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How Microsoft makes money: revenues broken down by product line

Under further scrutiny, Microsoft’s 10-K filing is proving to be a bastion of clear and coherent information about the company’s present and future, more so than its investment-speak quarterly earnings report. Once again, we turn to a report from Geekwire that highlights Microsoft’s transition to the cloud while it subtly cuts dependencies to its desktop operating system in Windows.

While the numbers Microsoft reported for its fourth quarter fiscal year 2016 earnings report indicated a reduction in the revenue generated by Windows, the company’s annual 10-K filing with the Securities and Exchange Commission details just how far its bread-winning product has fallen within the company’s finances.

The house that Windows built is no longer leaning on the operating system as its main source of revenue as Microsoft seeks to augment its financial structure by championing its cloud-based opportunities in Office and Azure. Microsoft reported in its 10-K filing that Office raked in $23.6 billion in revenue for the end of the company’s fiscal year in June, while its cloud services group brought in $19.2 billion in revenue for the same period.

Where does that leave Windows?

Microsoft’s former gold star product in Windows dropped to third place, rounding out the top earner’s list at $14.7 billion in revenue. In its most profitable hay day, the Windows operating system generated roughly $18 billion in revenue for Microsoft, but a mere six years later, it’s showing consecutive quarterly declines. While the quarterly reports for Windows show three-month-long edgings downward, it should be noted that its overall decline has been close to a $4 billion reduction with no evidence to indicate a resurgence anytime soon.

Microsoft product revenue lines

Microsoft product revenue lines

Even as Microsoft is in the midst of releasing its Windows 10 Anniversary Update to consumers, the company’s transition to the cloud surges forward, further putting distance between its dependency on servicing an operating system.

Admittedly, the move of focusing on the cloud and away from Windows perhaps wasn’t Microsoft’s first choice and market trends seem to be dictating the company’s area of expertise. As PC sales continue to bottom out, and large businesses are preferring to combine Windows 7 with cloud-based programs and services that increasingly interoperate with mobile devices, the necessity of a new desktop operating system from Microsoft has lessened.

“What’s happening on Windows is that the PC market is declining rapidly, and most Windows revenue still comes from sales with new PCs,” said analyst Rob Helm, managing vice president at the Directions on Microsoft research firm.

Back when Microsoft made the structural and earnings report switch to combine Windows and its hardware efforts that included Windows Phone at the time, we made note that it was segregating what we referred to as its “legacy” offerings or potential loss leaders. At the time, Windows Phone was a known earnings bleeder, the Xbox One was a sunk cost, and just after Microsoft announced the free Windows 10 upgrade, combining all seemed to put a clear punctuation on the area of Microsoft that was not long for this world.

Even now, Microsoft is further blurring the lines of where Xbox stands as it shifts focus from pure console sales to more arbitrary usage stats and championing Xbox Live Gold subscriptions.

All is not doom and gloom for Windows, however. The company remains dedicated to improving the product and re-packaging it as a service, one that is free (for the time being) for consumers who already own a Windows 10 license and it becomes a monthly expenditure for businesses with its Windows Enterprise E5 solution.

Windows still commands an audience of over 1 billion, of which 350 million have chosen to upgrade or purchase a new device with Windows 10 on it. Also, Microsoft’s recent play with adding Cortana and Bing into Windows 10 is proving to be a worthwhile investment as its Bing search engine saw a nice bump in market share recently. With advertising revenue for the year coming in at $6 billion, an increase from $4.5 billion previously, Windows could soon be overrun by Bing, and that would be a good thing for the company.

Microsoft may be looking to the cloud for its future, but what observers are noticing is a company leveraging the install base of Windows to propel its next product without torpedoing it entirely. Microsoft is dancing a rather intricate dance atop a very fine line.

Whether or not the company can continue to make the gains in the cloud that its Windows revenues are losing, is entirely up to how well it pushes Azure and Office in conjunction with market influences. For now, Windows is still among its top three-billion-dollar club, and that in itself is no small feat for a desktop OS in an age of cloud computing.

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Do you think Microsoft can survive without Windows?