Microsoft 2009 Annual Report Download - page 22

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PAGE 22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Online Services Business (“OSB”) consists of an online advertising platform with offerings for both publishers and
advertisers, personal communications services, such as email and instant messaging, online information offerings,
such as Bing, and the MSN portals and channels around the world. We earn revenue primarily from online
advertising, including search, display, email, messaging services, and advertiser and publisher tools. Revenue is
also generated through subscriptions and transactions generated from online paid services digital marketing and
advertising agency services, and from MSN narrowband Internet access subscribers (“Access”). During the first
quarter of fiscal year 2008, we completed our acquisition of aQuantive, Inc. (“aQuantive”), a digital marketing
business. aQuantive was consolidated into our results of operations starting August 10, 2007, the acquisition date.
Fiscal year 2009 compared with fiscal year 2008
OSB revenue decreased primarily as a result of decreased online advertising and access revenue. Online
advertising revenue decreased $73 million or 3%, to $2.3 billion, reflecting a decrease in display advertising, partially
offset by an increase in search advertising. Access revenue decreased $72 million or 28%, reflecting continued
migration of subscribers to broadband or other competitively-priced service providers. Foreign currency exchange
rates accounted for a $28 million or one percentage point decrease in revenue.
OSB operating loss increased due to increased cost of revenue and research and development expenses, and
decreased revenue. Cost of revenue increased $692 million or 36%, primarily driven by increased online traffic
acquisition, data center and equipment, and headcount-related costs. Research and development expenses
increased $149 million or 13%, primarily due to increased headcount-related expenses.
Fiscal year 2008 compared with fiscal year 2007
OSB revenue increased driven by increased online advertising revenue and the inclusion of aQuantive revenue,
partially offset by decreased access revenue. Online advertising revenue increased $550 million or 31%, to $2.3
billion. This increase reflects growth in our existing online advertising business and includes aQuantive online
advertising revenue of $161 million. Agency revenue, which is solely derived from aQuantive, was $345 million
during fiscal year 2008. Access revenue decreased $98 million or 28%, to $256 million, reflecting migration of
subscribers to broadband or other competitively-priced service providers.
OSB operating loss increased driven by increased cost of revenue and other operating expenses, partially offset
by increased revenue. Cost of revenue increased $796 million or 71%, primarily driven by increased data center and
equipment costs, online content expenses, and aQuantive-related expenses. Sales and marketing expenses
increased $311 million or 37%, primarily due to increased amortization of customer-related intangible assets of $94
million, increased headcount-related expenses, and increased marketing costs. Research and development
expenses increased $177 million or 17%, and general and administrative expenses increased $114 million or 178%,
primarily reflecting increased headcount-related expenses and merger and acquisition-related expenses.
Headcount-related expenses increased 24%, driven by an increase in headcount from the prior year-end.
Other
The segment information discussed above is presented the way we internally managed and monitored performance
at the business group level in fiscal years 2009, 2008, and 2007. Effective July 1, 2009, we reorganized the
Windows Live operations from OSB to Client to better align our strategies and focus in those areas.
On July 29, 2009, we announced that we entered into a 10-year agreement with Yahoo! Inc. (“Yahoo”). Under
terms of the agreement, Microsoft will provide the exclusive algorithmic and paid search platform for Yahoo
websites. We believe this agreement will allow us over time to improve the effectiveness and increase the value of
our search offering through greater scale in search queries and an expanded and more competitive search and
advertising marketplace. The transaction is subject to regulatory review. Both parties anticipate entering into more
detailed definitive agreements prior to closing the transaction which is expected in calendar year 2010. See Note 24
– Subsequent Event of the Notes to Financial Statements.