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Microsoft Corp.
(425)
882-8080
One
Microsoft Way
Redmond, WA 98052
www.microsoft.com
Sales
$37
billion
Business Description
Microsoft Corporation was founded as a partnership in 1975 and incorporated
in 1981. Our mission is to enable people and businesses throughout the world
to realize their full potential, and our vision is empowering people through
great software – any time, any place, and on any device. We develop,
manufacture, license, and support a wide range of software products for a
multitude of computing devices. Our software products include scalable
operating systems for servers, personal computers (PCs), and intelligent
devices; server applications for client/server environments; information
worker productivity applications; business solutions applications; and
software development tools. We provide consulting services and product
support services and we train and certify system integrators and developers.
We sell the Xbox video game console, along with games and peripherals. Our
online businesses include the MSN subscription and the MSN network of
Internet products and services.
Microsoft also researches and develops advanced technologies for future
software products. A significant portion of our focus is on our .NET
architecture. Using common industry standards based on Extensible Markup
Language (XML), a universal language for describing and exchanging data, our
goal is to enable seamless sharing of information across many platforms and
programming languages, and over the Internet, with XML Web services. In
addition, we have embarked on a long-term initiative called Trustworthy
Computing that aims to bring an enhanced level of security, privacy,
reliability, and business integrity to computer systems.
PRODUCT SEGMENTS
We revised our product segments for fiscal year 2003. Our seven product
segments are Client, Server and Tools, Information Worker, Microsoft
Business Solutions, MSN, Mobile and Embedded Devices, and Home and
Entertainment.
Changes in our segments are designed to provide management with a
comprehensive financial view of our key businesses; promote better alignment
of strategies and objectives among development, sales, marketing, and
services organizations; provide for more timely and rational allocation of
development, sales, and marketing resources within businesses; focus
strategic planning efforts on key objectives and initiatives; and give
business owners more autonomy in detailed planning.
See Note 21 of the Notes to Financial Statements for financial information
regarding segment reporting. Prior year segment information has been
restated to conform to the seven new segments.
Client
Client segment includes Windows XP, Windows 2000, and other standard Windows
operating systems. Windows XP extends the personal computing experience by
uniting PCs, devices, and services, while enhancing reliability, security,
and performance. Windows XP Home Edition is designed for individuals or
families and includes capabilities for digital photo, music, video, home
networking, and communications. Windows XP Professional includes all the
features of Home Edition, plus remote access, security, performance,
manageability, and multilingual features to help users improve productivity
and connectivity. Windows XP was the successor to Windows 2000.
Client has overall responsibility for product delivery, engineering and
technical architecture for the Microsoft Windows operating system, and new
media technology, as well as our relationships with manufacturers of
personal computers and non-PC devices, including multinational and regional
original equipment manufacturer (OEM) accounts. The segment includes sales
and marketing expenses focused on business development efforts for the
Windows platform, as well as integration of our technologies and products
into non-PC devices.
Server and Tools
Server and Tools segment consists of server software licenses and client
access licenses (CALs) for Windows Server, SQL Server, Exchange Server, and
other servers. It also includes developer tools, training, certification,
Microsoft Press, Premier product support services, and Microsoft consulting
services. Microsoft server products offer a comprehensive range of solutions
designed to meet the needs of developers and IT professionals, and are
designed to flexibly run the programs and solutions that enable information
workers to obtain, analyze, and share information quickly and easily.
Microsoft servers provide capabilities ranging from messaging and
collaboration to database management and ranging from e-commerce to mobile
information access.
Windows Server 2003 is a multipurpose operating system capable of handling a
diverse set of server roles in either a centralized or a distributed
fashion. SQL Server is a Web-enabled database and data analysis package,
providing core support for XML and the ability to query across the Internet.
Microsoft Exchange delivers a reliable, scalable, and manageable
infrastructure with 24×7 messaging and collaboration. Systems Management
Server delivers cost-effective, scalable change and configuration management
for Windows–based desktop and server systems. Small Business Server is a
network solution that includes the Windows 2003 Server network operating
system and is designed to help small businesses. Developer tools focus on
coordinating the overall programming model for the client and server,
creating tools for the .NET platform, and fostering synergies between
Windows and the Windows Server System offerings.
Server and Tools segment includes the integrated product development and
marketing that delivers Microsoft Windows Server System products. In
addition, the segment provides information about the extended Microsoft
platform through a variety of content offerings, such as web-based training
for developers and IT managers. Through this segment, we offer a broad range
of consulting services for advanced technology requirements, including
custom solutions services, enterprise application planning, architecture and
design services, and proof-of-concept services. We also provide product
support services aligned to our enterprise customers. The Server and Tools
segment includes our Enterprise and Partner Group, which is responsible for
enterprise sales strategy, enterprise sales learning and readiness,
enterprise solution selling, enterprise partner sales strategy, and
enterprise field communications. This group is also responsible for
technical selling, field competitive strategy, and all competitive sales
engagements.
Information Worker
Information Worker segment is responsible for developing and delivering
technologies that focus on improving productivity for information workers in
corporations. It consists of the new Microsoft Office System of programs,
servers, services, and solutions. Microsoft Office System is the successor
of Microsoft Office XP and is expected to be released to market in the first
half of fiscal 2004. The Microsoft Office System includes the Microsoft
Office 2003 Editions, which include (depending on the edition): Microsoft
Office Outlook 2003, Microsoft Office Excel 2003, Microsoft Office
PowerPoint 2003, Microsoft Office Word 2003, and Microsoft Office Access
2003. Other products in the Microsoft Office System include Microsoft Office
Visio 2003, Microsoft Office Project 2003, Microsoft Office Project Server
2003, Microsoft Office InfoPath 2003, Microsoft Office OneNote 2003,
Microsoft Office Publisher 2003, Microsoft Office FrontPage 2003, and
Microsoft Office SharePoint Portal Server 2003. Microsoft Office has evolved
from a suite of personal productivity products to a more comprehensive and
integrated system of products for information work designed to increase
personal, team, and organization productivity. The Microsoft Office System
features integration with Microsoft intranet collaboration technologies,
Information Rights Management, and support for industry standard XML. The
Information Worker segment also includes Microsoft Office Live Meeting,
resulting from our acquisition of PlaceWare, Inc., Microsoft Office Live
Communications Server 2003, and an allocation for CALs. The segment also
includes professional product support.
The segment includes the Small and Mid-Market Solutions & Partners (SMS&P)
organization, which is responsible for sales, partner management, partner
programs, and customer segment marketing for the small and mid-market
businesses. In fiscal year 2004, SMS&P group will integrate the sales and
marketing assets of the Microsoft Business Solutions segment with the
existing Worldwide Small and Medium Business groups. We believe this
combined effort will lead to expanded opportunity for Microsoft and our
customers and partners by making available the complete range of Microsoft
products and services to small and mid-market businesses, creating increased
growth opportunities for the independent software vendor (ISV) community.
Microsoft Business Solutions
Microsoft Business Solutions segment includes the businesses of Great
Plains, Microsoft bCentral, and Navision. Microsoft Business Solutions
develops and markets a wide range of business applications designed to help
small and mid-market businesses become more connected with customers,
employees, partners, and suppliers. Microsoft Business Solutions
applications provide end-to-end automation for financial reporting,
distribution, project accounting, electronic commerce, human resources and
payroll, manufacturing, supply chain management, business intelligence,
sales and marketing management, and customer service and support. Microsoft
Business Solutions products are designed to meet the broad spectrum of
business application needs of small to mid-market businesses, a group that
generally consist of businesses with $1 million to $800 million in annual
revenue. The business solutions are fully and seamlessly integrated across
the application areas of enterprise resource management (ERM), customer
relationship management (CRM), supply chain management (SCM) and business
intelligence. These business solutions are sold, implemented, and supported
through a partner network consisting of more than 4,500 value added
resellers, systems integrators, consultants, ISVs, accounting firms
(national, regional, and local), application service providers (ASPs), and
eBuilders. Microsoft Business Solutions partners provide strong
distribution, marketing, training, and support in the business application
customer segment.
MSN
MSN segment includes MSN Subscriptions and MSN Network services. MSN
Subscription services include MSN Internet access and premium services such
as MSN Extra Storage, MSN Bill Pay, MSN Radio Plus and MSN Mobile, which are
offered to consumers regardless of their Internet Service Provider. The MSN
Network delivers online communication services such as email and online
instant messaging through its MSN Hotmail and MSN Messenger products. It
also delivers popular information services, such as MSN Search and content
from top partners like MSNBC, ESPN, Expedia, and Access Hollywood.
The segment is responsible for building and operating the MSN Network and
for delivering MSN Subscription services. Revenue is principally generated
from subscribers to MSN’s Internet access and premium services and from
advertisers on the MSN Network. MSN delivers its services direct via its MSN
Network and through partnerships with network operators such as Verizon,
Qwest, Charter Communications, and Bell Canada.
Mobile and Embedded Devices
Mobile and Embedded Devices segment consists of Windows Mobile software,
Windows Embedded device operating systems, MapPoint, and Windows Automotive.
Windows Mobile software powers Pocket PC, Pocket PC Phone Edition, and
Smartphone products. Windows Embedded, including Windows CE.NET, Windows XP
Embedded and Windows NT Embedded, is a family of operating system software
used in non-PC computing devices. Windows Embedded software is used widely
in advanced consumer electronics devices including digital televisions,
IP-based set top boxes, network gateways, and portable media players, as
well as in enterprise devices including industrial controllers, retail point
of sale systems, and voice-over-IP phones. The MapPoint family of
location-enabled products and services includes the MapPoint Web Service, a
hosted programmable XML web service that allows developers to integrate
location intelligence in applications, business processes and web sites, and
business and consumer oriented mapping CD-ROM products. Windows Automotive
is an automotive grade software platform that provides developers with the
building blocks to quickly and reliably create a broad range of advanced
telematics solutions.
Mobile and Embedded Devices segment develops and markets the product lines
described above. Further, the segment manages relationships with device
manufacturers and with network service providers, including
telecommunications, cable and wireless companies and host and network
equipment providers.
Home and Entertainment
Home and Entertainment segment includes the Microsoft Xbox video game
system, PC games, the Home Products Division (HPD), and TV platform
products. Microsoft Xbox, released in fiscal 2002, is our next-generation
video game console system that delivers high quality graphics and audio
experiences. We offer several types of entertainment products, including
classic software games, online games, simulations, and sport and strategy
games. HPD includes Microsoft’s line of consumer hardware and software
products, such as the Encarta line of learning products and services, the
Picture It! consumer publishing and productivity line of products and
services, the Macintosh applications business, and the Microsoft hardware
products.
Home and Entertainment segment oversees development and business strategy
for the Microsoft Xbox video game system, including hardware, third-party
games development, games development published under the Microsoft label,
Xbox and Xbox Live operations, marketing, research, and sales and support.
The segment leads the development efforts of our HPD product lines. The
segment also carries out all retail sales and marketing for Microsoft
Office, the Windows operating systems, Xbox, games, and HPD products. The
segment is responsible for the development, sales, and deployment of
Microsoft’s TV platform products for the interactive television industry.
INTERNATIONAL OPERATIONS
Microsoft develops and sells products throughout the world. Our three major
geographic sales and marketing organizations are the Americas Region, the
Europe, Middle East, and Africa Region, and the Japan and Asia-Pacific
Region. Pressure to globalize our pricing structure might require that we
reduce the sales price of our software in the United States and other
countries. A number of other factors could also have a negative effect on
our business and results from operations outside of the United States,
including changes in trade protection laws, policies and measures, and other
regulatory requirements affecting trade and investment; unexpected changes
in regulatory requirements for software; social, political, labor, or
economic conditions in a specific country or region, including foreign
exchange rates; difficulties in staffing and managing foreign operations;
and potential adverse foreign tax consequences. A portion of international
revenue is hedged, thus offsetting a portion of the currency translation
exposure.
PRODUCT DEVELOPMENT
During fiscal years 2001, 2002, and 2003, research and development expense
was $4.38 billion, $4.31 billion, and $4.66 billion, respectively. Those
amounts represented 17.3%, 15.2%, and 14.5%, respectively, of revenue in
each of those years. During fiscal year 2001, $272 million of goodwill
amortization was included in research and development expense. No goodwill
amortization is included in fiscal years 2002 and 2003, in accordance with
Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other
Intangible Assets. We plan to continue spending significant amounts for
research and product development.
Most of our software products are developed internally. We also purchase
technology, license intellectual property rights, and oversee third-party
development and localization of certain products. We do not believe we are
materially dependent upon licenses and other agreements with third parties
relating to the development of our products. Internal development allows us
to maintain closer technical control over our products and gives us the
freedom to designate which modifications and enhancements are most important
and when they should be implemented. We work to devise innovative solutions
in computer science, such as making computers easier to use, designing
software for the next generation of hardware, improving the software design
process, and investigating the mathematical underpinnings of computer
science. We have created a substantial body of development tools and have
evolved development methodologies for creating and enhancing our products.
These tools and methodologies are also designed to simplify a product’s
portability among different operating systems, microprocessors, and
computing devices. Product documentation is generally created internally. We
strive to obtain information at the earliest possible time about changing
usage patterns and hardware advances that may affect software design. Before
releasing new software platforms, we provide to application vendors a range
of resources and guidelines for development, training, and testing.
Microsoft .NET is our strategy and implementation of connecting people,
information, systems and devices through the use of Web services. It
includes everything needed to develop and deploy a Web service-connected IT
architecture: servers to host Web services (Windows Server System and
Windows Server 2003), development tools to create them (Microsoft Visual
Studio .NET 2003 and the .NET Framework), applications and smart devices
that use them (Microsoft Office System, smart phones, Pocket PCs and PCs),
and a worldwide network of more than 35,000 Microsoft Certified Partner
organizations – people whose skills and experience can help businesses get
the most from their IT investments. Built on industry standards, Web
services enable applications to communicate and share data over the Internet
or an intranet, regardless of operating system or programming language.
We believe that establishing trust in computing will be critical to our
future success. Trustworthy Computing means helping ensure a safe and
reliable computing experience that is both expected and taken for granted.
Achieving Trustworthy Computing will require the collaboration of hardware
and software companies, academic and government research institutions, and
policy leaders. For us, Trustworthy Computing is a company-wide initiative
aimed at changing how we do business that will take fundamental research and
advances in engineering, as well as changes to business culture and business
processes to accomplish. We think there are four factors that affect the
level of trust that people place in computing: Security, Privacy,
Reliability, and Business Integrity. Security means the customer can expect
that systems are resilient to attack, and that the confidentiality,
integrity, and availability of the system and its data are protected.
Privacy means the customer is able to control personal information and feel
confident it is not only safe and used appropriately, but in a way that
provides value. A reliable system or service is one the customer can depend
on to fulfill its functions. Business Integrity involves being responsive to
customers, addressing problems effectively with products or services, and
being transparent and responsive in customer interactions.
To serve the needs of users around the world, we “localize” many of our
products to reflect local languages and conventions and to improve the
quality and usability of the product in international markets. Localizing a
product may require modifying the user interface, altering dialog boxes, and
translating text.
COMPETITION
The software business is intensely competitive and subject to rapid
technological change, evolving customer requirements, and changing business
models. We face significant competition in all areas of our current business
activities. The rapid pace of technological change continually creates new
opportunities for existing competitors and start-ups and can quickly render
existing technologies less valuable. Customer requirements and preferences
continually change as other information technologies emerge or become less
expensive, and as emerging concerns such as security and privacy become of
paramount concern. We face direct competition with firms adopting
alternative business models to the commercial software model. Firms adopting
the Open Source model typically provide customers with Open Source software
at nominal cost and earn revenue on complimentary services and products,
without having to bear the full costs of research and development for the
Open Source software. Additionally, global software piracy – the unlawful
copying and distribution of our copyrighted software products – deprives us
of large amounts of revenue on an annual basis. Further, the existing
versions of our products licensed to our installed base of users compete
with future versions. This means that future versions must deliver
significant additional value in order to induce existing customers to
purchase a new version of our product.
Our competitive position may be adversely affected in the future by one or
more of the factors described in this section.
Client
Although we are the leader in operating system software products, we face
strong competition from well established companies and entities with
differing approaches to the market. Competing commercial software products,
including variants of Unix, are supplied by competitors, such as
IBM, Hewlett-Packard,
Apple Computer,
Sun Microsystems and others, who are
vertically integrated in both software development and hardware
manufacturing and have developed operating systems that they preinstall on
their own computers. Personal computer OEMs who preinstall third party
operating systems may also license these firms’ operating systems or Open
Source software, especially offerings based on Linux. Variants of Unix run
on a wide variety of computer platforms and have gained increasing
acceptance as desktop operating systems, in part due to the increasing
performance of standard hardware components at decreasing prices. The Linux
open source operating system, which is also derived from Unix and is
available without payment under a General Public License, has gained
increasing acceptance as its feature set increasingly resembles the distinct
and innovative features of Windows and as competitive pressures on personal
computer OEMs to reduce costs continue to increase. The Microsoft Windows
operating systems also face competition from alternative platforms such as
those based on Internet browsing software and Java technology promoted by
Sun Microsystems, as well as innovative form factors that may reduce
consumer demand for traditional personal computers. We believe our operating
system products compete effectively by delivering better innovation, overall
value, an easy-to-use interface, compatibility with a broad range of
hardware and software applications, and the largest support network for any
operating system.
Server and Tools
Our server operating system products face intense competition from a wide
variety of competing server operating systems and server applications
offered by firms with a variety of market approaches. Several vertically
integrated computer manufacturers, such as IBM, Hewlett-Packard, Apple
Computer, Sun Microsystems and others offer their own variant of Unix
preinstalled on server hardware, and virtually all computer manufacturers
offer server hardware for the Linux operating system. IBM’s endorsement of
Linux has accelerated its acceptance as an alternative to both traditional
Unix and Windows server operating systems. Linux’s competitive position has
also benefited from the large number of compatible applications now produced
by many leading commercial software developers as well as Open Source
community developers. A number of companies supply versions of Linux,
including Red Hat and VA Linux.
We compete in the business of providing enterprise-wide computing solutions
with several companies that provide competing solutions as well as
middleware technology platforms. IBM and Sun Microsystems lead a group of
companies focused on the Java 2 Platform Enterprise Edition (J2EE).
Commercial software developers that provide competing server applications
for the PC-based distributed client/server environments include
Oracle, IBM, Computer Associates, Sybase, and
Informix. There are also a number of Open Source server applications
available.
Numerous commercial software vendors offer competing commercial software
applications for connectivity (both Internet and intranet), security,
hosting, and e-business servers. Additionally, IBM has a large installed
base of Lotus Notes and cc:Mail, both of which compete with our
collaboration and email products. There are also a significant number of
Open Source software products that compete with Microsoft solutions,
including Apache Web Server.
The Open Source model of Linux and other server programs enables both
services and hardware companies to provide customers with Open Source
software at nominal cost and earn revenue on complimentary services and
products, without having to bear the full costs of research and development
for the Open Source software. For example, IBM, with the largest hardware
and services businesses in the industry, promotes Linux extensively and
seeks to earn revenues and profits on the sale of its consulting services to
implement the Linux server solution as well as related hardware and
commercial software products that run on Linux.
Our developer products compete against offerings from BEA Systems, Borland,
IBM, Macromedia, Oracle, Sun Microsystems, Sybase, and other companies.
We believe that our server products provide customers with significant
advantages in innovation, performance (both relative to total costs of
ownership and in absolute terms), productivity, applications development
tools and environment, compatibility with a broad base of hardware and
software applications, security, and manageability.
Information Worker
While we are the leader in business productivity software applications,
competitors to the Microsoft Office System include many software application
vendors, such as Apple, Corel, IBM, Oracle, QUALCOMM, Sun Microsystems, and
local application developers in Europe and Asia. IBM and Corel have
significant installed bases with their spreadsheet and word processor
products, respectively, and both have aggressive pricing strategies. Also,
Apple and IBM preinstall certain of their application software products on
various models of their PCs, competing directly with our applications.
Corel’s suite and Sun Microsystems’ Star Office are aggressively priced and
attractive for OEMs to pre-install on low-priced PCs. The OpenOffice.org
project provides a freely downloadable cross-platform application that is
gaining popularity in certain market segments. In addition to traditional
client-side applications, web-based applications hosting services such as
SimDesk provide an alternative to Microsoft Office and are gaining some
support. We believe that our products compete effectively by providing
customers significant benefits, such as easy-to-use personal productivity,
support for effective teaming and collaboration, and better information
management and control.
Microsoft Business Solutions
The small and mid-market business applications market globally is highly
fragmented and is intensely competitive in all sectors. We face competition
from a large number of companies in this business. Well-known vendors
focused on small and mid-market business, such as Intuit and Sage, compete
against us for a portion of this segment. In addition, large-enterprise
focused vendors, such as Oracle, Peoplesoft and
SAP, also compete against us for a portion of this
segment. However, the competition for a significant majority of the total
business applications market includes thousands of much smaller vendors in
specific localities or industries who offer their own enterprise resource
planning, customer relationship management, and/or analytic solutions.
MSN
MSN competes with AOL-Time Warner, Google, Yahoo!, and a vast array of Web
sites and portals that offer content of all types, such as email, instant
messaging, calendaring, chat, search, and shopping services. As the
broadband access market grows, we expect to have increasing opportunity to
deliver premium subscription services for consumers. AOL and Yahoo! are both
pursuing similar strategies and will be competitors in this emerging
category. While the movement to broadband access may cause our Internet
Access dial-up business to continue to decline, we will strive to convert
customers to MSN premium subscription services via partnerships with network
providers and Internet software services offered directly from MSN. We
believe our strengths are our heritage of technology innovation,
particularly in communication services, distribution partnerships, and the
large base of users of our free MSN Network. Additionally, while our
advertising business has grown considerably over the last year, evolving
market conditions, particularly paid search, will impact our strategy over
the next year. We currently are building our own search engine and investing
to support the continued growth of our advertising business.
Mobile and Embedded Devices
Windows Mobile software faces substantial competition from
Nokia, Openwave Systems, PalmSource, QUALCOMM,
and Symbian. The embedded operating system market is highly fragmented with
many competitive offerings. Key competitors include IBM, Wind River, and
versions of embeddable Linux from commercial Linux vendors, such as
Metrowerks and MontaVista Software. MapPoint competitors include DeLorme,
MapInfo, Mapquest.com, Rand McNally, Webraska Mobile Technologies, and
Yahoo!. The telematics market is also highly fragmented, with competitive
offerings from IBM and automotive suppliers building on various real-time
operating system platforms from commercial Linux vendors, QNX Software
Systems, Wind River, and others.
Home and Entertainment
The home and entertainment business is highly competitive and is
characterized by limited platform life cycles, frequent introductions of new
products and titles, and the development of new technologies. The markets
for our products are characterized by significant price competition, and we
anticipate continued pricing pressure from our competitors. These pressures
have, from time to time, required us to reduce prices on certain products.
Our competitors vary in size from very small companies with limited
resources to very large, diversified corporations with substantial financial
and marketing resources. We compete primarily on the basis of price, product
quality and variety, timing of product releases, and effectiveness of
distribution and marketing.
Our Xbox hardware business competes with console platforms from Nintendo and
Sony, both of which have a large established base of users. In addition to
competing against software published for non-Xbox platforms, our games
business also competes with numerous companies that have been licensed by
Microsoft to develop and publish software for the Xbox console. These
competitors include Acclaim Entertainment, Activision, Atari, Capcom, Eidos,
Electronic Arts, Sega, Take-Two Interactive, Tecmo, THQ, and Ubi Soft, among
others. Success in the games business is increasingly driven by hit titles,
which are difficult to develop and require substantial investments in
development and marketing. In addition, other forms of entertainment, such
as music, motion pictures, and television, compete against our entertainment
software for consumer spending. Our PC hardware products face aggressive
competition from computer and other hardware manufacturers, many of which
are also current or potential partners.
Ticker
MSFT
Microsoft is included in the following directory categories
ERP
Software Go
Operating Systems Go
Server Software Go
Accounting Software Go
Website Design Software Go
Operating System & Server Software
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