Microsoft 2007 Annual Report Download - page 20

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PAGE 19
Online Services Business
(In millions, except percentages) 2007 2006 2005
Percent
Change 2007
versus 2006
Percent
Change 2006
versus 2005
Revenue $2,474 $2,299 $2,344 8% (2)%
Operating income (loss) $ (732) $ (74) $ 402 * *
* Not meaningful
The Online Services Business (“OSB”) provides personal communications services, such as e-mail and instant
messaging, online information offerings, such as Live Search, and the MSN portals and channels around the
world. OSB also provides a variety of online services such as MSN Internet Access, MSN Premium Web Services
and OneCare. We earn revenue primarily from online advertising, from consumers and partners through
subscriptions and transactions generated from online paid services, and from MSN narrowband Internet access
subscribers. We have transitioned to adCenter, our own platform, for online delivery of advertising in the U.S. and
certain international markets. We continue to launch new online initiatives and expect to do so in the future. In
fiscal year 2007, we launched Windows Live Search and Live.com in 54 international markets, Live Local Search
in the U.S. and U.K., beta versions of MSN Soapbox (our expansion of the MSN Video experience), Virtual
Earth™ 3D, Windows Live Hotmail, and other offerings.
Fiscal year 2007 compared to fiscal year 2006
OSB revenue increased driven primarily by advertising revenue which grew $314 million or 21% to $1.84 billion.
This increase was primarily due to growth in advertising for search, home page, email, and messaging services.
The increase in advertising revenue was partially offset by a $156 million or 31% decrease in access revenue. At
June 30, 2007, we estimate that OSB had over 310 million active Hotmail accounts and over 280 million
Messenger accounts.
OSB operating loss increased driven primarily by increased cost of revenue which grew $352 million or 45%
and increased headcount-related costs as a result of continued search and advertising platform investments. The
increase in cost of revenue was primarily driven by increased data center costs, online content expenses, and
royalties. Headcount-related costs increased 30%, driven by a 12% increase in headcount and an increase in
salaries and benefits for existing headcount.
Fiscal year 2006 compared to fiscal year 2005
OSB revenue decreased primarily reflecting a $195 million or 28% decline in access revenue, partially offset by a
$126 million or 9% increase in advertising revenue and a $23 million or 9% increase in revenue from subscription
and transaction services other than access. Advertising revenue for fiscal year 2006 was $1.52 billion. The
increase in advertising revenue reflects growth in display advertising for portals, channels, email, and messaging
services, which was partially offset by a decline in search revenue due to the transition to adCenter. As of
June 30, 2006, OSB had 2.1 million access subscribers compared with 2.7 million at June 30, 2005. In addition,
OSB had over 261 million active Hotmail accounts and over 243 million active Messenger accounts as of June 30,
2006.
OSB operating income decreased due to a $230 million or 39% increase in research and development costs, a
$126 million or 22% increase in sales and marketing expenses, and a $67 million or 9% increase in cost of
revenue as we continued to invest in adCenter, Windows Live, and other new platforms. Headcount-related costs
increased 25%, reflecting a 44% increase in headcount and increased salaries and benefits for existing
employees, partially offset by a decrease in stock-based compensation.
Microsoft Business Division
(In millions, except percentages) 2007 2006 2005
Percent
Change 2007
versus 2006
Percent
Change 2006
versus 2005
Revenue $16,396 $14,486 $13,520 13% 7%
Operating income $10,838 $ 9,620 $ 9,116 13% 6%