Today I saw a somewhat interestingly timed post about MSN's profitiability, or lack of. The analysis is based on the Online Services Business (OSB), which is split out as one of the reportable segments in Microsoft's annual and quarterly company statements. From the just published 2007 accounts, you can see that OSB has experienced a drop in profitability since 2005, which on the analysis is shown to occur in the March 2006 quarter. However the analysis fails to mention that OSB actually includes Windows Live along with MSN, and consequently this means the financial results make a lot more sense.
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Windows Live was announced in November 2005, there is a corresponding increase in costs in the next full quarter of March 2006. This gives OSBs first quarterly loss in the current run.
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Preparation for Windows Live started before November 2005, there is a corresponding smaller increase in the December 2005 costs.
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Research and Development costs cannot be capitalised, so that's Ozzie's Windows Live Core and other secret projects taken straight to the income statement. (Total Microsoft R&D is up $1billion from 2005 to 2007)
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Windows Live needs to recruit and retain the best staff in order to compete with Google, think
Ozzie's dream team. Payroll costs will have increased significantly in this division as a result.
Also this quote caught my eye:
"In the past 12 years, in fact, Microsoft's online story has had any number or re-orgs, restarts, and revampings, but the reality has never changed."
Windows Live reflects a change in Microsoft's whole approach to online services. The concept of integrating the services where possible and then providing a software counterpart is like nothing MSN did before November 2005. Also comparing MSN's internet access business model to the current advertising/S+S business model doesn't work, particularly as the latter is on such a different scale both in terms of costs and potential revenue.
So back to the question, why is Microsoft losing $1billion a year from its OSB? Investment in the future of web services, not uncontrollable advertising costs. I don't think anybody at Microsoft expects OSB to be making a loss indefinitely, they have the Entertainment division to fund after all ;)