We dive into the strategies Microsoft is pursuing across cloud, enterprise IT, AI, gaming, and more to see how the company is positioning itself for the future.
As the world’s most valuable company, and with a current market cap hovering around $780B, Microsoft may be the next company to reach the $1T threshold.
While it may not grab as many headlines as its buzzier tech giant counterparts, the company is quietly adapting across its core business areas, led by a future-focused Satya Nadella.
Since assuming the CEO role in 2014, Nadella has deprioritized the Windows offering that initially helped Microsoft become a household name, refocusing the company’s efforts on implementing AI across all its products and services.
That’s not the only change: in addition to an increased focus on AI, cloud and subscription services have become unifying themes across products. And to maintain its dominance in enterprise technology, Microsoft is expanding in new areas — like gaming and personal computing — that leverage the company’s own cloud infrastructure.
Below, we outline Microsoft’s key priorities, initiatives, investments, and acquisitions across its various business segments.
TABLE OF CONTENTS
- Microsoft’s structure & history
- Microsoft’s priorities
- Cloud: Drive revenue growth and provide a foundation for other products and services
- Enterprise software & services: Enable digital transformation for businesses across industries
- Artificial intelligence: Infuse everything with AI
- Gaming: Build new platforms and experiences supported by exclusive content
- Devices & hardware: Optimize the Windows experience for consumers
- Open-source: Build developer trust
Microsoft’s structure & history
Microsoft, which has had several structural changes in recent years, currently buckets its products and services into three main segments:
- Productivity & Business Processes
- Intelligent Cloud
- More Personal Computing
The majority of Microsoft’s revenue comes from its enterprise technologies, which fall under its Intelligent Cloud and Productivity & Business Processes segments.
The Productivity & Business Processes segment includes software products like Office 365, Skype, LinkedIn, and Microsoft’s ERP (enterprise resource planning) and CRM (customer relationship management) platform, Dynamic 365.
Microsoft’s Intelligence Cloud segment includes cloud platform Azure, the Visual Studio developer platform, and Windows Server, a version of Microsoft’s proprietary operating system optimized for running in the cloud.
Outside of enterprise technology, Microsoft generates revenue from products like Xbox and Microsoft Surface, among others areas. These products are bucketed into the company’s More Personal Computing segment.
In addition to its in-house efforts, Microsoft has a number of initiatives that look to support promising young businesses. These include Microsoft’s venture capital arm, M12, Microsoft’s accelerator, ScaleUp, and other initiatives like Microsoft for Startups.
Microsoft Ventures was renamed to M12 in April 2018, while Microsoft Accelerator was renamed as Microsoft ScaleUp in February 2018.
Many of these investment initiatives report to the EVP of Business Development, Peggy Johnson. Johnson was responsible for most of these changes and has also introduced new initiatives to boost investment returns.
Since Satya Nadella replaced Steve Ballmer as CEO in February 2014, Microsoft’s value has grown by approximately 200%.
This growth is due in part to recent leadership changes that prioritize key areas like cloud, AI, and gaming. In March 2018, Nadella announced leadership changes that resulted in two major organizational developments: deprioritizing Windows, while prioritizing AI.
Once a core business for Microsoft, Windows now falls under the leadership of Rajesh Jha, EVP of Experiences & Devices, as one of the many products under Jha’s purview. Meanwhile Microsoft’s AI initiatives are now split between two executives, Scott Guthrie, EVP of Cloud & AI, and Harry Shum, EVP of AI & Research.
Based on these changes, it seems that Microsoft will pursue AI through three different strategies.
First, it will cater to customers looking to add AI functionality to their applications by offering AI developer tools and services in Azure.
Second, Microsoft will infuse AI in everything from its software to its laptops in an effort to improve the customer experience.
And third, the company will leverage AI to improve all aspects of its internal operations.
Given that Microsoft generates a majority of its revenue from its Productivity & Business Process and Intelligence Cloud segments, the company is prioritizing AI in these areas most.
So far, Microsoft’s strategy seems to be yielding positive results: in its most recent quarter, the company reported higher than expected earnings, driven largely by the strong performance of its cloud products and business services. And in 2017, the company surpassed over $100B in annual revenue.
While Microsoft faces increasing competition from cloud providers like Amazon and Google, as well as from enterprise software providers like IBM, Oracle, SAP, and Salesforce, it regularly holds the title of world’s most valuable company (if only temporarily).
Below, we take a closer look at Microsoft’s strategy across its core business segments.
Microsoft’s Azure cloud plays a critical role in the company’s long-term growth potential. Not only is Azure offered as a standalone service, but it also provides the foundation for Microsoft’s software, gaming, and personal computing products.
WHAT IT’S DOING NOW
During Microsoft’s most recent quarterly earnings call (Q1’19), CEO Satya Nadella highlighted the importance of the cloud, saying,
“Every one of our solutions is reinforcing our core intelligent cloud and intelligent edge platform. Not only are we optimistic about the opportunity for us and for our customers, we also recognize our responsibility.”
Since Nadella became CEO in February 2014, the Azure cloud has become a primary focus for Microsoft across its investments, acquisitions, internal research, and internal development.
Microsoft has invested in cloud across a variety of entities, including its VC and accelerator arms as well as directly off Microsoft’s corporate balance sheet.
Many of the companies backed by Microsoft look to support the Azure cloud directly, while other investments go towards potential well-capitalized cloud customers. (Microsoft typically offers free cloud credits to portfolio companies, hoping to facilitate early dependency on Azure’s infrastructure, platforms, and services.)
Among its investment vehicles, Microsoft has backed companies ranging from container management platform Mesosphere, to private cloud infrastructure service CloudSimple, to container developer tool CodeFresh.
However, Microsoft biggest investments in the cloud have been made internally — the most obvious being the company’s investment in data center locations around the world.
Azure data centers are currently available in 44 regions globally, with plans for 10 more in the coming months and years, much more than cloud services competitors AWS and Google Cloud Platform (GCP).
Microsoft claims to have spent over $15B on data center infrastructure since opening its first location in 1989. Comments from a former general manager at Microsoft suggested that annual spending on data centers exceed the company’s annual research budget of $10B.
Microsoft’s recent annual and quarterly filings state that the company expects capital expenditures to increase in coming years in order to support growth in cloud offerings.
Microsoft has been known to buy data center infrastructure from Fortune 500 companies to fuel growth of its cloud services. These organizations typically conclude that it is more cost effective to use third-party cloud services than maintain their own on-premise infrastructure.
Microsoft has been one of the most active acquirers of cloud-related technologies since 2013.
The company has been just as (if not more) active as cloud competitors like Amazon Web Services and Google Cloud Platform. Since 2013, Microsoft has matched Google’s cloud-related acquisition activity and more than doubled the activity of Amazon.
A few of Microsoft’s recent notable acquisitions include cloud management platform Cloudyn, AI training platform Bonsai, and the $7.5B acquisition of source code management platform GitHub. According to CB Insights’ Deal Search, the GitHub deal marked the largest enterprise software M&A exit in history.
CB Insights expert intelligence customers can learn more about Microsoft’s cloud acquisition strategy in our brief, Microsoft & Google Use M&A To Make A Run At Amazon’s Cloud Dominance.
At Microsoft, the Azure business encompasses hundreds of products and services. According to Nadella,
One of Azure’s original offerings is its hybrid-cloud service, which acts as a primary growth driver and also gives the company one of its greatest competitive advantages.
Hybrid-cloud computing is an infrastructure architecture that connects public cloud services to private, local area, or on-premise cloud services.
Many of the world’s largest organizations use hybrid-cloud as a way to benefit from the scalability and flexibility of the public cloud while maintaining the security and control of on-prem infrastructure.
According to CFO Amy Hood, Microsoft’s most recent quarterly revenue from Intelligent Cloud was “$8.6B, increasing 24%, better than anticipated, driven by demand for our hybrid offerings.”
Some companies use hybrid-cloud computing as an initial foray into public cloud, moving first to a hybrid architecture before going all-in on public cloud. Azure supports all use cases for hybrid-cloud systems. One hybrid customer is InterContinental Hotels Group, which uses Azure’s hybrid-storage, security, and management tools to support the IT needs of more than 5,200 properties in almost 100 countries.
Once there is demand for other peripheral cloud products and service, Azure already has a proven track record and a foot in the door.
On Microsoft’s Q1’19 earnings call, Nadella said that he doesn’t think of the hybrid-offering as a temporary solution for businesses:
“…we don’t think of hybrid as some stopgap as a move to the cloud. We think about [it as] the coming together of distributed computing where the cloud and the edge work together for not just the old workloads, but most importantly for new workloads.”
With Azure’s IoT Hub, Microsoft has accomplished just that. Azure customers can now deploy their workloads to the edge just as they would deploy to the cloud.
By simplifying the development, deployment, and management of applications across disparate types of infrastructure, Microsoft creates a seamless experience for its customers. In doing so, it encourages the adoption of new products and services.
In addition to IoT and edge, Microsoft is apparently moving into quantum computing, according to recent news.
Over the past few months, Microsoft has been hiring former employees from Qualcomm’s quantum computing division. Apparently, Microsoft has been so aggressive in poaching talent that it now occupies a floor in the same building that Qualcomm’s quantum division use to occupy.
Serverless computing is also a growing interest for cloud customers. Serverless is a new type of computing model that removes the need for developers or system admins to manage the infrastructure resources offered by cloud providers.
While serverless computing does use servers to run applications, it removes the server management and capacity planning aspect of cloud computing.
Azure offers Serverless Architecture, which became publicly available in October 2016. A few months later, in May 2017, CEO Satya Nadella acknowledged the potential of serverless and its ability to change the mechanics of cloud computing:
“…one of the things that I think is going to completely change how we think about logic is serverless … So serverless computation is going to fundamentally not only change the economics of what is back-end computing, but it’s going to be the core of the future of distributed computing.”
While Azure has made significant progress with its Serverless offering, Microsoft faces fierce competition in Amazon Web Services and Google Cloud Platform.
CB Insights expert intelligence clients can learn more about serverless computing by reading our report, Why Serverless Computing Is The Fastest-Growing Cloud Services Segment.
Microsoft often thrives on competition. When cloud competitors release similar products, Microsoft works to improve its own.
While acquisitions can help ward off competitors, intellectual property is also an effective way to re-establish competitive advantage.
While Amazon has historically applied for the most cloud-related patents between the three competitors, Microsoft has overtaken activity in recent years.
Note: Due to a lag in the patent application process, patent data for 2017 and 2018 may be incomplete.
In 2016, Microsoft’s cloud-related patent application activity was twice that of Amazon and nearly 6x more than Google.
One example is Microsoft’s 2016 patent application for an Artificial Reef Datacenter. The patent is an iteration of a 2014 patent filed by Microsoft for a Submerged Datacenter.
In both patents, Microsoft looks to submerge data centers at the bottom of the ocean, which will cool the infrastructure naturally. In the earlier patent, Microsoft also outlined the possibility of using oceanic wind turbines to power the underwater data centers.
Since these patents were originally filed, Microsoft has begun work on Project Natick, an underwater data center off the coast of Scotland. The submerged data center runs on 100% locally produced renewable electricity from on-shore wind and solar as well as off-shore tide and wave sources.
CB Insights clients can learn more about Microsoft’s cloud-related IP activity in our client-only brief, As Cloud Services From Amazon, Google, And Microsoft Become Commoditized, Is IP The New Arms Race?
WHERE IT’S GOING NEXT
Microsoft’s recent investments, acquisitions, product developments, and research activity suggests that the company will prioritize areas like edge computing and IoT as it relates to cloud computing.
Even the media has bought into Microsoft’s cloud narrative. Using the CB Insights Trends tool, which aggregates news mentions across press sources, we can see that mentions of Azure paired with terms like “edge” and “IoT” have picked up substantially in recent months.
Some media outlets are discussing the initial release of Azure’s IoT Edge platform (May 2018), or commenting on Microsoft’s 2018 Ignite conference (September 2018), where IoT and edge were popular topics of discussion.
Cloud computing is a major priority for Microsoft, as indicated by its earnings calls. While Windows once dominated Microsoft’s calls, Azure is now the most discussed product.
Edge computing has been the dominant cloud-related topic on earnings calls. On Microsoft’s Q2’18 call, Nadella said,
“Azure is the only hyper-scale cloud that extends to the edge across identity, data, application platform, security and management, and our differentiated architectural approach drove another strong quarter of growth. We are investing aggressively to build Azure as the world’s computer.”
As Microsoft’s ambitions to become the “world’s computer” grow, edge will play a vital role in that outcome.
Learn more about edge computing in our explainer, What Is Edge Computing?
WHY IS THIS A PRIORITY?
Cloud substantially impacts just about all of Microsoft’s businesses and stands to upend a number of large industries. By differentiating itself across its businesses with Azure, Microsoft can better solidify its dominance in areas like enterprise software and gaming.
The market for cloud is hard to size, given that the technology is ubiquitous and has the potential to improve operations across a wide variety of industries.
That said, the CB Insights Market Sizing tool estimates that the cloud industry may reach $513B by 2022. Additionally, Microsoft’s foray into the internet of things industry could tap into an estimated $1T+ market by 2020.
Building the most sophisticated cloud offering could also help Microsoft as a software-as-a-service provider. As a result, Azure is directly tied to Microsoft’s future strategy and success.
Learn more about the competition between Microsoft, Amazon, and Google within the $513B global cloud industry in our brief, Here’s Why Amazon Is No Shoo-In To Win The $513B Global Cloud Market.
2. Enterprise software & services
Microsoft is the world’s largest enterprise software provider.
The company has grown its enterprise business through investments, acquisitions, and internal efforts. It has also iterated on a number of software products in recent years to avoid getting surpassed by enterprise software giants like Salesforce, Oracle, and SAP.
WHAT IT’S DOING NOW
While Microsoft continues to build and improve its Office products, which includes software like Word, Excel, Outlook, and PowerPoint, it has also released several new products and services to help boost revenue for the Productivity & Business Processes (P&BP) line. (This segment also includes products and services like Office 365, Dynamic 365, Skype, and LinkedIn, among others.)
In Microsoft’s most recent quarter, the P&BP segment earned nearly $9.8B in revenue and $3.9B in operating income.
While the More Personal Computing segment earned more in total quarterly revenue, the P&BP segment earned more in total operating income. The nature of software and Microsoft’s strength as a cloud provider allow for better margins compared to other areas of the business.
Microsoft has ramped up its external investments in enterprise software since Nadella became CEO in 2014.
For 3 consecutive years, the company has made over 15 investments in enterprise software startups — spanning industries from cybersecurity to marketing.
Of all the areas Microsoft has invested in, enterprise software has attracted the greatest number of deals. M12, formerly Microsoft Ventures, invested in 48 of Microsoft’s 61 total enterprise deals since 2013, while Microsoft Corporate backed the other 13.
And while Microsoft’s accelerator, Microsoft ScaleUp, has been active in the enterprise technology space, these investments are often less focused and strategic than those made by M12 or Microsoft Corporate. ScaleUp typically invests across a variety of industries to establish early relationships with companies rather than drive Microsoft’s primary investment returns.
On the M&A front, enterprise software is another top priority for Microsoft. According to Nadella,
“[Microsoft’s] pending acquisition of GitHub, which we expect to close shortly, recognizes the increasingly vital role developers play in value creation and growth across every industry. I’m excited about the opportunity to bring our tools and services to new audiences while enabling GitHub to grow and retain its developer-first ethos.”
GitHub is one of Microsoft’s 6 enterprise software acquisitions in 2018, which is on pace with recent years’ activity.
These acquisitions have played a significant role in Microsoft’s overall strategy. Certain acquisitions, such as LinkedIn in 2016, remain independent, while others, like calendar integration tool Genee, become integrated into Microsoft’s own products and services.
Microsoft has fully embraced the idea of SaaS and subscriptions. Today every Microsoft software product is delivered using these models, including many of the cloud services mentioned above.
In addition to improving on longstanding products like Office and Windows, Microsoft has also developed a number of other subscription services that have driven its business forward.
While Microsoft’s software products were once delivered as one-off purchases, many are now delivered as software-as-a-service where enterprise customers pay for a monthly or annual subscription.
One example is Microsoft’s Dynamic 365 service, which delivers a suite of enterprise resource planning (ERP) and customer relationship management (CRM) services to enterprise customers as a subscription.
These services compete directly with ERP offerings (from companies like Oracle and SAP) as well as with CRM offerings (Salesforce, Hubspot).
While Dynamics dates back to the turn of the century, when Microsoft acquired ERP provider Great Plains in 2000 and CRM platform iCommunicate.net in 2001, Dynamics 365 first became publicly available in November 2016.
The primary difference between Microsoft’s former Dynamics software and Dynamics 365 is the way the product is delivered.
Like many of the world’s enterprise technologies today, Dynamics 365 is offered as subscription-based software-as-a-service. While customers still utilize downloaded, on-premise desktop applications, Dynamics 365 is also accessible from a web browser. This removes the need to download the application and allows access from a variety of devices and locations.
This is made possible by Microsoft’s cloud infrastructure. Dynamics 365 is one of many Microsoft products hosted on the same infrastructure used to deliver Azure’s services.
Another example of Microsoft’s cloud-hosted software is the Power BI platform. The big data analytics tool has become a growing focus for the company.
This product first became available in September 2013 as an extension for Office 365’s Excel. However, in July 2015 Microsoft made the Power BI platform as a standalone SaaS product.
Since 2015, Power BI has added the ability to integrate data from a variety of sources, including Google Analytics, Salesforce, and MailChimp, in addition to all of Microsoft’s own services (Azure, Dynamics 365, Sharepoint, etc).
Microsoft has also experimented with workflow automation (known more commonly as robotic process automation) with its own Microsoft Flow platform. Flow allows users to automate repetitive tasks and services that can provide notifications, sync files, collect data, and more.
Similar to Microsoft’s Power BI platform, Flow can integrate with both third-party apps like Dropbox and Slack as well as proprietary apps like Outlook and employee engagement platform Yammer.
Another one of Microsoft’s software initiatives is Microsoft Teams. Teams is a recent addition to the Office 365 suite, and offers a chat and messaging service similar to that of Slack.
Like most of Microsoft’s software products and services, Teams offers integrations with both proprietary and third-party applications.
As part of Office 365, Teams will also be part of Microsoft 365, a new subscription service. Instead of requiring subscriptions to Windows 10, Office 365, and Microsoft Drive, Microsoft 365 bundles everything into a single subscription.
Offering subscriptions like this allows users to pay incrementally for products and services, eliminating the need for costly upfront expenditures. It also allows Microsoft to retain business through a recurring revenue stream, as with SaaS, customers don’t actually own the software. These recurring revenue streams allow Microsoft to better predict future revenue and costs.
Many organizations subscribe to these services for years at a time, which provides Microsoft with a better understanding of what infrastructure will be needed to support these services, as well as how much revenue they will generate in future quarters.
Generally, Microsoft has prioritized enterprise R&D over consumer R&D. Patent data trends indicate rising interest, with interest in enterprise R&D hitting a peak in 2016. (2017 and 2018 data is incomplete.)
While many of these patents won’t necessarily become products, Microsoft’s interest alone suggests that enterprise software and services will be the primary focus for years to come.
Learn more about Microsoft’s recent enterprise software initiatives by downloading our FAMGA Earnings Call Analysis report.
WHERE IT’S GOING NEXT
The media has also picked up on Microsoft’s enterprise technology focus. While the terms “enterprise” and “consumer” encompass more than just software, it’s clear that Microsoft’s enterprise software and services are far more popular than its consumer offerings.
News mentions of “Microsoft” and “enterprise” peaked in Q2’17. The 1,002 mentions included topics related to Microsoft’s data center expansion in South Africa, the availability of Visual Studio for Mac, and highlights from the company’s Microsoft Build conference.
Even though enterprise software and services have been top-of-mind for Microsoft for quite some time, mentions of enterprise and enterprise-related products reached a peak in Q2’17, suggesting that the company has become increasingly focused on this area.
This correlates with the total media mentions of enterprise and business in June 2017.
The majority of enterprise product mentions are related to services like Azure, Office 365, or Dynamics 365.
However, there have also been a growing number of mentions related to the company’s new subscription, Microsoft 365. On the company’s most recent earnings call, Nadella highlighted the progress and potential of the new offering:
“A little over a year ago, we introduced Microsoft 365 to help organizations of all sizes empower their employees in the modern workplace. Today it’s a multi-billion dollar business that gives our customers a path to the cloud and broadens our reach with new and under-penetrated markets.”
So while Microsoft continues to innovate with new software products and services, the packaging of these services also plays an important role in the growth of the company and how they can sell to businesses around the world of any size.
WHY IS THIS A PRIORITY?
Microsoft has been mentioning its “digital transformation” at recent industry conferences and earnings calls. The term describes the transition that organizations undergo when moving from legacy systems and methods to modern technologies and solutions.
Organizations that have not already made this transition present a great opportunity for Microsoft, and digital transformation is a natural place for the company to focus on based on its expertise in the enterprise technology space.
The enterprise software market itself is estimated to be $350B+ today, with the potential to exceed $500B by 2022, according to CB Insights’ Market Sizing tool.
But Microsoft’s positioning in the enterprise software industry lets it capitalize on a number of growing markets, including:
- ERP software, which is expected to exceed $40B by 2020
- CRM software, $50B by 2020
- Workflow automation software, nearly $10B by 2020
3. Artificial intelligence
AI and machine learning are helping Microsoft clients extract, clean, and visualize relevant data, all without the need for technical expertise.
In addition, Microsoft is leveraging AI technology to improve areas like enterprise security, gaming, and advertising, among others.
WHAT IT’S DOING NOW
In a recent keynote address, Nadella said that the company plans to “infuse everything with AI.” Based on the company’s recent investment activity, it seems that Microsoft is backing up this claim.
Microsoft has heavily invested in artificial intelligence over the last few years. As of early December 2018, Microsoft had already made a record high number of artificial intelligence investments for the year.
The majority of these investments were made by VC arm M12, which has made 24 of Microsoft’s 27 total AI investments since 2015.
Notable deals by M12 include 2 investments in enterprise AI company Element AI, which raised $102M in June 2017 at a valuation of $680M.
M12 also invested in Bonsai AI, which raised funds in May 2017 before being acquired by Microsoft corporate in June 2018. Bonsai is one example of how M12 helps source acquisition opportunities for Microsoft corporate.
Microsoft hasn’t been shy about acquiring AI companies. Since 2013, Microsoft has acquired 7 companies that leverage artificial intelligence in some way.
In addition to the Bonsai acquisition this year, Microsoft acquired natural language processing company Semantic Machines in May.
Prior to 2018, Microsoft purchased several notable AI companies that have been integrated into the company’s software products, including its 2016 acquisitions of Genee, which enhances Outlook calendar features, as well as predictive text mobile keyboard company SwiftKey.
SwiftKey offers a popular iOS and Android app that can be used to make typing on mobile devices and tablets easier, but recent news suggests that Microsoft will soon integrate SwiftKey’s technology into Windows 10 for its touchscreen-enabled Surface computers.
Learn more about which corporates are acquiring AI companies by reading our brief, The Race For AI: Google, Intel, Apple In A Rush To Grab Artificial Intelligence Startups.
Artificial intelligence can analyze tens of millions of data points and detect anomalies much faster than human analysts. Models also improve over time as they learn from the continuous data ingestion.
While artificial intelligence typically isn’t offered as a standalone product, Microsoft does generate revenue by selling its AI capabilities.
For example, many clients develop, train, and implement AI using Azure’s tools and infrastructure.
Developers use these tools to add AI functionality to their own applications, without having to develop models from scratch. As shown above, Microsoft also specializes in specific AI use cases like IoT.
In addition to providing tools for developers, Microsoft also uses AI to improve its own products and internal operations.
For example, Microsoft uses AI in its data centers to reduce energy consumption. Artificial intelligence has allowed Microsoft’s data centers to remain 100% carbon neutral, according to a report published in May.
Microsoft is also using AI to gain deeper financial insight: the company plans to infuse Dynamics 365 with AI to help customers predict future business outcomes.
It has also used AI to improve security, which is a growing priority for both Microsoft and its customers.
Microsoft has also been exploring the use of AI to detect cheating in video games. In its patent titled “Detecting Cheating In Games With Machine Learning,” the company proposes the use of machine learning techniques to develop a behavioral analytics engine that detects anomalies in gaming.
When a user plays a game, the game logs behaviors like scores, rankings, and interactions with other players. These behaviors are then analyzed and deemed normal or outlying, based on collected data.
This patent is a move by Microsoft to integrate information across data silos — in this case, between a gaming platform like Xbox and a third-party game. Using machine learning, the company could analyze a large collection of unstructured data that otherwise might be inaccessible to determine whether a user is cheating.
Read more about Microsoft’s anti-cheating initiative in our brief, Microsoft Looks To Patent AI For Detecting Video Game Cheaters.
More generally, Microsoft has been actively researching and developing new technologies that leverage artificial intelligence in some capacity.
Since 2012, Microsoft has applied for over 1,000 patents related to artificial intelligence or machine learning.
Microsoft’s patent “Using Various Artificial Intelligence Entities as Advertising Mediums” shows how the company is using artificial intelligence for advertising (a growing business for Microsoft). The patent shows a digital assistant interacting with a customer and a dynamic pricing platform for digital advertisers.
CB Insights expert intelligence clients can read more about Microsoft’s AI research strategy in our brief, How Microsoft Is Applying Artificial Intelligence to All Areas of Its Business.
WHERE IT’S GOING NEXT
Not only has Microsoft been investing more in artificial intelligence technology, it’s been talking about it more too.
For the second consecutive year, Microsoft has mentioned artificial intelligence 48+ times on earnings calls, far outranking AI mentions by rivals like Google and Amazon.
Nadella outlined the importance of AI on productivity and collaboration within the workplace on Microsoft’s most recent earnings call:
“The future of productivity and collaboration will be defined by AI innovation and new AI-driven features.”
AI is clearly a growing priority for the company. Whether in business analytics, security, gaming, or advertising, artificial intelligence is being baked into all of Microsoft’s products and services.
WHY IS THIS A PRIORITY?
Microsoft benefits from AI in two key ways.
First, the company can monetize its AI technology by helping cloud customers implement AI into their products, as well as by implementing the technology into products of its own.
Second, Microsoft benefits from the increases in efficiency provided by AI. Reducing energy consumption in data centers with the power of artificial intelligence is a primary example.
The market for AI and machine learning is hard to size, given that the technology has the potential to tackle inefficiencies across a wide array of industries. That said, the market for artificial intelligence is expected to reach $126B by 2025, according to CB Insights’ Market Sizing tool.
Building out more sophisticated artificial intelligence will strengthen Microsoft’s dominance as an enterprise technology leader. Subsequently, using AI in its products and internal operations will be an important part of Microsoft’s future success.
One Microsoft business that drastically differs from the rest is the company’s Xbox division. Xbox, which has been around for nearly 2 decades, played a central role in the proliferation of online, multiplayer gaming for consoles. Xbox Live now boasts approximately 57M active users.
The Xbox division reached the milestone of $10B in annual revenue under Microsoft’s VP of Gaming, Phil Spencer. This is one of the primary reasons that Microsoft continues to invest in Xbox.
WHAT IT’S DOING NOW
While Microsoft is actively investing in the gaming space, it doesn’t typically participate in private market equity investments as it does in other strategic business areas. Instead, gaming investments are focused on increasing the content available to gamers and improving the overall Xbox experience.
For example, Microsoft seeks to partner with game developers to bring console exclusive titles to the Xbox platform. Games like PlayerUnknown’s Battlegrounds attract new gamers while keeping current Xbox console owners happy.
According to its website, Microsoft currently counts 38 Xbox exclusive games, including titles like Halo, Forza Motorsports, Gears of War, and Minecraft, which Microsoft purchased in 2014 as part of its $2.5B Mojang acquisition.
Mojang was just one of many gaming acquisitions made by Microsoft since 2014. In 2018, Microsoft has already made a record 7 gaming acquisitions.
The most recent acquisition by Microsoft was game development studio Obsidian Entertainment. Obsidian specializes in developing console role-playing games (RPGs) for established franchises like Fallout, Star Wars, and South Park.
Clients can learn more about Microsoft’s gaming strategy in our client-only brief, Microsoft’s Xbox Fortifies Gaming Empire With Recent Acquisitions And Product Developments.
The acquisitions of PlayFab and Havok played an important role in helping Microsoft establish Azure as an ideal cloud platform for game developers.
Today, companies like Ubisoft and 343 Industries (developer of recent Halo games and established by Microsoft Studios) use Azure to accommodate large online multiplayer gameplay, while others develop entire games using Azure’s infrastructure and development tools.
By attracting more developers to Azure, Microsoft may also incentivize those developers to create more Xbox exclusive games — a benefit to both sides of the business.
In addition to reliable infrastructure and advanced development tools, developers and publishers look for platform reach. While Xbox’s distribution is strong, more consumers own Sony’s PlayStation. This may have helped drive Microsoft’s decision to develop a game streaming service, announced during the company’s recent E3 keynote.
The service, called Project xCloud, will expand the company’s reach by providing console-quality gaming on any device, including Xbox, PCs, or smartphones.
While Project xCloud is still in the works, Microsoft released its newest Xbox One console back in November 2017. The Xbox One X is Microsoft’s most powerful console to date, and allows users to browse social media, stream live television, and even surf the internet with a built-in Microsoft Edge browser.
Microsoft is uniquely positioned to deliver a reliable and seamless service via its Azure cloud services. It has also used subscriptions to remove the burden of high upfront costs, while also keeping gamers engaged.
While Xbox Live remains the premiere Xbox subscription service, the company launched a new subscription service called Xbox Game Pass in June 2017. This recurring subscription offers unlimited access to ~200 digitally downloadable games.
According to interviews with the Xbox team, this curated catalog of games looks to provide something for everyone. And Microsoft regularly adds new titles to keep the catalog relevant. Many of the titles, such as State of Decay 2, are the types of Xbox exclusive games mentioned earlier.
In an effort to further grow membership for these services, Microsoft has bundled the Xbox Live and Game Pass services into a subscription called Xbox All Access. This offers gamers both services (Xbox Live and Game Pass) in addition to one of two Xbox consoles.
Not only does this service get users hooked on two different subscription services, it also eliminates the expensive upfront console costs that often “price out” customers. While this service is new, low monthly prices seem to be the primary draw.
This type of subscription may also serve as the foundation for Project xCloud’s offering when it officially launches.
While Microsoft has had a busy 2018 acquiring gaming companies, developing new products, and structuring new business models, it has also continued with a steady pace of intellectual property research.
One of the company’s more notable patents illustrates a cloud-based gaming platform. The patent, titled “Media Synchronization for Real-Time Streaming,” was granted in July 2018 and provides an example where a user streaming a video game prompts an avatar to jump. The prompt is sent to a cloud server, which then returns the audio and video content associated with the specific in-game action.
For streamed content, the time required to return audio vs. video information may differ. For this reason, Microsoft is looking to synchronize these two content types, so they are delivered to the user’s device at the same time.
This patent is just one of many applications filed by Microsoft over the last few years. Since 2013, the company has filed over 500 patents related to gaming.
While its activity has fluctuated over time, gaming patent activity is another example of Microsoft’s commitment to its Xbox division and the broader gaming landscape.
CB Insights expert intelligence customers can learn more about which companies are pursuing cloud-based gaming platforms in our brief, What Patents From Google, Microsoft, Nvidia, & More Tell Us About The Next Big Platform In Gaming.
WHERE IT’S GOING NEXT
Gaming has been a popular topic on recent Microsoft’s earning calls. Mentions of “gaming” or “video games” have grown in recent quarters to hit a new peak in Q2’18, suggesting that gaming will continue to be a priority.
Notably, the Xbox division surpassed $10B in annual revenue at the close of Q2’18 (Microsoft’s 2018 year end), a first for the company. During the Q4’18 earnings call, Nadella said that the company will continue to invest in all areas of gaming:
“In gaming, we’re pursuing our expansive opportunity, from the way games are created and distributed, to how they’re played and viewed, surpassing $10 billion revenue this year for the first time. We’re investing aggressively in content, community, and cloud services across every end-point to expand usage and deepen engagement with gamers.”
WHY IS THIS A PRIORITY?
While Microsoft’s Xbox business differs greatly from the rest of the company’s enterprise offerings, it is a tremendous asset to the company.
Although Microsoft reportedly doesn’t generate a profit on the Xbox consoles, the company does profit from digital content and subscriptions. (Microsoft’s cloud helps tremendously with the latter.)
With Project xCloud on the horizon, Microsoft may one day ditch the console altogether. While this wouldn’t happen in the near future, we should expect to see cloud gaming and subscriptions play an increasingly important role in the future of the Xbox business.
According to CB Insights’ Market Sizing tool, the gaming industry generated over $120B in revenue in 2017 and is expected to reach more than $180B in 2021.
Microsoft is poised to lead the industry in cloud-based gaming. If the company is able to establish itself as a successful player in the space, it could reap the benefits of the industry’s estimated value of over $4B by 2023.