Microsoft Teardown
CLOUD, AI, & SUBSCRIPTIONS AND THE
NEXT TRILLION-DOLLAR COMPANY
2018
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Microsoft Teardown
INTRO
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.
Microsoft Teardown
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Microsoft Teardown
Table of Contents
MICROSOFT’S STRUCTURE
& HISTORY


5
MICROSOFT’S PRIORITIES

Cloud


10
Enterprise software & services


27
Artificial intelligence


42
Gaming


55
Devices & hardware


67
Open-source


77
CONCLUSION


85
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Microsoft Teardown
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Microsoft Teardown
KEY SEGMENTS
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.
Microsoft’s structure & history
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Microsoft Teardown
INVESTMENT ARMS
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.
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Microsoft Teardown
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.
LEADERSHIP
Since Satya Nadella replaced Steve Ballmer as CEO in February
2014, Microsoft’s value has grown by approximately 200%.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
Cloud
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MICROSOFT’S PRIORITIES
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Microsoft Teardown
Investments
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).
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Microsoft Teardown
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.
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Microsoft Teardown
Acquisitions
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.
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Microsoft Teardown
Product developments
At Microsoft, the Azure business encompasses hundreds of
products and services. According to Nadella,
“[Azure] introduced 100 new Azure
capabilities [in Q1’19] alone, focused on
both existing workloads like security and
new workloads like IoT and edge AI.”
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
Patents
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.
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Microsoft Teardown
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?
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Microsoft Teardown
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.
News
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.
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Microsoft Teardown
Earnings transcripts
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.”
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Microsoft Teardown
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?
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Microsoft Teardown
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.
Market sizing
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
Enterprise software & services
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MICROSOFT’S PRIORITIES
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Microsoft Teardown
Investments
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.
M12 has backed notable companies like CRM platform Outreach,
authentication software Onfido, and augmented intelligence
platform CognitiveScale.
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.
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Microsoft Teardown
GitHub is one of Microsoft’s 6 enterprise software acquisitions in
2018, which is on pace with recent years’ activity.
Acquisitions
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.”
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Microsoft Teardown
In 2015, Microsoft acquired a record 14 total companies, including
public cloud data management company Informatica and startups
like to-do scheduler Wunderlist and text analysis software Equivio.
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.
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Microsoft Teardown
Product developments
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).
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
Patents
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.
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Microsoft Teardown
News
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.
WHERE IT’S GOING NEXT
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Microsoft Teardown
Earnings transcripts
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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.
Market sizing
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
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Microsoft Teardown
WHAT IT’S DOING NOW
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.
Investments
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.
Artificial intelligence
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MICROSOFT’S PRIORITIES
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Microsoft Teardown
Recently Microsoft has backed AI-focused companies like data
anonymization company Hazy and customer journey analytics
provider Cerebri AI.
The majority of these investments were made by VC arm M12,
which has made 24 of Microsoft’s 27 total AI investments
since 2015.
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Microsoft Teardown
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.
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Microsoft Teardown
Acquisitions
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.
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Microsoft Teardown
Product developments
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.
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Microsoft Teardown
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.
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Microsoft Teardown
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Microsoft Teardown
Patents
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.
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Microsoft Teardown
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Microsoft Teardown
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.
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Microsoft Teardown
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.
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Microsoft Teardown
Earnings transcripts
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.
WHERE IT’S GOING NEXT
54
Microsoft Teardown
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.
Market sizing
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.
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Microsoft Teardown
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.
Gaming
4
MICROSOFT’S PRIORITIES
56
Microsoft Teardown
Investments
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.
WHAT IT’S DOING NOW
57
Microsoft Teardown
Acquisitions
Mojang was just one of many gaming acquisitions made by
Microsoft since 2014. In 2018, Microsoft has already made a record
7 gaming acquisitions.
Recent acquisitions include gaming studios like Compulsion
Games, Ninja Theory, Playground Games, and Undead Labs, as well
as game development tools like PlayFab, which was acquired in
January 2018.
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.
58
Microsoft Teardown
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.
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Microsoft Teardown
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.
60
Microsoft Teardown
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.
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Microsoft Teardown
Patents
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.
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Microsoft Teardown
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.
63
Microsoft Teardown
Earnings transcripts
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.
WHERE IT’S GOING NEXT
64
Microsoft Teardown
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.”
65
Microsoft Teardown
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.
Market sizing
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.
WHY IS THIS A PRIORITY
66
Microsoft Teardown
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.
67
Microsoft Teardown
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