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