Microsoft's ambitions are anything but small. The world's #1 software company develops and sells a variety of products used by consumers and businesses. Its core products are the ubiquitous Windows PC operating system and the Office business productivity application suite that is sold in part through PC makers such as Acer, Dell, Hewlett-Packard, and Toshiba, who pre-install the software on their devices. Microsoft also sells directly online and through resellers. It also makes video game consoles (Xbox), enterprise applications (Microsoft Dynamics), server and storage software, and digital music players (Zune). Other activities include online advertising, mobile software, consulting, and support services.
Microsoft reported a 12% increase in sales in 2011, continuing the upward trend of the previous decade after a dip in 2009 that the company attributed largely to the global economic downturn. Microsoft cited robust sales of Xbox 360 (helped along by sales of the new add-on Kinect motion sensor controller), Microsoft Office, and Servers and Tools applications as key contributors to higher revenue in 2011. Meanwhile, sales of Windows slipped for the year. The strong overall sales performance drove double-digit profit growth in 2011, despite higher expenses in the areas of sales and marketing, research and development, as well as in general and administrative activities.
While research and development investment has slipped as a percentage of total sales the past couple of years, Microsoft continues to devote more than 10% of its revenue to R&D for enhancing existing products and creating new ones. It is targeting cloud computing, Web search and other online services, mobile computing, entertainment, and new technologies, such as natural user interface, for future software products. The company is looking to industries such as health care, education, and environmental sustainability to create opportunities for new products and enhancements. It is also eyeing emerging markets for growth internationally. Microsoft operates from subsidiaries in more than 100 countries, but the company makes more than half of its sales in the US.
Some of these R&D funds went toward adapting the company's widely used Microsoft Office suite of business software (which accounts for 30% of total sales) for use over the Internet. Introduced in 2011 as Microsoft Office 365, this version of the product is offered as a paid subscription service to address the broader industry trend toward cloud computing, which enables the online hosting and access of enterprise software and data rather than maintaining locally installed applications. Like many products in this category, Office 365 targets businesses with a need to outsource the management and upkeep of their software as they seek ways to cut costs and increase operational efficiency.
The current iteration of the company's PC operating system software is Windows 7 (introduced in 2009). It followed Windows Vista, which was plagued by criticism and negative reviews, as well as initial problems with compatibility with other hardware and software when it was released in 2007. While Vista was largely portrayed as a failure, it exceeded Microsoft's sales projections and became the second most widely used OS in the world. Windows 7 has claimed that honor while largely avoiding the bad press heaped on its predecessor, but with Windows XP still holding an estimated 50% share of the global OS market, it remains to be seen how much longer many enterprises and large organizations will hold onto the now decade-old Windows XP to avoid costly upgrades and compatibility issues that arise when migrating to a new version.
While desktop applications and platforms remain the cornerstone of its operations, Microsoft continues to invest in other businesses (video game consoles, its MSN division, digital media players, server and enterprise software) to diversify. Microsoft hopes to position its operating systems, software, and services as a de facto standard for accessing, communicating, and doing business over the Internet.
In late 2011 the company paid $8.5 billion in cash to acquire Internet video calling software maker Skype to further enhance its product line. The deal gives the company a leg up in the booming Internet communications market, where it goes head to head with Google. In addition to using Skype's voice and video technology to enhance products such as the Xbox, which could exploit more robust communications features for its multi-player online gaming service, Microsoft had been keen to tap Skype's user base, which totals about 100 million users a month. The acquisition of the Luxembourg-based company is Microsoft's largest in its history; it has typically avoided pursuing huge deals in favor of smaller, selective purchases.
It got back to that groove that year by picking up California-based video search technology company VideoSurf. The company's technology makes the video, instead of just text, in videos searchable. Microsoft has been exploring search innovations for its Xbox 360 console, and VideoSurf will be a part of expanding those capabilities for the platform, particularly as Microsoft grows its entertainment partnerships, signing vendors such as HBO, Bravo, and the BBC.
The previous year Microsoft bought Canesta, a designer of semiconductors tailored for gesture recognition applications, as part of an ongoing effort to redefine how people interact with their computers. When combined with a digital camera, the company's chips enable depth perception for devices that can then be controlled by moving hands and other body parts. Prior to its acquisition, Honda invested in Canesta as part of its effort to put 3-D sensors in cars to help detect obstacles. Microsoft sees additional applications for gesture technology in TVs, cell phones, and other devices, as well as in its PCs and gaming devices. The deal complemented technology acquired in 2009 with the purchase of digital 3-D camera specialist 3DV Systems.
Even before the Canesta deal, Microsoft had developed a motion-sensing technology called Kinect for its Xbox 360 video console. Released late in 2010 (just in time for the holiday buying season), Kinect houses small cameras in a thin set-top bar that enables people to use hand and body movements to manipulate certain computer games without using a controller. The 3-D technology in Kinect is from PrimeSense, a Canesta rival.
Despite its efforts to gain traction as a developer of software for cell phones with its Windows Mobile product, Microsoft has made little headway into a mobile OS market dominated by Google's Android, Apple's iOS, Research in Motion's Blackberry platform, and Nokia's Symbian. The company's most recent effort to make a greater impact in the mobile space was an early 2011 agreement to power the smartphones of Nokia with Windows Mobile. The partnership came on the heels of the appointment of Stephen Elop, the former head of Microsoft's Office division, as Nokia's first non-Finn CEO in late 2010. Nokia, a longtime global dominator of basic feature phones, has struggled to maintain its grip on the market as consumers have more often opted to buy smartphones made by its rivals as they upgrade.