <a href="http://www.genericdruglist.net/">Generic drug list</a>,<a href="http://www.genericdruglist.net/blog/">Medication List</a>,<a href="http://www.genericdruglist.net/blog/muscle-relaxers.html">Muscle Relaxers</a>,<a href="http://www.genericdruglist.net/blog/pain-drugs.html">Pain Medications</a>,<a href="http://www.genericdruglist.net/blog/erectile-dysfunction-drugs.html">ED Medications</a>,<a href="http://www.genericdruglist.net/blog/arthritis-drugs.html">Arthritis Medications</a>,<a href="http://www.genericdruglist.net/blog/weight-loss-drugs.html">Weight Loss Medications</a>,<a href="http://www.genericdruglist.net/blog/antiviral-drugs.html">Antiviral medications</a>,<a href="http://www.genericdruglist.net/blog/antidepressants.html">Antidepressant Medications</a>
      Peter38
  • and 8 bn on the xbox

    and they lost around 8 bn in their entertainment and devices division (xbox, zune) over the last decade, too. only recently have they turned a small profit here. why they simply don't stop to waste money on search and gaming is beyond me. focus on your corporate business microsoft, invest there.

    but i will not argue, may ballmer remain ceo for as long as it takes!
    banned from zdnet
    • RE: Microsoft's lost eight years online: More than $6 billion lost

      @banned from zdnet gaming has turned a profit the last few years---mainly xbox---and you could argue that xbox is a hub of the digital living room. In other words, I can make the case for the division. Unless all this Internet investment turns out to be key to Azure somehow it's hard to make the case with those losses. Fighting the last war basically...
      Larry Dignan
      • Has XBox recouped all its development costs?

        @Larry Dignan ... will it ever?
        HollywoodDog
      • RE: Microsoft's lost eight years online: More than $6 billion lost

        @HollywoodDog

        They don't need to recoup the "in-the-past" money spent on xbox - it was written off several years ago.

        What matters is profit and revenue growth potential going forward. Without the xbox, they would have ZERO presence in the living room/TV. Which means no Zune video streaming market, no Xbox Live memberships, no video game integration with Phone7, no media center integration, etc.

        What would they prefer: specing a few billion to be a leading contender in a market (xbox) OR not spending and being in a position like they are in the mobile phone market.
        ababiec@...
      • Easy to make money, when

        @Larry Dignan... the user has to buy a new xbox console every couple of years, after it had already been sent into the shop 3 times for problems. I myself am on my 3rd console. My PS3 Original is still going strong.
        Snooki_smoosh_smoosh
      • And my brother lost 2 Play stations, JM1981

        Play stations to defects, (a PS2, and PS3).<br><br>Nothing great about the PS line. Now Wii looks to be a well build machine, but I really don't own any of them.
        John Zern
      • Even if it's written off, it's still money.

        @ababiec - "They don't need to recoup the "in-the-past" money spent on xbox - it was written off several years ago."

        There's a couple ways you can look at this. If they've written off their investment in the Xbox completely, this could be nothing more than creative accounting used to increase future profits. In the accounting world we call this a "big bath", which is fraudulent, but often hard to detect. Basically a company that knows it's going to post a loss decides to post a bigger loss in order to ensure that future quarters show profit. Happens a lot, especially when there's a change at the helm (easy to blame a big loss on the outgoing boss).

        Besides this, if what you're talking about is whether a product has been a success or not, then this write-down needs to be recouped, and the profit in later years has to be discounted to account for the risk in the initial endeavor (in something as high risk as game consoles, you're talking at least a 20% discount per year). At 20%, that means that in 2006 you'd need a profit of 1.2 billion dollars just to break even from a $1b loss in 2005 - in future years, that value would have to be more.
        daftkey