Steve Ballmer leaves Microsoft, but the profits keep on flowing

We’ve written every now and again about monopolies (most recently for our subscription site, Spend Matters PRO), and how procurement often unwittingly conspire with – or at least assist – firms to create their own monopolies or oligopolies. In time they inevitably prove to be bad news for the buyers.

The decision of Steve Ballmer to step down as CEO of Microsoft last week brought this to mind. Microsoft created perhaps the most effective monopoly of the last 50 years, for basic Personal Computer software. Now in that case, it is hard to blame procurement people, or individual buyers. Microsoft took advantage of a huge strategic mistake by IBM (who could have bought Microsoft and the nascent Windows technology for a song in the 1990s), to exploit the opportunity for what we might call a natural monopoly situation.

The personal computer manufacturers had to buy an operating system, so once Microsoft got some initial traction, it was natural for every manufacturer to adopt the same standard as the consumers got used to that product. The same then applied as corporates got into mass word processing, spreadsheets and so on.

It’s easy to forget these days just how successful Microsoft has been. They are under pressure from the move to mobile and to open-source software, their share price has stagnated for ten years and you might question their future prospects. But in fiscal year 2013, they still had revenues of $77.8 billion and operating income (profits) of $26.8 billion.

That’s a profit margin of almost 35% - quite extraordinary  when you think the average in the FTSE 100  or Dow Jones is something around 10%. That in itself is a clear sign of a firm that either has incredible innovation and uniqueness or a monopoly position allowing it to extract super- profits.  Another way of looking at it is that if Microsoft operated to “normal” margins, we would all be paying around 25% less  of what we currently pay for those products.

Note we’re not criticising Microsoft for brilliantly developing and exploiting their position, and we might argue that Bill Gates for one has used these profits to great benefit for mankind. But it is a salutary warning to us to be careful that our own actions don’t create the opportunity for monopolies.

And there’s more specifically about Ballmer’s exit and the prospects for Microsoft  on our sister site, Spend Matters US.

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Voices (2)

  1. Dan:

    Microsoft have never really innovated, they were just in the right place at the right time. MS-DOS was developed by someone else, then Microsoft bought it, rebadged it and made that deal with IBM. Windows was b asically ripped off from Apples OS (although the court decided otherwise). They ignored the internet until it was almost too late, then had to use uncompetitive practices to crush Netscape.

  2. Market Dojo:

    Microsoft have done brilliantly but one cant help to question their future. Their previous Office suite developments seem to have been more aimed at justifying the need for more computing power and thus the need to continually upgrade than at actually improving the products. When Office 2007 came out, it was nicer better looking, they’d moved things about but it wasn’t actually easier to use and showed a real lack of innovation. Then you had Apple and Google come along, always questioning the norm and looking to make things better which has really stirred up the market in a good way. Apple got it right with the IPAD and Google were the first company to really develop SaaS products for business productivity with respect to the SME market. It will be interesting to see how Microsoft reacts and some of the recent products are looking better although now they are definitely a follower. Large companies should always be looking towards the new disruptive technologies or risk missing out on a new market.

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