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Microsoft effectively defined the nature of modern computer communications in the 1990s and early 2000s, though it has since lost its crown to Google and Apple. Bill Gates and his colleagues didn't invent computers, the graphical interface or internet browsing. But they came to dominate most users' experience of all three in the 1990s and 2000s. As a result, for several years, Microsoft was the world's most valuable corporation, with a market capitalisation bigger than businesses five times its size by revenues. However, it was also the industry's most hated entity, juggling a string a lawsuits from smaller rivals it had elbowed into oblivion. More recently, peace has broken out at Microsoft. This partly because the company worked hard to rebuild bridges, using part of its huge cash stockpile to settle legal rows with rivals and forge strategic alliances. But just as important was the fact that its role as the big bad giant of the industry was to some extent transferred to Google. Microsoft has attempted to keep pace with Facebook and other rivals with a string of high-priced - but often ill-fated - acquisitions including internet advertising giant aQuantive, online phone service Skype, and Nokia mobile phones. Skype continues but Microsoft shuttered its mobile handset business in 2017. The company's biggest deal to-date was the purchase of business-oriented social network LinkedIn in 2016 for a mammoth $27bn.
Who handles advertising? Click here for Agency Account Assignments for Microsoft from Adbrands. Including unmeasured media, the company declared advertising expenditure of $1.5bn in year ending 2017.
Interbrand's Best Global Brands survey ranked Microsoft as the world's #4 brand in 2016, with an estimated brand value of $72.8bn. Millward Brown's Brandz survey also ranked it as the world's #3 brand, with an estimated value of $121.8bn. Both surveys use different measurement criteria.
see IT Sector index for other companies
Microsoft is still the world's biggest software company, with a firm stranglehold on the vast majority of the world's 1.5bn or so PC users. Realistically, the company has no significant rival in its core segment of client operating system software for PCs. Software and hardware manufacturers have for many years attempted to establish rival systems for PCs that would reduce their reliance on Microsoft's Windows. Yet although Unix and Linux-based systems have made some in-roads into Microsoft's dominance of the market, their impact remains minimal, especially within desktop computers. The biggest competition to Microsoft's dominance comes from Apple, through its own proprietary operating system, though this runs only on Mac computers rather than PCs. For years, Apple offered no real competitive threat to the far more numerous PC platforms. However, Mac sales have rocketed in recent years the wake of the popularity of iPhone, iPad and iPod and now represent a genuine - but still small - threat to traditional PCs. So does the shift away from desktop computing towards mobile Android and Mac OS platforms. Google launched its own web-based Chrome operating system for desktops in 2011, but this has failed to gain real traction with end-users.
Until summer 2013, Microsoft had comprised a number of distinct product groups, and this steadily led to entrenched rivalry between the different teams, slowing development and reducing efficiency. This structure underwent a complete overhaul following the launch of a new "One Microsoft" strategy in which all existing product groups were merged and then reorganised by function. This led to the creation of 12 new function groups, in which the majority of staff effectively work on all the company's products rather than within individual silos. Engineering is still separated into four hubs but many of the existing product-based boundaries were erased. So for example, one unit works on all operating systems, from desktop to mobile phones to Xbox; another on all applications, from Office to online search and Skype; a third on all hardware devices, from Xbox to Surface, as well as games development; and the fourth on all cloud and enterprise software and services. All other functions are centralised.
The best known of Microsoft's products, as well as the most important in terms of market dominance, is the Windows operating system and its associated software, including tools such as Internet Explorer and its more stripped down successor Edge. The main Windows operating software has gone through a number of different redesigns since it was first launched. Several of these have been widely considered to be duds. Windows 8, launched in October 2012, was a major overhaul of the previous version, offering a very different design more like a mobile phone or tablet OS. Although it was greeted with widespread acclaim by critics and industry insiders, it crucially failed to win over end-users, many of whom were baffled by the difference from the old versions with which they were familiar, not least the familiar Start button in the bottom left corner and traditional desktop. Microsoft attempted to fix some of those issues in an updated version, 8.1. However, many PC users didn't bother with either - even in early 2015 the vast majority of Windows users were still on version 7.
The Windows 9 iteration was skipped altogether and instead the company launched Windows 10 in Summer 2015. In a crafty marketing ploy, the software was offered free of charge to existing users of Windows 7 and 8.1 for free in the hope that it would win back trust and also encourage them to purchase additional Windows-powered devices. Upgrades to Windows 10 are also free (a fact that obliges the company to defer a proportion of revenues from sales of the software over several years). Windows 10 is generally regarded as a hit, probably the most successful iteration since Windows 95 from the mid-1990s.
Despite the criticisms aimed at Windows, especially over Vista, a widely disliked version from 2005, the software continues to dominate the worldwide computer market, with over 80% global share. By far the biggest chunk of revenue - 75% of total sales - comes from PC manufacturers who purchase "OEM" rights to pre-install the operating system in bulk on their computers prior to sale to end-users. As a result, Microsoft's costs are minimal over and above software development. However, revenues have also fallen, reflecting the shift to free supply of Windows 10 and especially the deferral of revenues over furture years. In ye 2013, the Windows system generated sales of over $19bn. For ye 2017, the figure reflected in Microsoft's statutory results was just $8.6bn, although another $6.7bn of sales were received but are deferred.
Even more significant in terms of revenues is the all-conquering Office suite, and its numerous component applications, including Word, Excel, Access and Publisher. It remains Microsoft's most lucrative product by far. Office has come to dominate the office productivity software sector. However, increasing competition from Google persuaded Microsoft to launch a set of its own free web-based Office-lite programs in 2009. These eventually evolved into the paid-for Office 365 service, launched commercially in 2013. This reformatted the familiar productivity suite as a cloud-based subscription service rather than disk-based software. Other desktop applications include drawing program Visio and communications tool Outlook, and these are increasingly being integrated to form an extensive interlocking suite of different technologies, in which files can be seamlessly migrated from one application to another.
There are also a variety of more advanced software solutions which aim to compete with more established business software companies such as SAP and Oracle, or Sage and Intuit in the financial software segment. These are now marketed under the umbrella of Microsoft Dynamics business solutions. Products include software for integrated financial reporting, project accounting, human resources and supply chain management systems. The division's core is formed by two companies acquired in 2001 and 2003, Great Plains (now Microsoft Dynamics GP) and Navision (Microsoft Dynamics NAV), and the combined business raised its game at the end of 2003 with the launch of an improved version of customer relationship management software Microsoft CRM. Other products include Microsoft Dynamics AX accounting software and Microsoft Dynamics SL resource planning solutions. Like Office, these are now offered as subscription-based services under the Dynamics 365 banner.
In 2004 Microsoft let slip that it had discussed the acquisition of German software giant SAP, but negotiations fizzled out. Two years later the two companies agreed a loose strategic alliance whereby workers in companies running SAP will be able to access some of its back-office functions via the Office desktop. In early 2008, the group bolstered its offering with a $1.3bn offer for Norwegian developer FAST Search, which designs data search systems, mainly for enterprise networks.
In 2012, the group agreed terms to acquire Yammer, a developer of business-oriented social networks, for $1.2bn. However far more significant was the deal, agreed in June 2016, to acquire online business network LinkedIn for a final price tag of $27.0bn (roughly 10 times annual revenues) to give additional support to Office and its other business software products. It incorporated the training videos marketed by LinkedIn's subsidiary Lynda.com within its own software.
Office, Dynamics and LinkedIn are now grouped under the general heading of Productivity & Business Processes. Combined revenues for the year to June 2018 were $35.87bn, an increase of 20% on the year before, with operating income of $12.92bn. The group disclosed product-specific revenues for certain items in ye 2017. Total revenues from Office that year rose 8% to $25.39bn. LinkedIn contributed $2.27bn.
Infrastructure and back-end applications for IT administrators and developers were rehoused in 2013 in what is now the Intelligent Cloud business division. They include Microsoft Server Systems, the Microsoft Developer Network for software developers, application development tool Visual Studio, database design tool SQL Server and cloud platform Windows Azure. Divisional performance was stunted in 2004 by a $1.2bn payment to Sun Microsystems to settle a long-running legal case over patent infringement. Since then, though, growth has been strong and steady, helped by the launch of multi-year cloud storage services. Total revenues rose 18% in ye 2018 to $32.33bn, with operating income of $11.52bn. The largest proportion of sales is contributed by server products and tools, with combined sales in ye 2017 of $21.76bn. Consulting & product support services added a further $5.59bn. Total revenues from commercial cloud computing services, split across several segments, were $14.9bn. That figure soared by 56% during ye 2018 to $23.2bn.
The main Windows operating system now forms the cornerstone of a catch-all business group known as "More Personal Computing". It is partnered under that heading by the Xbox gaming service, other hardware and peripheral devices and a collection of advertising-based online services. Combined revenues from this division were $42.28bn in ye 2018, with operating income of $10.61bn. Reported revenues in ye 2017 included $8.6bn from Windows (excluding its deferred sales). Xbox was the biggest subsidiary unit by reported revenues at $9.3bn, while other hardware devices - the Surface tablet, peripherals, and what little remains of Nokia mobile - contributed $4.6bn. See separate profile for Xbox and Devices.
The fourth pillar of the More Computing division alongside Windows, Xbox and Devices is advertising generated from online services. Microsoft's online services business was originally built around Microsoft's MSN web portal, later supplemented by search services, now marketed under the Bing banner. Considering the vast amounts of time and energy the company has spent on this part of the business over the years, and the acres of media coverage it generated, it remains small. Microsoft's revenues from advertising in ye 2017 rose by 14% year-on-year to reach a best-ever figure of $6.97bn. However, Google's revenues for just the single quarter to June 2017 were over three times larger, while Facebook's were over $9bn for the same quarter. In addition, Microsoft's business has long reported hefty operating losses. In 2012 alone, Microsoft lost more than $8bn on its online division. Any other group, faced with those results, would have quit the market altogether, but Microsoft has always viewed its online presence as vital if it is to prevent further erosion of its overall business from web-based challengers.
For several years, a key focus for Microsoft's online division was to find ways of loosening the iron grip of Google on the search and online advertising markets. In late 2003 Microsoft actually offered to buy Google but was turned down. Instead the group began developing its own improved search engine, which eventually launched towards the end of 2004. It was revamped several times over the following five years, with several variations, but met with comparatively little success. If anything, its position steadily weakened, with its share of US web search falling from around 14% for the first half of 2006 to close to an all-time low of around 8% by April 2009, compared to 64% for Google and 20% for Yahoo (comScore figures). In the mean time, Microsoft made a bid to substantially enhance its range of internet services and its share of the search market by issuing an offer of around $44.6bn in February 2008 to acquire rival Yahoo. However that bid, the value of which declined over the following weeks as Microsoft's share price weakened, was steadfastly stonewalled by Yahoo, who demanded a much higher price while also attempting to assemble an alternative deal with companies such as Time Warner and News Corp. Microsoft attempted to scare Yahoo's board into action by threatening to convert its friendly overtures into a hostile bid, but to no avail. Eventually it agreed in May to raise its offer to around $47.5bn. That price too was rejected out of hand by Yahoo, at which point Microsoft withdrew its bid and walked away.
Almost immediately, there were reports that Microsoft was instead being separately courted by both Time Warner and News Corp over a possible tie-up with their respective AOL and MySpace subsidiaries. There were also attempts to structure some form of compromise deal with Yahoo, but these too were effectively terminated in June 2008 by Yahoo's decision to outsource some of its paid search advertising to Google. Shortly afterwards, Microsoft enhanced its own resources with a deal to acquire technology developer Powerset for what is thought to be around $100m. That company claimed to have developed a breakthrough in search technology using what it calls "natural language processing" to unlock the meaning encoded in ordinary search queries. This was used as the platform for a new incarnation of Microsoft's search engine, unveiled in June 2009 under the new name of Bing. Positioned as a "decision-making engine" with more intuitive search technology, and launched with a large marketing campaign, it gradually won back small amounts of market share from both Google and Yahoo. By January 2010, Bing's share of US search had risen to 11.3%.
In the intervening period, Yahoo's alliance with Google also collapsed as a result of the threat of an anti-monopoly investigation. This brought Microsoft and Yahoo back together again, and the two companies finally agreed terms for a search pact in July 2009 after more than a year of on-again off-again negotiations. Under that deal, launched in 2010, Yahoo used Microsoft's Bing service to deliver search results for its own site network. Those pages retained Yahoo branding, but were "powered by Bing". In addition, Yahoo managed search advertising sales for both companies, mainly using Microsoft's technology. The two businesses split revenues, with Microsoft paying Yahoo 88% of the search revenue generated from its own sites. However, the combined service made only limited headway against Google, even if Bing's share steadily rose. In 2016, the Yahoo arrangement was revised, allowing Yahoo to source just under half of its search results from other providers. In return Microsoft took over sales of display advertising alongside the results it still provided.
Indeed, the key battlefield has always been in online advertising sales. Facing an increased threat from Google in this market, Microsoft re-established its muscle by launching an eye-popping $6.3bn bid to acquire interactive advertising giant aQuantive in May 2007. The best-known subsidiary of that group was digital agency Razorfish. However it also controlled several other important units, including the advertising platform Atlas and sales brokerage DRIVEpm. Following completion of the aQuantive deal in August 2007, those businesses became part of Microsoft advertising Solutions. Microsoft later put the Razorfish business up for sale again, and a deal was agreed with Publicis Groupe in August 2009 for $530m in cash and shares. The Atlas platform was also sold off in 2013 to Facebook, for an undisclosed sum. Subsequently, in 2012, Microsoft wrote off almost all of the $6bn aQuantive acquisition cost in a massive impairment. Massive, acquired by Microsoft in 2006, is a New York marketing agency which manages a network of advertising sites and sponsorship opportunities within video games. ScreenTonic is a European mobile advertising agency which creates and plans advertising on mobile phones. In 2008, the group acquired Navic Networks, which provides technology solutions for interactive television advertising via software embedded in set-top boxes.
As of April 2017, Microsoft's various sites accounted for a best-ever 22.8% of US-based search queries, according to ComScore. However, Google still had 63.4%, while Yahoo was on 11.7%. Globally, Google had 81.1% of total search in July 2017, compared to 7.0% for Bing. China's Baidu accounted for 5.8%.
Microsoft also has a broad portfolio of other investments. However it sold during 2008 its 7% shareholding in US cable operator Comcast, inherited as a result of a $5bn investment it acquired in AT&T Broadband in 1999. The MSNBC online news service and cable channel were launched in the 1990s as a joint venture with NBC. Microsoft sold out its share in the cable channel in 2005, but maintained involvement with MSNBC online until 2012, when it sold its stake to NBC for around $300m.
For the year to June 2014, group revenues hit a new high of $86.83bn, up 12% on the previous year. Net income peaked in 2011 at an extraordinary $23.15bn, but were dented the following year by a huge writeoff against online services. For ye 2014, net income edged up 1% to $22.07bn. Around 54% of revenues are generated in the US.
Under the new structure, commercial licensing of software products contributed the largest share of revenues, $42.03bn in ye 2014, and operating profit of $38.60bn. Devices & consumer licensing was the next largest with revenues of $18.80bn and operating income of $17.22bn. Computing & gaming hardware contributed revenues of $9.63bn and operating income of $893m.
Performance for the year to June 2015, on the topline at least, continued to surge. Revenues hit another record high of $93.58bn. Net income was slashed by almost half to $12.19bn, but that was almost entirely the result of a whopping $10bn charge for impairment, integration and restructuring. Excluding that charge, profits were more or less flat from the year before, and not far below 2011's record.
Commercial licensing of software (primarily in OEM form to PC manufacturers or as business solutions) was again the biggest business by far. Revenues slipped to $41.04bn, with a lower but still massive operating profit of $37.83bn. There was a similar but more marked picture at devices & consumer licensing with revenues falling to $14.97bn and operating profit of $13.87bn. Devices & consumer other (online services including Xbox Live, Bing and search advertising) was up 26% to $8.83bn with operating profit of $2.02bn. Commercial Other, primarily cloud storage and computing services, jumped 44% to $10.84bn with operating profit of $4.20bn.
A strong 4Q lifted Microsoft's results for the year ended June 2016, though the precise nature of the improvement or otherwise was obscured by a barrage of accounting adjustments and alternative versions, as well as Microsoft's opaque new reporting structure. In general terms, strong growth in cloud services partly offset a sharp decline in software revenues, largely prompted by the decision to offer the Windows 10 operating system for free. Just how sharp a decline was masked by the company's newly adopted structure, which groups together multiple different businesses under very broad categories. Combined topline for the year slipped back by 9% to $85.32bn. Adding back deferred Windows 10 revenues would have resulted in a decline of only 2%. (Under accounting rules, the fact that Microsoft now offers free upgrades of Windows software means the company must defer a proportion of booked revenues). Lower costs and the absence of the previous year's Nokia impairment and restructuring charges powered a big jump in net profits, up soared 38% to $16.8bn. Yet that figure remained well below the $20bn-plus reported in 2013 and 2014.
Revenues began to rise once again in ye 2017, reaching $89.95bn on a statutory basis, or a new company record of $96.66bn including deferred Windows 10 revenues. Net income jumped 26% to a best-ever $21.20bn, or $25.88bn including deferrals. Sales within the US accounted for just over half of revenues.
Another 14% leap in ye 2018 lifted revenues to a new high of $110.36bn. Net income was impacted by a large one-off tax charge associated with new tax regulations. The final figure came in at $16.57bn; however, stripping out the one-off tac charge, the figure would have been a best-ever $30.27bn. Pretax income jumped 22% to $36.47bn.
Microsoft still generates a mountain of cash, but spends comparatively little. Under pressure to do something with its $60bn-plus cash pile in 2005, it announced plans for a massive $32bn dividend payout, then the biggest in corporate history. All shareholders received a one-off bonus of $3 per share. The arrangement paid out some $3bn to Microsoft's largest shareholder Bill Gates. The company spent another $30bn buying back stock from public shareholders. By summer 2018, that cash pile had grown back steadily to almost $134bn.
Steve Ballmer retired as CEO in summer 2014, and resigned as a director of Microsoft in August. Cloud and enterprise chief Satya Nadella was confirmed as his successor in Feb 2014. At the same time, Bill Gates stepped down as non-executive chairman, though he remains a director. John Thompson was named as the new chairman.
In fact, Gates initially increased the amount of time he spent on Microsoft work, assisting Nadella with technology and product development. After Ballmer's appointment as CEO in 2000, Gates also held the title of chief software architect, overseeing product development. In 2006, he announced plans to step back from daily involvement with the business by 2008, devoting most of his time instead to his charitable foundation, previously run by his wife Melinda Gates. Microsoft co-founder Paul Allen returned to business following an illness in the 1990s, but finally resigned from the board in 2000. He accumulated a wide variety of investments including Charter Communications and movie studio DreamWorks Animation. Bill Gates owns around 12% of Microsoft; Allen and Ballmer each own around 5%. As a result of share price declines in the technology sector, Gates fell from the position of the world's richest man in 2008, according to the Forbes Rich List, overtaken by his friend Warren Buffett of Berkshire Hathaway. By 2016, Gates had regained first place with wealth estimated at $75bn. Steve Ballmer ranked #26 with $23.5bn and Paul Allen at #40. Allen died in 2018 at the age of 65.
Several key divisional leaders left the group in 2012 or 2013. These included Steven Sinofsky, formerly president, Microsoft Windows, who departed the company unexpectedly at the end of 2012 only weeks after the launch of Windows 8; and Xbox leader Don Mattrick, who left in June 2013. In July 2013, Ballmer announced a bold overhaul of Microsoft's operating structure, under which all the existing divisions were merged and then reorganised by function. (Ballmer's own planned departure was announced a few weeks later).
Microsoft was formed in 1975. Little more than 25 years before that, computers didn't even exist. The first all-electronic computer was built in 1946, weighing more than 30 tons and costing almost $500,000. It could add two numbers together. However by the mid-1970s, a new breed of microcomputers were not just more affordable but more practical, able to perform slightly more complex calculations and simple games. Inspired by Popular Electronics magazines, two computer nerds named Bill Gates and Paul Allen set out to write their own version of the programming language BASIC for Altair computers. They called their partnership Micro-Soft, and set up a business adapting the language for different computer manufacturers.
Micro-Soft's BASIC became an invaluable tool within the fast-expanding computer environment, and the partners were commissioned by IBM to develop a core operating system for the launch of the company's first "Personal Computer" or PC in 1981. Rather than write a new system from scratch, they paid another programmer $50,000 for his code, called QDOS ("Quick and Dirty Operating System") then adapted it to become version 1.0 of the Micro-Soft Disk Operating System, popularly known as MS-DOS. The same year they incorporated as a company, dropping the hyphen to become plain Microsoft. With admirable foresight, the pair had chosen not to sell but to license MS-DOS to IBM, and they were quickly bombarded with offers by rival PC manufacturers who wanted to use compatible software.
However IBM and all its clones faced increasingly serious competition from a start-up computer manufacturer called Apple, which had developed its own even more attractive operating system which used a graphical user interface (GUI), incorporating pictures and symbols to make the computing experience more intuitive and enjoyable. In 1983, Gates and Allen turned their attention to creating their own version. However, Allen was diagnosed with Hodgkin's disease and left the company the same year. Gates soldiered on, launching Microsoft's first GUI in 1985 as Windows. The product was hugely successful, and on the back of its success, Microsoft went public a year later in one of the most successful IPOs of the decade. By 1987 Bill Gates was a billionaire.
To a large extent, however, computers were still a niche product used by academics and businesses. Windows version 3.0, launched in 1990, did much to change this, making the GUI easier and more instinctive than ever before. In 1993, Microsoft turned their attentions to software developers and IT professionals, developing new software for large networks under the name Windows New Technology or NT. Two years later, Windows 95 became the world's best selling software, shipping over a million units in the first four days on-sale. Meanwhile, Office, the company's collection of database and spreadsheet applications had become the dominant software on every business user's desktop.
In the same year, Microsoft set out to conquer a new market. The proliferation of computers had led to the rapid expansion of the internet, a loose global network used mainly by academics and the government. Jumping comparatively late into a market then dominated by start-up software developers Netscape, Microsoft developed its own browser software, Internet Explorer (IE), which it progressively locked into the core Windows operating system. Rapidly, IE overtook Netscape as the most common browser. Also in 1995, the group launched its own portal, the Microsoft Network (later MSN), and online travel agent Expedia in an attempt to grab hold of users at every stage of their computing experience.
It was at this point that Microsoft began to hit inevitable obstacles caused by their size. The group's first antitrust investigation came in 1995 when an attempt to acquire personal finance software company Intuit was blocked on competitive grounds. Another concern for the industry was the aggression with which Microsoft targeted their competitors. For example, in 1995, Microsoft licensed the Java programming language developed by network computer manufacturer Sun. According to Sun, they then set out to develop their own competitive version in an attempt to outmanoeuvre the computer maker.
In 1998, the US government began antitrust proceedings against Microsoft on grounds that their integration of Internet Explorer into the Windows system prohibited browser competition. Principally, the company had used the Windows/IE combination to crush what was originally the main browser product, Netscape. In an attempt to appease the courts, Microsoft was restructured into separate divisions by customer groups rather than products. However this only encouraged a subsequent decision by a federal judge in 2000 that the company should be split into two separate businesses, with the Windows operating system in one company and all the other software applications in the other. Microsoft fiercely contested the ruling. After a year of deliberation, an appeal court overturned the separation order, although a decision on exactly what action would be enforced was postponed..
In reality however, Microsoft did indeed show signs of having reached its peak. Having leapt by an average of more than 30% every year for seven years, revenues slowed dramatically in 2000 and 2001, especially in the core Windows division, and the company lost many of its senior staff, either through retirement or a jump into the dot.com sector. With Windows now firmly established throughout the computerised world, the company needed a new frontier to conquer. Ignoring the original antitrust ruling, Bill Gates came up with his own alternative plan to transform the company. Under his Microsoft.NET strategy, the group begin taking steps to stop providing software sold in a box. In this vision the company would become a technology services provider, working with hardware manufacturers to incorporate Microsoft-designed operating systems into virtually any computer-operated device from computers to mobile phones, home appliances and more. At the same time, software will be licensed annually rather than acquired outright, generating a permanent revenue stream. Some Microsoft products, like Office, would even be altered so that they would live not on the user's PC, but on a server. Users would rent access to them on a subscription basis instead of buying them to own.
In late 2000, Microsoft gave a huge boost to its MSN with the launch of MSN Explorer, a new browser designed to help the network defeat AOL. The launch was backed with a global $150m advertising campaign, Microsoft's biggest since Windows 95. The group also began moves to create a broadband MSN delivery network through agreements with several US cable companies. Having already part-floated its online travel agent Expedia in 1999, Microsoft sold a 75% stake in Expedia to broadcast group USA Networks (now IAC) in 2001 for about $1.5bn, and sold its remaining stake in 2002. A new version of the core operating system, Windows XP, was launched in late 2001 with an even bigger splash - a global marketing spend of $250m from Microsoft, supported by a further $750m of advertising from computer and chip manufacturers hoping to boost their own sales on the back of the new code. An upgraded version of the server software NT designed for home use, the software faced a few challenges, not least low consumer confidence and falling sales throughout the IT sector. However it was the first mainstream version of Windows which entirely dispensed with MS-DOS. As a result, Microsoft promised greater reliability and functionality.
Meanwhile the company's three-year battle with the US courts appeared to be coming to an end. In a final deal with the Department of Justice, agreed in 2001, Microsoft was permitted to continue bundling its various pieces of application software along with the main Windows system. But the company was obliged to allow computer manufacturers to decide which items they wish to bundle or to supply rival software. In addition, Microsoft was forced to reveal additional technical information regarding its own software, and license parts of its software to other developers. Although this agreement ended the company's wrangle with the US Government, several of the 18 US States which had separately joined the lawsuit were less satisfied. Nine including California and Connecticut vowed to press on with the case in pursuit of tighter restrictions. Microsoft attempted to resolve these, as well as a number of private suits, with a deal to provide more than $1bn of computer hardware and software to the nation's poorest schools. The rogue nine States' proposals were eventually dismissed by court in late 2002, although they later lodged an appeal.
Meanwhile, in early 2002 AOL Time Warner reheated the court action against Microsoft with a new an antitrust suit claiming damages for the harm done to Netscape during the browser wars of the 1990s. The skirmish was finally settled in 2003 in a truce. Microsoft agreed to pay $750m in damages and the two sides agreed to abandon their differences and work together to broaden consumer access to digital content. But a new war began at the end of the year for control of online media content. Real Networks, whose software is the main rival to Microsoft's Media Player application, filed an antitrust lawsuit at the end of the year claiming Microsoft engaged in illegal business practices. The company also sought protection in an alliance with IBM to establish online stores that would sell TV and other video content to consumers over the internet, available only via Real Player.
Meanwhile, Microsoft's lawyers were also busy with legal challenges in Europe, where regulators threatened in 2002 that they would be even tougher than their US counterparts on monopoly reforms. The case rumbled on for almost two years before coming to a head in 2004. Despite last-minute attempts to resolve the case peacefully behind closed doors, the European Union finally made its ruling in March 2004. Microsoft was handed a record €497m fine, the highest penalty yet imposed to-date by the EU on a company, to punish the software giant for supposed abuse of its Windows monopoly. In addition the company was ordered to share more information about its systems with rivals in the server market and also allow computer manufacturers to bundle a version of Windows without the Media Player program. Microsoft appealed the ruling, but EU judges blocked attempts to delay implementation of the fine and sanctions. Microsoft eventually agreed to comply in early 2005, but took its time putting the ruling into practise. As a result, the company was eventually fined a further €280m in summer 2006, and warned that additional fines of €3m a day would be imposed if Microsoft had not complied with the 2004 ruling by the end of July. The case dragged on for three more years, until Microsoft eventually agreed to offer consumers the choice to install alternative browsers, as well as other concessions. The EU eventually dropped its case at the end of 2009 after a decade of legal skirmishing that cost Microsoft almost $2bn in fines.
In the meantime the company settled its long-running legal disputes over patents and competition with Sun Microsystems and InterTrust Technologies, paying out almost $2.5bn in fees and damages; and later made peace with Novell as well with a payment of $536m. In 2005, Microsoft agreed to pay $775m in cash (as well as a $75m in credit for software) to settle an antitrust charge brought against it by IBM, as well as $761m to settle its antitrust wrangle with Real Networks. A separate 2003 action from Lucent, alleging that Microsoft had infringed patents on MP3 technology, was eventually settled in 2007 when Microsoft was handed a $1.5bn fine.
In 2005, it was revealed that Microsoft was involved in talks with AOL to work out the framework for some sort of strategic alliance to combat the growing power of rival Google. Possibilities discussed range from a full merger of the AOL and MSN portals to partnerships in search results and advertising sales. The group also agreed an alliance with Yahoo to allow interaction between Yahoo's instant messaging service and MSN Messenger. Meanwhile, the group continued to face antitrust problems in international markets. At the end of 2005, South Korea's competition watchdog ordered the group to unbundle Messenger and Media Player from its Windows operating system, although it has already reached settlements of civil lawsuits brought by local competitors.
In January 2007, Microsoft launched a new incarnation of its Windows operating system under the name Vista, succeeding previous incarnation Windows XP (launched 2001). Initially billed as the company's most ambitious redesign to-date of the Windows environment, Vista appeared to offer a substantial overhaul of the concept of computer operating systems. However the new software got off to a disappointing start. Not only was it well behind schedule - it was originally set for release in 2005 - but the first version came with numerous bugs and compatibility issues. The result was that end-users, especially companies, were slow to upgrade from XP, despite the company's claim of 180m Vista licenses sold by July 2008. To appease PC manufacturers, Microsoft continued to offer the option of pre-installed XP for 18 months, finally suspending supply of that system in summer 2008. Nevertheless some manufacturers still supplied an option for users to "downgrade" from pre-installed Vista after that date for an additional cost. For several years, these problems provided Microsoft's rivals with ammunition with which to launch attacks on the Windows environment.
Last full revision 18th August 2017
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