Microsoft’s microloss?

Microsoft is not in the same dominant position it was in the late 1990’s when it had virtually 100% of the desktop operating system market.  Flash forward 20 years to 2012 and Microsoft’s share of the office software suite market has increased but its dominance in the desktop operating system market has not been maintained (see below, its roughly 80% with Windows 7 & Windows XP).  

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Microsoft has also lost significant market share in other areas including smartphone operating systems – do you know anyone that uses a Windows phone?   Apparently 3.8% of us do.

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Despite these negative shifts in market share, I was a bit surprised to see that Microsoft recorded its first ever loss in 26 years as a publicly traded company, roughly a $500 million loss.  The graph below represents the last 16 quarters (fiscal years 2009 through 2012) of Microsoft’s net income.  Its actually very impressive; despite the loss in Q4 of 2012, Microsoft still earned almost $17 billion dollars in the last twelve months!  Why is the loss interesting?  Start by realizing that it is the first loss in over 100 quarters (26 years); we should be interested in what triggered or caused the loss. It turns out it is an accounting issue rather than something like plummeting sales of Windows or Office software.

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Back in 2007 Microsoft purchased another company, aQuantive, for roughly $6.3 billion.  The intent was to use aQuantive’s technology to help boost Microsoft’s revenue from online advertising (primarily via the Bing search engine).  Five years later management has decided that that purchase was not a great use of the money as aQuantive’s technology has not  helped grow revenue as quickly as expected (i.e. not at all).  What does this mean from an accounting perspective?  In 2007, Microsoft purchased an asset, all the shares of aQuantive, for $6.3 billion.  In 2012, management did an assessment of that asset and determined that it is essentially worthless.  Accounting requires that we write down worthless assets so Microsoft  ends up expensing the entire value (the journal entry would be:

CR Long Term Investment in aQuantive [Asset]  $6.3 billion

DR Asset impairment expense [Expense]  $6.3 billion

Therefore net income is decreased by the full $6.3 billion, resulting in an overall loss for the quarter of $492 million.

Some people argue that this is a temporary blip; Microsoft is still generating approximately $6 billion of income per quarter before write downs like the aQuantive one.  In fact the stock market reacted positively to the earnings release so obviously shareholders weren’t too upset by the loss.

On the flip side however, I believe that the write down suggests that either Microsoft made a fairly large investment ($6.3 billion!) in something that turned out to be worthless, shame on them, or their business model, particularly online advertising revenue is suffering substantially.

Its too early to determine if this loss will have repercussions for Microsoft, I will be keeping my eyes and ears open and post anything else related to this matter.

Note: this blog was originally posted on my site hosted by Pearson Education (http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

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