Microsoft has just announced its financial results for the past three months and has beaten out Apple’s profits by nearly 50 percent, despite extremely similar revenues. Why? Because it makes the right type of revenue.
The figures for the quarter ending 30 June show revenue up 22 percent to $16.04 billion, operating income (costs minus revenue) at $5.93 billion and net income (what the company is left with after taxes and interest payments) of $4.52 billion, the latter two both up by roughly half on the same period last year.
For the past year as a whole, Microsoft had a net income of $18.76 billion, which isn’t exactly chump change.
This past quarter, which is a record performance for Microsoft in the April to June period, did particularly well thanks to both ongoing Windows 7 sales and the launch of Office 2010.
The figures also display a key difference in Apple and Microsoft’s business. With Apple taking $15.7 billion in the past quarter, the two companies have revenues which differ by barely a couple of percent. Yet Microsoft has a $4.52 billion to $3.35 billion when it comes to net income.
It’s possible part of this is the result of Microsoft operating more efficiently: shedding 5,000 jobs will have saved something like a couple of hundred million bucks. But the real difference is simply that Microsoft is predominately a software company, while Apple is mainly a hardware firm.
Nobody’s suggesting Apple doesn’t have healthy mark-ups on its products: we recently noted that the manufacturing cost of a $729 iPad is $287. But once you’ve made enough cash to cover the development and marketing costs, the marginal profit on each extra unit you sell is considerably higher with software. Apple may keep more than half the cash when it sells an extra iPad, but Microsoft keeps virtually every cent when it sells an extra copy of Office (and even that’s assuming its a boxed retail copy).
So the lesson is that there’s big money in well-marketed and well-received hardware. But there’s huge money in software, and when you’re the biggest software firm in the world, it almost become difficult not to make a genuine fortune.