Measuring Profits: Microsoft vs. Red Hat
Microsoft’s stock dropped sharply today because the company’s latest quarterly profits didn’t quite meet Wall Street’s expectations. Meanwhile, The VAR Guy and other open source bloggers continue to hype Red Hat and Linux as growing threats to Microsoft. But before you suggest open source will destroy Microsoft’s profits, take a look at these stagging financial figures.
Microsoft’s income for its most recent quarter was a staggering $4.3 billion. In other words, Microsoft generates a robust $47.3 million profit every day of each quarter. Or, $1.97 million in pure profit every hour. For a dead company, that sure sounds healthy to The VAR Guy.
Now, compare Microsoft’s profits to Red Hat’s financial results. During its most recent quarter, Red Hat’s net income was $17.3 million. Do some fast math, and you’ll discover that it takes Microsoft less than half-a-day to exceed Red Hat’s entire quarterly net income.
So, the key takeaway: Open source has great momentum and Red Hat is on its way to becoming a $1 billion company. But anyone who suggests open source has destroyed Microsoft’s business hasn’t really looked at the numbers.
Dollars are not the only numbers that matter, especially with free software and open source software. In this case they cannot begin to tell the whole story. One company’s profit margin is certainly no measure of a rival company’s success, or of its failure. Comparing the two does bring some perspective to the discussion, but there is far more to it than that.
Well of course MS is going to have higher profits then Red Hat. Microsoft has a far greater market share then Red Hat. Much as I love Linux, its going to be a while before open source operating systems are common in the desktop market.
Look at Vista. M$ is scoring licence fees for Vista when folks are installing XP… What a racket… Even then, M$ reports only 180 million Vista licences have been sold, in 18 months. In that time, 450 million PCs have been produced. 180/450=2/5=40%, not good for an outfit with Vista on virtually all PCs spit out by the OEMs. The next quarter will tell the tale. Will sales of Vista take up the slack due to the “death” of XP?
If Vista does not earn its wings in the next quarter, M$ is really on borrowed time. GNU/Linux will eat its lunch.
MacOS has about 3% of the global PC market in units. M$ has about 90%. That leaves 7% for GNU/Linux. That is well above geek-share. Ordinary folks are finding GNU/Linux works for them. The next quarter will punch up GNU/Linux for back-to-school and the quarter after will do it again for Christmas. GNU/Linux is growing exponentially with a huge annual rate since the middle of 2007. It will be the elephant in the living room by the middle of 2009 and it will not be an hallucination.
M$ is still doing well on the basis of the outrageous profit margins from printing CDs/licences. By 2009 M$ will have to cut prices seriously if they want to sell Vista. No one wants to buy a step backwards these days. If their next release is as bad, they are toast. Only inertia will keep the dead carcass moving. Office will not continue to sell now that ODF has won the format wars. Only file incompatibility has made it palatable for many years. Now that that is gond, Office is on borrowed time. M$ lost a lot of money on other streams. The cash cow is running dry soon.
It does look like MS is making every stupid mistake possible these days, but I agree with Robert that even then, it will take time before Microsoft truly comes to a halt. Despite the most rapid deceleration Microsoft has ever experienced, we are talking about a truly massive beast that has had at least a decade to build up a lot of velocity. That’s a lot of momentum to stop or bleed away.
These numbers prove one thing:
Either free-market doesn’t work, or Microsoft is not operating in a free-market environment.
Indeed, the theory goes that in a free-market environment, efficiency eventually prime, that is, if someone is making insane amount of profit out a product, other will notice and jump in, increasing the offer, hence lowering the price.. to the point where the margin is reasonable again.
This principle crumble when in presence of monopolies, either de facto or de jure (patents for instance).
Some monopolies are practically inevitable, and even desirable: for instance Electricity transport. It would be unpracticable and very inefficient, if each electricity providers were to install their own electric grid, same goes for Water or Sewer…
These instances have to be Monopolies, hence out of the free-market reach, hence need to be tightly regulated.
Some Monopolies are the result of a political and societal will. The Patent sytem is a monopolistic system intended, originally, to provide incentive to inovation and exchange of innovation: Indeed the idea was: share your secret an in exchange we – the people – will garanty you a monopoly on the exploitation of your secret for a certain amount of time. These monopolies are not a fundamental necessity, but a political choices. Recent abuse of that system is raising pressing question about it’s wisdom…
Finally we have purely predatory monopoly. Microsoft is the poster child for this class of abuse.
The ability of Microsoft to generate such massive profit as such large scale is proof positive of the inefficiency of the market. Microsoft, based on the number above, generate about $200,000 of net profit per employee and per year (and that is AFTER having paid all these employee their salaries and bonuses).
I’m sure Microsoft employees are all exceptional individuals with stellar productivity… but $200,000 net per head!!!
For reference IBM is doing $25,000 a head, and Oracle do $60,000, and the much smaller RedHat do about $30,000.
I am a bit confused by the measure of Red Hat profits v Microsoft as a measure of Linux V Windows. I run a business and am not happy with the constant paying to upgrade software that is good enough for most of us. Why to I want to pay for and learn a new operating system when my current one is fine? Then the new system takes up more resources and requires an upgrade to all my computers. The same thinking applies to Microsoft Office upgrades.
Then look at the cost of Hardware. I just upgraded my work computer for £210. OK, I built it myself but I have a quad core motherboard, dual core chip 2GB of realy fast ram, 350GB hard drive. But Microsoft want £200 for Vista Pro and £350 for Office 2007 Pro. For 2 discs! OK, I did not need them for an upgrade, and you can get OEM, but this is just too much for 2 CD’s. Or I could go Linux for Free and OpenOffice. But non of these opteions would affect Red Hat’s profits – just Microsoft.
Then Bill Gates has left Microsoft.
So for my business I am looking at migrating to Openoffice as a first step – as I can use Windows still. This program is as good as Microsoft Office. I am struggling with e-mail as I use a Exchange Server – I can get what I need to run on Linux but not on Windows. I am also struggling with accounting software – I would move to Linux immediately if I could get away from Sage. So I am looking to install 5 of the main free Linux systems to try them and then to migrate – but they look fine so far.
To conclude, there is no real reason for anyone to pay for their basic office software any more – and this has seemed to have crept up on Microsoft. Some will change, then Microsoft will probably change too. But the writing is on the wall and this could be a great time for Linux systems. But the fall in Microsoft’s profits will not – for my viewpoint – simply see turnover transferred to the profits of one Linux system.
If there was no Red Hat (Linux in general), Microsoft would earn _much_ more in the server market, because the _majority_ of their potential customers instead of buying their server OS for almost one thousand dollars – spend in fact nothing by installing a free Linux OS (not to mention upgrade and other software costs).
_This_ is what is driving Microsoft to kill Linux, or Red Hat for that matter.
No FOSS would roughly mean doubling Microsoft’s enterprise sector income.
What’s further disturbing – Linux continues getting better (although still far from an ideal OS).
xlinuks: Your points are on the mark. The VAR Guy was just trying to point out that MSFT isn’t going to die anytime soon, contrary to what some open source fans believe. Competition is good. Competition is healthy. Linux is hot. But MSFT remains very profitable.
The sheer scale of Microsofts market share will keep it safe for a good few years to come. In fact, unless Linux makes decent headway in the OEM pre-install market Microsoft is as safe as houses.
Currently on the desktop Ubuntu and Xandros are the only Linux OSs that seem to be making any serious push in this effort.
Dell I believe are offering Novell SuSE Enterprise Linux in China. But all Windows installations in China are pirated anyway. So that makes no difference.
M$ is only safe in the USA and some parts of Europe for now. The emerging markets have billions of potential new PC users. That is where the OEMs will find growth. These emerging markets have no affinity for M$. GNU/Linux works for them. China is one of the hottest PC markets and GNU/Linux is hot there. Efforts by the government of China to control copyright violations of software have fed the flames of GNU/Linux. M$ cut some prices to $3 to try to compete there. What would M$’s 10Q look like if M$ were charging $3 instead of $300 globally? HAHAHA! Similarly, in South America governments have taken pro-FLOSS stands. Globally, ODF finds acceptance and M$ has promised to implement it. Fires spread. GNU/Linux is spreading like a wildfire in the low-end PCs, governments, schools, and is making good progress in the mid-range PCs. Intel, AMD and VIA are ramping up production of good-enough chips for low/mid-range PCs. The world does not need quad-core CPUs and 2gB RAM to surf the web and do e-mail/chat. The low-end PCs have been rate-limited by bottlenecks in supply of parts, not user acceptance. In 2008, these supply-side bottlenecks will open and with present low hardware prices, GNU/Linux will take off. M$ has no such upside except the truly locked-in who feel PCs last only three years.
With roughly 6.5 billion annual spending on employees salaries alone, the total amount of money they need to keep things going for a year could easily be above 10 billion (i.e. they had to pay 1.4 billions to EU this year), considering the highly unfriendly environment that is around Microsoft (and in US in general), their huge “extra” money amounts are for them just like a two-years time-out which is not enough to rearrange a giant company from bottom up, Sun is an example of that, the only difference is their desktop market share which is their saving blue bubble inside which exists the 800 pounds slow and lazy gorilla. But with their (Vista/Zune/whatever) failures and Apples/Google/whatever success stories – the bubble clearly started bursting. And I don’t really want that to happen, because there _are_ good people at Microsoft.
Xlinuks: I wouldn’t say MSFT’s bubble has burst. But I would suggest that competition has begun to eat away at MSFT’s market share and mind share.
I didn’t say “has burst” but “started bursting” which only implies the beginning, I think it makes difference.
The problem with M$ is that even if the make x20 time more profit they can’t invest 50% of such proffit to improve its products. 100 developers working for OpenOffice will continue to improve with similar pace to 100 developers working for M$ Office to the point that some day customer will not notice the diference between M$ Office and Open Office. Then what?
Only if M$ finds a way to invest its proffit in development and innovation they will survive, but right now the case is the opposite. Small OOSS companies are managing to innovate at faster pace than Microsoft (just compare a Linux distro from 2004 to a moderm Ubuntu distro 2008.1 or M$ server products to OpenBravo, Zimbra, Plone, RedHat Jboss or Terracotta clusters).
Not everithing is about OOSS. “Conventional” companies like Google or Adobe (Flash) are doing really well. But M$ didn’t jump into the bandwagon. All they had 10 years ago was Windows and Office. All have today is Windows and Office and a marketing image that goes lower each day it pass.
Be realistic, M$ will need a miracle to survive in the next comming years.