The Real Secret to Microsoft's Success (2024)

Microsoft was started by Bill Gates and Paul Allen in 1975 and was incorporated six years later. The multinational corporation was one of the biggest tech companies in the world and remains a leader in software development. Best known for its Windows operating systems software and Office applications suite, Microsoft also develops other electronics like tablets and gaming consoles.

For certain people, it’s fun to make light of Microsoft (MSFT). That's because they see it as the parent of outdated and occasionally bloated software: An operating system so despised that most users refused to upgrade from its predecessor and waited for its replacement. A browser that once held 95% of the world market share no longer leads in any country. And mobile phones that barely register in a universe dominated by iPhone and Android. So with all that being said, what makes Microsoft such a big name in the industry?

Microsoft Matures Its Business

If you're old enough, you'll remember the time when Microsoft was considered an innovative company. Its founders and their unorthodox culture flew in the face of a formal, understated business world that had limited use for (or knowledge of) computers.

But in a world full of Apples, Googles, and IBMs, the name Microsoft seems muddled in the mix. Still, the company is a pillar of the Dow Jones Industrial Average (DJIA)—even today. The alternative would have been for the brash software upstart to be of no consequence today. But that can't be farther from the truth.

The consensus sentiment about Microsoft prompts questions such as “How does it make so much money?” After all, Microsoft isn’t the most innovative company in the world, nor the most limber. But critics seem to forget a few very important things about the company:

1. Microsoft is the world’s largest software maker
2. People have great utility for software
3. Microsoft is not just a software maker anymore

This leads to some very key factors that point to Microsoft's continued success. These include innovation, strong leadership, a vision, trust in every employee, and resiliency.

Microsoft's Leadership

For years, the company was stuck in a rut. This was due largely to an increase in competition and its failure to adapt to changes in the overall marketplace. It seemed, at one point, that Microsoft's name would become obsolete.

But things shifted under the leadership of chief executive officer (CEO) Satya Nadella, who took the reins in 2014. That's when he made an aggressive move into services and cloud computing. Microsoft's Azure cloud computing system now has a solid percentage of market share globally, second only to Amazon Web Services. In fact, it accounts for nearly a big portion of the company's overall revenue.

Microsoft revenue topped $198 billion in revenue in 2022 and pulled in $8 billion in operating income.With a 33% profit margin, which is considerably larger than that of either Alphabet (GOOG) or Apple (AAPL), two companies that popular opinion assumes have overtaken Microsoft.

Microsoft: Stalwart and Ubiquitous

That popular opinion derives from a false assumption: that a new product line with frequent updates is the surest path to success in the technology sector. This just isn't true.

Take Surface, the company's answer to Apple’s iPad. It isn’t the kind of product that makes or breaks a company with the power and magnitude of Microsoft. Rather, it’s a way to stay relevant in the consumer electronics market. Of course, the idea is for Surface to create enough profit to justify the expenses behind it, but a couple of million satisfied Surface owners have only a minimal effect on Microsoft’s net profit numbers.

The same goes for the formidable Xbox, whose sexiness as a gaming console vastly outweighs its contributions to Microsoft’s overall financial picture.

The truth is somewhat more pedestrian. Perhaps it’s because Microsoft is so ubiquitous—a constant reminder in the daily lives of those who use its products. Every time you turn your computer on, Microsoft’s logo is staring at you, even if you’re a Mac or Linux user who uses the company's Office suite. Shouldn’t a company with so wide and deep a footprint make itself into a business that endlessly delights and fascinates us, with a youthful exuberance and a penchant for self-promotion? You know, like Google does?

The fact is, more than four decades after its incorporation, Microsoft is as staid and disciplined as IBM (IBM), ITT (ITT), and the other companies that rounded out the upper reaches of the Fortune 500 back in 1975.

The software giant is primarily in the business of making money, which sounds tautological at first read. But it really isn’t. Microsoft is no longer in the raw experimentation stage common to young and growing companies. Rather, its modus operandi is to create profitability streams, then maintain and expand them.

Microsoft's Software As a Service

The name of Microsoft’s Productivity and Business Processes Division may sound unhelpfully generic, but it refers to the part of the operations that’s responsible for creating the stupendously profitable Office.

The suite started as an adjunct, a method for showcasing Microsoft’s revolutionary operating system. But since Office’s 1990 debut, the applications that comprise it have become just about mandatory for anyone wanting to conduct business. Over a billion people now use Office to the point where Word and Excel are practically synonymous with word processing and spreadsheets, respectively.

Multiply that user base by $150 per license for the stripped-down Home & Student version of Office, a product whose marginal cost is close to zero, and it’s easy to see why Microsoft does everything in its power to maintain Office’s profitability (and why competitors from OpenOffice to Google Docs want nothing more than to chip away at Office’smarket share.)

The Business Division’s only serious competitor for dominance at Microsoft is the company’s Windows Division, whose latest contribution to the marketplace is Windows 10. Windows’ share of the worldwide operating system market is more than 35%.

The Bottom Line

All-in-one entertainment systems (Xbox One) and free audio and video conferencing around the world (Skype) may be exciting. These are the kind of things that make life in the 21st century more enjoyable. But their impact on Microsoft’s income is minimal.

Instead, the company’s secret to staggering riches lies in the daily business of allowing users to create and manipulate documents. It also provides the software that performs a computer’s most important function by permitting data to make it from your computer’s hardware components to its display. This may not be alluring, but it pays the bills, at least to an extent few companies in history can match.