Microsoft – A well-oiled, expertly run and growing giant

Microsoft is one of the three tech giants, along with Facebook and Apple, that reported a blow-out quarter this past week. What impressed me is that Microsoft is a giant that recorded $43 billion as quarterly revenue in Q2 FY2020 AND grew at an unbelievable clip of 17% YoY for a company that size….AND showed improved efficiency with the operating margin of 42% in the latest quarter. Looking deeper at the segments, they have all exhibited growth, especially their Office Products, Cloud, Server Products and LinkedIn.

Some of their notable and strategic products continue to show their strengths. Microsoft 365 Consumer Subscriber Base stood at 47.5 million in Q2 FY2021 and its YoY growth is the highest since FY 2018. Even though its YoY growth has been hampered by the law of big numbers, Azure hasn’t seen this number dip below 40% since FY 2017. Teams, the product that has attracted a lot of attention so far during the pandemic, also saw great adoption from corporations and had 115 million Daily Active Users as of Q1 2021.

I created some charts here that hopefully can help show what an incredible business Microsoft is right now.

Microsoft's quarterly revenue
Figure 1 – Microsoft’s quarterly revenue. Source: Microsoft
Microsoft's segment revenue
Figure 2 – Microsoft’s segment revenue. Source: Microsoft
Microsoft's operating margin
Figure 3 – Microsoft’s operating margin. Source: Microsoft
Microsoft segments operating income, including Productivity & Business Processes, Intelligent Cloud and More Personal Computing
Figure 4- Microsoft’s segment operating income. Source: Microsoft
Microsoft's consumer subscriber base and YoY growth
Figure 5- Microsoft 365 Consumer Subscriber Base and YoY Growth. Source: Microsoft
Azure YoY Growth
Figure 6- Azure YoY Growth. Source: Microsoft
Teams adoption from corporations
Figure 7 – Teams adoption among corporations. Source: Microsoft

Disclaimer: I own Microsoft stocks in my portfolio

Weekly readings – 25th July 2020

What I wrote

Slack filed an antitrust complaint against Microsoft over Teams to the EU. On the surface, I don’t think Slack is going to win the case, if the EU decides to formally launch an investigation. How Microsoft structures their Microsoft 365 offers does give customers a choice to include Teams or not, a counterpunch to the core of Slack’s complaint. I wrote my thoughts here

I also wrote about matcha, how it can beneficial to our health and why it and its accessories are expensive

Business

In investing, when truly exceptional opportunities present themselves, Charlie Munger said: use a shovel, not a teaspoon

Both strategies yield the same result: that foreign affiliate employment increased as a direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high-skilled human capital and in countries like Canada with more relaxed high-skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer

Source: NPER

How Ben & Jerry’s Perfected the Delicate Recipe for Corporate Activism

A look at how influential Facebook is in Bangladesh

Apple’s report on their sustainability progress

Where banks really make money on IPOs

An investigative piece by WSJ that looks into accusations that Amazon used confidential information accessed through its investment arm to launch competing products.

Shopify Saved Main Street. Next Stop: Taking On Amazon

An interesting piece on what appears to be a change in strategy for Apple TV+. This streaming space is highly competitive. I look forward to how Apple will compete with other heavyweights. On a side note, I really enjoyed Greyhound. You should give it a try

Technology

Giving GPT-3 a Turing Test

A good blog post on the behind-the-scenes technology that changed air travel

A report commissioned by Apple on commission rates of other marketplaces, compared to Apple Store. It’s an interesting study and it’s definitely good to have all the facts in one document. On the surface, Apple Store’s commission rates don’t look outrageous, compared to those of other marketplace platforms. However, the debate doesn’t end only at take rates

What I think is interesting

The Last Hunter Gatherers

A great write-up on beaches in Quy Nhon and Phu Yen in Vietnam. If you visit my country, I highly recommend that you go there. Wonderful beaches, few tourists, and great sea food

For years, African countries have taken loan money for China to improve their infrastructure and economy, in exchange for the use of these countries’ vast reserve of rare metal and resources. Now, a report said that Africa is more aware of the strings attached to loans from China. For a good reason!

Slack’s complaint against Microsoft

Disclaimer: I own Microsoft stocks in my personal portfolio.

Today, Slack filed an antitrust complaint against Microsoft in the EU over Microsoft Teams. Here is what Slack says in their blog

The complaint details Microsoft’s illegal and anti-competitive practice of abusing its market dominance to extinguish competition in breach of European Union competition law. Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.

Slack’s objective is to force Microsoft to unbundle Teams from Microsoft Office 365 and sell it as a separate feature. The company reportedly had been discussing legal matters concerning Teams with the US authority for a while (per WSJ), but just decided to launch a formal complaint today. Given what has happened between the EU and big tech companies, it’s not difficult to see why Slack lodged the complaint there. Last year, the EU fined Google almost 1.5 billion euros for abusive practices in online advertising. It is also looking into Apple’s antitrust behavior with App Store rules. In 2004, Microsoft was fined half a billion euros for bundling Windows Media Player into its Windows. Perhaps, Slack is banking on the fact that the precedent and the current events as of late will be favorable to them in this case.

When I read the main part of the complain above, I was a bit surprised. My company is a bank in a highly regulated industry. We use licensed Microsoft Office 365, yet Cisco Jabber, not Teams, is our chat and video application. I don’t have a lot of confidence in our IT department to think that they can go around Microsoft and remove Teams if it’s not allowed by the Seattle-based company. In fact, if you look at how Teams is marketed, you will see that there are options to customers. There are three ways to get Teams: Office 365 Enterprise, Microsoft 365 Business and Microsoft 365 Enterprise. I know it’s not the easiest thing in the world to differentiate between the three, but here are the plans

Figure 1 – Office 365 Enterprise. Source: Microsoft

Figure 2 – Microsoft 365 Business. Source: Microsoft

Figure 3 – Microsoft 365 Enterprise. Source: Microsoft

As you can see from the three figures above, customers have at least one option in each category that allows them to use Microsoft Office 365 without Teams. To be clear, the screenshots above do not capture all features under each plan. It’s plausible that the other features which are not shown can force businesses to choose plans that only come with Teams. As a result, there are two points I want to make:

  • On the surface, the claim that Teams is forced on customers doesn’t seem true. Customers do have a choice to use Teams or not.
  • If Microsoft uses some indirect tactics to force Teams on customers, the onus is on Slack to prove it. However, the fact that companies whose products compete with Microsoft’s such as Slack, Cisco, Zoom, AirTable or Tableau, just to name a few, have a market does seem to me that it’s entirely possible to use non-Microsoft applications in addition to the popular Microsoft Office.

From Microsoft’s side, the company issued this following statement:

We created Teams to combine the ability to collaborate with the ability to connect via video, because that’s what people want. With COVID-19, the market has embraced Teams in record numbers while Slack suffered from its absence of video-conferencing. We’re committed to offering customers not only the best of new innovation, but a wide variety of choice in how they purchase and use the product.

source: Techcrunch

A big advantage that Microsoft has over Slack when selling a competing product is that the former, in most cases, already has an established relationship with customers through Microsoft Office and other products. To sign any customer, Slack has to cultivate the relationship from scratch. The task is even made more difficult when Slack has to convince potential customers to make additional investments, on top of what they already pay for Microsoft applications. Imagine if a company already pays from $5 to $35/month for every one of hundreds of employees to use Microsoft Office, in case Teams is included, there has to be a very good reason why it should incur more expenses to use Slack.

The last publicly revealed figures put Microsoft Teams and Slack at 75 million and 12 million daily active users, respectively. Microsoft revealed that in Q4 FY 2020, there were 69 organizations that had more than 100,000 users of Teams, up from 20 organizations in Q3 FY 2020. In the past, Slack insisted that Microsoft Teams isn’t a true competitor to their product; a claim that I found bewildering. It’s clear that Slack has a big problem at hand and the fact that they are formally complaining about Teams contradicts the previous claim.

I am all for competition as it benefits end users. If Microsoft deployed underhanded tactics during negotiations with companies and it’s not publicly known or if Slack can prove that the dizzying and head-scratching offerings by Microsoft indirectly force customers’ hands, by all means, I do think Microsoft should be held accountable. However, I am not convinced that it’s harmful to the end users that Microsoft can offer value through bundling and establish a direct relationship with customers more easily than Slack. Microsoft has to invest a lot of resources in building and maintaining a lot of other features, not just Teams.

The difference between the 2004 case and this, I suspect, is that Microsoft didn’t give users a choice whether they wanted to install Windows Media Player while they do with Teams, at least on the surface. My guess is that Slack’s complaint won’t go any far, but it’ll be interesting to see how this actually pans out.

What do you think about this complaint from Slack? Let me know in the comment. Have a good day and stay safe!