Microsoft Case Study

9-709-461

JANUARY 15, 2009

JAN W. RIVKIN ERIC VAN DEN STEEN

Microsoft’s Search

In September 2008, Microsoft executives weighed alternatives for improving the company’s position in the market for Internet searches and related advertising. Jay Girotto, a member of Microsoft’s search team for three years, described the situation: Microsoft got serious about search five years ago. Since then, we’ve made great strides in technology and marketing, but we’re still a distant third behind Google. We’re chasing Google’s taillights, and we’re losing money as we do so. We can keep battling Google feature by feature and advertiser by advertiser, and we will. But my division leader Satya Nadella— the senior vice president who leads Microsoft’s search, portal, and advertising platforms—also wants us to consider radical moves, real game changers, to catch and pass Google. One potential game changer was Microsoft’s bid this year to buy Yahoo, the #2 player in the market. It’s now clear, however, that the deal is not going to go through. So Satya is looking for new options to tackle one of the toughest competitive threats that Microsoft has ever faced.

Microsoft in 2008

The firm confronting this challenge was, by any financial measure, one of the world’s strongest companies. In June 2008, Microsoft closed its fiscal year with cash and short-term investments of nearly $24 billion, revenue of $60 billion, and operating cash flow of almost $22 billion.1 Since its founding by Bill Gates and Paul Allen in 1975, Microsoft had grown to sell a complex line of software, services, and hardware. Exhibit 1 shows the company’s product line as well as the revenue and operating income that flowed from each part of Microsoft’s business in 2008.

Operating Systems

The historical heart of Microsoft was its line of operating systems for personal computers (PCs). Microsoft’s entry into operating systems came in 1980, when Gates learned that IBM, long the dominant maker of mainframe...