Microsoft may be toying with the idea of buying Tik-Tok, but more than ever, its bread-and-butter is basic cloud services and server software for businesses.
Speaking of M&A, Microsoft was relatively active on the acquisition front but also pretty thrifty with its spending in its recently completed fiscal year.
The company’s list of officially recognized competitors is growing, with the addition of Netflix, Hulu and Tencent for the first time.
And Microsoft now sees restrictions on marketplaces operated by competitors (i.e., Apple’s App Store) as a material risk to its business.
Those are some of our takeaways from the Redmond company’s new Form 10-K filing with the Securities and Exchange Commission, an annual treasure trove of tidbits about the tech giant. In addition to reading the latest filing, we used the Compare Documents feature in Microsoft Word to help us spot significant changes since last year’s filing.
The biggest additions this year are long passages about COVID-19 and the company’s response to the pandemic, plus its racial justice, environmental sustainability and digital skills initiatives, largely reiterating Microsoft’s past public statements and announcements on each of those fronts.
Most notable on the business front is a section that breaks down Microsoft’s revenue into categories associated with its traditional product lines: Office, Windows, Xbox, etc. This is in contrast with the company’s quarterly financial reports. Those use a broad-based and somewhat ambiguous divisional structure — Productivity and Business Processes, Intelligent Cloud, and More Personal Computing — that mix different businesses and products in such a way that it’s not always easy to discern clear trends by product line.
The alternative categories in the 10-K filing show a clear trend: Microsoft’s back-end server products and cloud services are booming. Revenue grew by nearly 27% to $41.4 billion in the product category of Server and Cloud Services in the fiscal year ended June 30.
Office and Cloud Services revenue was the second-fastest growing category, at 11%, reaching $35.3 billion in revenue for the year. Windows grew by 9% to $22.3 billion.
Microsoft made 15 acquisitions for a total amount of $2.4 billion in its 2020 fiscal year, according to the filing. That was down from 20 acquisitions for a total of $9 billion the year before, which included the $7.5 billion acquisition of GitHub.
The company’s biggest acquisition on record was its $26.2 billion purchase of LinkedIn in December 2016, in Microsoft’s 2017 fiscal year.
Microsoft’s official list of rivals is growing. It’s always interesting to see which competitors the company considers worthy of mentioning in the filing, as an indication of where its business is headed. Two years ago, it was Slack. This year, it’s Netflix, Hulu and Tencent.
Here’s how the section on the company’s gaming and entertainment competition now reads with those additions.
Xbox Live and our cloud gaming services face competition from various online gaming ecosystems and game streaming services, including those operated by Amazon, Apple, Facebook, Google, and Tencent. We also compete with other providers of entertainment services such as Netflix and Hulu. Our gaming platform competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. We believe our gaming platform is effectively positioned against, and uniquely differentiated from, competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our own first-party game franchises as well as other digital content offerings.
Interesting to see the company’s main console rivals, Nintendo and Sony, practically relegated to afterthoughts. This is notable in part as an indication that Microsoft continues to see Xbox as a broader entertainment platform, with the release of the Xbox Series X console coming up later this year.
And finally, the filing reflects the growing tension between Microsoft and competitors that operate online marketplaces in which the company wants to participate.
This section is entirely new: “Competitors’ rules governing their content and applications marketplaces may restrict our ability to distribute products and services through them in accordance with our technical and business model objectives.”
Microsoft is at odds with Apple over App Store restrictions that Microsoft says restrict its ability to offer its xCloud gaming service on iOS.
Those are our main takeaways. If you’re up for some light reading, here’s the full filing. Let us know if you spot anything notable that we missed.
