Microsoft revenue rose 10 percent to $19.9 billion, helped by sales of Microsoft’s Office suite of applications.
Microsoft will make headway against Sony and Google in H2 2013 with the latest versions of its Xbox and Bing Platforms and better product integration across its portfolio
Subscriber additions to Skype and Xbox Live, plus strong growth in Windows Phone royalties helped Microsoft grow its Online Services Division (OSD) and Entertainment and Devices Division (EDD) revenue from 2Q12. The company’s organizational realignment will allow for better integration of major platforms across Microsoft’s portfolio, including better integration of Skype and Bing with Windows Phone and Xbox.
Online advertising growth will continue to drive OSD revenue but hinder margin improvements as a greater portion of internet search transitions to mobile from the PC. The OSD segment remained unprofitable with a -46.3 percent operating margin, reversing the trend of slowing margin decline. Concurrently, the EDD segment saw Xbox unit sales decline in anticipation of the Xbox One release in 4Q13, offset by double digit year-to-year growth of Xbox Live account revenue and Skype minutes of calls as Microsoft actively promotes the adoption of these platforms.
The forthcoming Xbox One launch will continue to weigh on Xbox 360 sales through 2H13
Microsoft revamped its Xbox strategy to accelerate the company’s shift from physical to digital distribution in the marketplace, a move that will alter the way Microsoft approaches game ownership and content distribution. Transitioning to an all-digital model in the long-term would appeal to third parties that benefit less from second hand game sales and provide Microsoft with a constant channel of contact with consumers across their entertainment platforms.
Xbox sales will continue to decline through November 2013, down 7.1 percent year-to-year in 2Q13, as users anticipate the availability of Xbox One, slated to go up against the PlayStation 4 this holiday season. Microsoft continues to push pre-launch day sales through retail partners Best Buy, GameStop and Wal-Mart, consistent with the vendor’s desire to be more available to customers and its recent move to open more than 600 mini-stores within Best Buy locations.
Microsoft will reduce transparency of Bing performance with companywide reorganization while it repositions the search engine as a developer platform
Microsoft’s reorganization will allow the company to tuck Bing into another segment to hide the platform’s sizable losses. Since 1Q05, Microsoft’s Online Services Division has cost the company $10.9 billion in losses, of which Bing contributes to each quarter. Though the company increased its U.S. market share 230 basis points year-to-year to control 17.9 percent of the market, Bing will not successfully detract from Google’s 65 percent lead of the U.S. search market in 2H13 as Yahoo’s share of searches continues to fall steadily, down to 11.4 percent from 13.1 percent in June 2012.
Bing is being repositioned as more than a search engine to compete with Google. Microsoft will continue to invest in Bing as a developer platform to directly challenge Google. The shift is beneficial to Microsoft as it aims to develop intelligent applications to run on the Windows 8 platform and the Xbox One. Microsoft has already embedded search APIs within Windows 8.1, a move that over time could result in users searching within Windows and not leaving the Windows platform to navigate to Google’s search engine.
Jessica Paterson, research analyst, Technology Business Research
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