Microsoft Draws a Line in the Stream

The line along which the Department of Justice wants to break up Microsoft, with Windows operating systems on one side and applications on the other, was not terribly sharp to begin with. Microsoft's announcement yesterday of new categories of revenue would seem to erase it altogether.

By Nico Detourn (TMF Nico)
September 28, 2000

As part of its ongoing effort to reposition itself in a changing business and technology landscape, Microsoft (Nasdaq: MSFT) has defined a new set of categories for its various sources of revenue. The new revenue categories reflect the company's recent reorganization around the Microsoft .NET initiative and its focus on Internet-based products and services.

The company will break out its revenues into these new segments when it reports first-quarter results on October 18. "Microsoft's business continually evolves, and our financial reporting needs to evolve accordingly,'' CFO John Connors said in announcing the changes Wednesday evening. "The new segments... will help investors evaluate our progress in these areas.''

Having the reported revenue segments line up with the company's .NET product lines (and with the newest lines drawn on the corporate org chart) will allow a sharper view into the Microsoft machine. But like the .NET concept itself, Microsoft's new five-segment revenue grid appears oblivious to the perforated line along which the Justice Department wants to split the company in two.

The antitrust line drawn by the DOJ, with Windows operating systems on one side, and Microsoft Office and other applications on the other, was not terribly sharp to begin with. With yesterday's announcement, Microsoft erases it altogether.

Drawing Lines in the Revenue Stream
Microsoft was dividing its business into three categories. Two of those -- Windows Platforms and Productivity Applications and Developer (for end-user and developer products) -- provide the blueprint for the DOJ's break-up plan.

And since the plan's goal is to separate the operating systems from everything else, Microsoft's third business category, Consumer and Other (Microsoft Network, WebTV, books, accessories, etc.) would remain with the Applications side.

In contrast, Microsoft's new scheme defines its business categories based more on where and by whom the products are used. As a result, the first of its new revenue segments is Desktop Software, the two product highlights of which are the Microsoft Windows operating systems and Microsoft Office -- virtually all of Microsoft's cash-cow applications. The DOJ's line in the sand is thus washed away by the new segment's common revenue stream.

Microsoft's new Consumer Software, Services and Devices segment covers the Microsoft Network (MSN), WebTV, mobile and wireless devices and software, and learning and games software. The Enterprise Software and Services segment includes the Microsoft's server products, developer tools, and consulting and product support Services.

Microsoft has also decided to separately break out revenues from its stakes in other companies and online properties through a Consumer Commerce Investments segment. This includes Expedia (Nasdaq: EXPE), and the HomeAdvisor (online real estate) and CarPoint (automotive service) sites at MSN. A fifth, Other, segment includes Microsoft Press, keyboards, mouse products, and whatever didn't comfortably fit elsewhere this time around.

Show Me the Money
In its announcement Wednesday, Microsoft presented in the new format revenue figures for its last two fiscal years. In doing so, the company emphasized that total revenue for those two years was unchanged, and that rather than its new segmentation scheme being a restatement of past revenues, they were simply stuffing the same old money into new mattresses for demonstration purposes only.

So that you, dear Fool, need not attempt any risky demonstrations at home, we offer Microsoft's FY2000 revenues, as reported by Redmond, in both the new and old formats. Dollars are in millions.

Microsoft FY2000 Revenues

New Business Segments          FY2000
Desktop Software              $16,314
Enterprise Software
 & Services                     4,081

Desktop & Enterprise
         (sub total)           20,395

Consumer Software,
 Services & Devices             1,626
    Consumer Commerce
 Investments                      182
Other                             753
Total Revenue                 $22,956

Old Business Segments          FY2000
Windows Platforms             $ 9,380
Productivity Applications 
  and Developer                10,467
Consumer and Other              3,109
  Total revenue               $22,956

Motley Fool Research Coverage on Microsoft
The Motley Fool Research team will begin coverage of Microsoft on Friday, September 29. Fools can order the premium reports here.

Your Turn:
Microsoft's new revenue segments line up with its new reorganization. But aren't Bill and his crew just spinning their hourglass if the DOJ succeeds in breaking-up the beast? Is it possible that these reorgs make that less likely? Why not segment and organize your thoughts and share them with other Fool's on the Microsoft discussion board?

Related Links:

  • Microsoft's Split Personality, Rule Maker, 9/28/00
  • Microsoft Reshuffles the Deck, Fool News, 8/15/00
  • Finding the Next Microsoft, Fool On The Hill, 8/11/00
  • Microsoft's Fiscal Millennium, Fool News, 7/28/00
  • Microsoft Huffs Through Tough Year, Rule Maker Portfolio, 7/21/00
  • Tom and David Talk with Microsoft CFO John Connors, Fool Radio Show, 5/15/00
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