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The Real Secret To Microsoft’s Success

For people of a certain persuasion, it’s fun to make fun of Microsoft (MSFT). It’s outdated and occasionally bloated software. An operating system version so despised that most users refused to upgrade from its predecessor and instead waited for its replacement. A browser that once held 95% of world market share, no longer leads in any country. And mobile phones that barely register in a universe dominated by iPhone and Android.

Key Takeaways

  • Microsoft is a household name with commonly known product lines like Windows, Office, and Xbox.
  • Founded more than 30 years ago, Microsoft has expanded way beyond software and devices into cloud computing and services
  • Microsoft is the most widely held stock in index funds and ETFs in 2019.

Microsoft Matures its Business

Many (alright, some) of us are old enough to remember when Microsoft was the very definition of novel, its youthful founders and their unorthodox culture flying in the face of a formal, understated business world that had limited use for, or knowledge of, computers. Today, Microsoft is a grey-flannel pillar of the Dow, and that’s a welcome occurrence. The alternative would have been for the brash software upstart to be of no consequence today.

Still, at times it seems the consensus sentiment about Microsoft prompts questions such as “How on Earth do they make so much money?” After all, Microsoft isn’t the most innovative company in the world, nor the most limber. However, critics seem to forget something: a) Microsoft is the world’s largest software maker, b) people have great utility for software, and c) Microsoft is not just a software maker anymore.

Microsoft under CEO Satya Nadella

Under the leadership of CEO Satya Nadella, who took the reigns in 2014, Microsoft has moved aggressively into services and cloud computing. It’s Azure cloud computing system now has a solid percentage of market share globally, second only to Amazon Web Services, and accounts for nearly one third of the company’s overall revenue.

Microsoft revenue topped $125 billion in revenue last year, and pulled in $42 billion in operating income. With a 29% profit margin, which is considerably larger than that of either Apple (Nasdaq:AAPL) or Alphabet (Nasdaq:GOOG), two companies that popular opinion assumes have overtaken Microsoft.

Stalwart and Ubiquitous

That popular opinion derives from a false assumption: that a new product line with frequent updates is the surest path to success in the technology sector. Not true. Take Surface, Redmond’s answer to Apple’s iPad. It isn’t the kind of product that makes nor breaks a company with the power and magnitude of Microsoft. Rather, it’s a way to stay relevant in the consumer electronics market – of course, the idea is for Surface to create enough profit to justify the expenses behind it, but a couple million satisfied Surface owners have only a minimal effect on Microsoft’s net profit numbers. The same goes for the formidable Xbox, whose sexiness as a gaming console vastly outweighs its contributions to Microsoft’s overall financial picture.


Microsoft vs. the S&P500 since 2010.

The truth is somewhat more pedestrian. Perhaps it’s because Microsoft is so ubiquitous, a constant reminder in the daily lives of those who use its products. Every time you turn your computer on, Microsoft’s logo is staring at you, even if you’re a Mac or Linux user who nevertheless uses Microsoft’s Office suite. Shouldn’t a company with so wide and deep a footprint make it its business to endlessly delight and fascinate us, with a youthful exuberance and a penchant for self-promotion? You know, like Google does?

The fact is, more than four decades after its incorporation, Microsoft is as staid and disciplined as IBM (NYSE:IBM), ITT (NYSE:ITT), Litton Industries and the other companies that rounded out the upper reaches of the Fortune 500 back in 1975. The software giant is primarily in the business of making money, which sounds tautological at first read, but really isn’t. Microsoft is no longer in the raw experimentation stage common to young and growing companies. Rather, its modus operandi is to create profitability streams, then maintain and expand them.

Software as a Service

The name of Microsoft’s “Productivity and Business Processes Division” may sound unhelpfully generic, but it refers to the part of the operations that’s responsible for creating the stupendously profitable Office. The suite started as an adjunct, a method for showcasing Microsoft’s revolutionary operating system. But since Office’s 1990 debut, the applications that comprise it have become just about mandatory for anyone wanting to conduct business. Over a billion people now use Office, to the point where Word and Excel are practically synonymous with word processing and spreadsheets, respectively. Multiply that user base by $150 per license for the stripped-down Home & Student version of Office, a product whose marginal cost is close to zero, and it’s easy to see why Microsoft does everything in its power to maintain Office’s profitability (and why competitors from OpenOffice to Google Docs want nothing more than to chip away at Office’s market share.)

The Business Division’s only serious competitor for dominance at Microsoft is the company’s Windows Division, whose latest contribution to the marketplace is Windows 10. Windows’ share of the worldwide operating system market is more than 35%.

The Bottom Line

All-in-one entertainment systems (Xbox One) and free audio- and video-conferencing around the world (Skype) may be exciting, the kind of things that make life in the 21st century more enjoyable, but their impact on Microsoft’s income are minimal. Instead, the company’s secret to staggering riches lies in the daily business of allowing users to create and manipulate documents; and providing the software that performs a computer’s most important function – permitting data to make it from your computer’s hardware components to its display. It isn’t alluring, but it pays the bills … to an extent few companies in history can match.

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Wall Street hit with $2 billion in fines over employees using WhatsApp and other unauthorized messaging apps

U.S. regulators reached settlements with a dozen banks in a sprawling probe into how global financial firms failed to monitor employees’ communications on unauthorized messaging apps, bringing total penalties in the matter to more than $2 billion. 

The Securities and Exchange Commission announced $1.1 billion in fines and the Commodity Futures Trading Commission disclosed $710 million in penalties in separate statements Tuesday. Those levies — against firms including Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. — combined with JPMorgan Chase & Co.’s $200 million in fines from December, bring the total to $2.01 billion, making them the biggest penalties ever against US banks for record-keeping lapses. 

“Finance, ultimately, depends on trust. By failing to honor their record-keeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” SEC Chair Gary Gensler said in the agency’s statement. “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”

Tuesday’s announcements cap months of discussions between regulators and the banks. Morgan Stanley said in July it was nearing a settlement that would see it pay a $200 million fine, with other major banks also disclosed setting aside similar figures as part of their second-quarter results without specifying the reason.

JPMorgan had been the only bank until now to reach a settlement with the regulators, and was the first to report the fines, in December. Even managing directors and other senior supervisors at the largest US bank had skirted regulatory scrutiny by using services such as WhatsApp or personal email addresses for work-related communication, regulators said at the time.

Finance firms are required to scrupulously monitor communications involving their business to head off improper conduct. That system, already challenged by the proliferation of mobile-messaging apps, was strained further as firms sent workers home shortly after the start of the Covid-19 outbreak.

In the SEC probe, eight firms agreed to penalties of $125 million each: Barclays Plc, Bank of America, Citigroup, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs, Morgan Stanley and UBS Group AG. Jefferies Financial Group Inc. and Nomura Holdings Inc. agreed to pay $50 million apiece, and Cantor Fitzgerald LP agreed to pay $10 million.

Bank of America had the biggest CFTC penalty, at $100 million, followed by Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS at $75 million each. Nomura was fined $50 million, Jefferies $30 million and Cantor Fitzgerald $6 million.

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Ray Dalio says the U.K.’s policies ‘suggest incompetence’ and warns other governments not to make the same mistakes

Ray Dalio added his name to a growing list of critics of the U.K.’s new spending plan, unveiled last week by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng.

The billionaire investor—who founded what is now the world’s largest hedge fund, Bridgewater Associates, in 1975—argued the plan’s aggressive tax cuts will raise the U.K. debts to an unsustainable level and cripple the pound.

“Investors and policymakers: Heed the lesson of the UK’s fiscal blunder,” Dalio wrote in a Tuesday tweet. “The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand.”

On Monday, in response to Truss’ new spending plan, the U.K.’s bond market experienced the largest one-day sell-off in its history, pushing the total losses in the country’s stock and bond markets since Truss’ appointment as prime minister on Sept. 5 to over $500 billion. Meanwhile, the pound sank to a record low of $1.05 against the U.S. dollar on Monday morning, and although it has since risen to $1.07, the currency remains near a 40-year low vs. the dollar. 

After the new Truss spending plan was announced, the U.K. Debt Management Office said that it will raise its debt issuance by 72.4 billion pounds for the current fiscal year to 234.1 billion pounds.

The new spending plan will also push the U.K.’s debt to GDP ratio to around 101%, the highest level of debt the U.K. has held since 1962, according to Deutsche Bank.

Deutsche Bank, UK Office of Debt Management

In Ray Dalio’s view, this rapid increase in debt, coupled with the lack of demand for the pound on the global stage, is a recipe for disaster.

“That makes people want to get out of the debt and currency. I can’t understand how those who were behind this move didn’t understand that. It suggests incompetence,” Dalio said. “Mechanistically, the U.K. government is operating like the government of an emerging country, it is producing too much debt in a currency that there is not a big world demand for.”

The investor went on to argue that this should be a teaching moment for governments around the world to not increase their debts to unsustainable levels.

“I hope, but doubt, that other policymakers who are doing similar things…will recognize that they are risking a similar outcome—and that investors will see this too,” he said.

Analysts are also worried that the U.K.’s new spending plan, which was designed to spur economic growth and help alleviate the effects of high energy prices in the short term, could end up exacerbating inflation in the U.K. overall. And consumer prices already jumped 9.9% from a year ago in August.

“The government is trying to balance support for consumers and businesses with measures that might trigger further inflation, whilst also trying to reinvigorate a stagflationary economy,” Giles Coghlan, chief market analyst at global Forex broker HYCM, told Fortune. “Such a large fiscal package could contribute to elevated prices in the medium to long term that could inflict further damage to an economy and currency that are already on their knees.” 

The potential inflationary impact of the new spending plan has increased calls for the Bank of England (BoE) to dramatically hike interest rates, with some economists even calling for the U.K.’s base interest rate to move from 2.25% to as high as 6% next year

That’s bad news for the U.K.’s homeowners. Monthly mortgage rates will increase immediately for 2 million people on tracker or variable interest rate plans if the BoE follows through with its next rate hike. And another 1.8 million homeowners with fixed-rate deals will also be forced to pay significantly higher rates next year, according to U.K. Finance.

With the U.K. facing more interest rate hikes ahead, rising government debts, a sinking pound, and a European energy crisis, Deutsche Bank’s chief economist, David Folkerts-Landau, said he now believes the country will experience a severe recession that lasts three to four quarters.

“We’re thinking in terms of a recession that will be deep and long,” he told Bloomberg on Tuesday. “It’s the price we have to pay for financial stability and for getting on the right track.”

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Russian billionaire Petr Aven used estate management companies as a personal ‘piggy bank’ British authorities say

Petr Aven does not have a bank account himself, authorities say.  

Instead, he has been using his wife’s account, and that of other estate management firms, as his personal “piggy bank” to support his lifestyle, lawyers for the National Crime Agency (NCA), a British law enforcement agency, told Bloomberg Tuesday.

The Russian oligarch is under investigation for allegedly routing nearly £3.7 million from an Austrian trust into the U.K. hours before Europe imposed sanctions on him following Russia’s invasion of Ukraine in late February. British authorities are now accusing Aven of using the funds of his companies for personal expenses, with no personal bank account of his own.

The Kleptocracy Unit, a new team within the NCA created to monitor sanctioned Russian oligarchs, says it was alerted to the last-minute fund transfer by Monzo Bank and HSBC Holdings. Authorities ultimately froze £1.5 million of the funds linked to the billionaire, Bloomberg reported. 

Aven has said that the transfer was meant to pay for things like security at his Surrey mansion and London property, Bloomberg reported. He is worth $4.98 billion, per the Bloomberg Billionaire Index

In a lower court hearing, a judge relaxed some of the restrictions on Aven’s estate accounts, allowing him to pay for “basic needs.” Lawyers representing Aven’s estate companies suggested that the NCA was looking for criminality in the money transfer by tying it to sanction evasion. Lawyers for Aven’s companies are now challenging the decision to keep his accounts frozen in London’s High Court, Bloomberg reported. 

Adrian Waterman, a lawyer for the companies that manage Aven’s household, told Bloomberg Tuesday that the NCA painted a “muddled factual picture.”

Waterman did not immediately return Fortune’s request for comment. 

Aven, along with his business partner, Mikhail Fridman, made a considerable amount of his wealth from oil-related investments, especially after selling stakes in TNK-BP to the state-owned Rosneft in 2013. The duo also built a banking and financial services empire in Russia. They served on the boards of Alfa-Bank, Russia’s largest private bank and Luxembourg-based investment firm LetterOne, stepping down from their directorial roles days after they were sanctioned.

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