Do Consumers Matter to Microsoft At All? ⭐

Microsoft quietly issued its fiscal year 2025 annual report today, giving investors key insights into the health of the business. I have an alert set up with the U.S. Securities and Exchange Commission (SEC) so that I’m notified every time Microsoft produces a regulatory filing. And I thought it might be interesting to view this filing through the lens of the audience I care about, which is individuals, or consumers.

? Microsoft’s customers

Consumers are just one of Microsoft’s customer groups, of course. It also lists “small and medium organizations, large global enterprises, public-sector institutions, service providers, application developers, and OEMs” [PC/device makers] as customers. I assume consumers are bigger as an audience—by number or revenues—than many of Microsoft’s other customer groups. But even Microsoft acknowledges that recognizing specific contributions to its bottom line is basically impossible because of the size, complexity, and interwoven nature of its various businesses.

? How Microsoft reaches those customers

Microsoft notes that it sells “commercial and consumer products and services directly to customers,” that these offerings include “cloud services, search, and gaming,” and that distribution is typically through “digital marketplaces and online stores.”

Microsoft continues to distribute some products at retail, too, for which it has a network of “independent non-exclusive distributors, authorized replicators, resellers, and retail outlets.” Individual consumers typically obtain these products through retail outlets, and it distributes its own devices, meaning Surface computers and PC peripherals, through third-party retailers.

And Microsoft also distributes some products and services through OEMs [PC/device makers] that “pre-install our software on new devices and servers they sell.” On the consumer side, this is primarily Windows and Microsoft 365 consumer, and “the largest component of the OEM business is the Windows operating system pre-installed on devices.” But these OEMs also sell PCs “pre-installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to Microsoft 365 Consumer.”

Microsoft obviously advertises to consumers as well, online, in products like Windows, on TV and radio, presumably, and elsewhere. Finding this information in the annual report is a bit tough. But Microsoft spent $26.5 billion on sales and marketing company-wide in FY2025, a sum that accounted for 9 percent of its total revenues. This was an improvement over FY2024, when 10 percent of its revenues were spent on sales and marketing.

? Microsoft’s consumer businesses

Microsoft says that it “continues to expand [its] reach with consumers,” but this feels like a soft number. The next sentence, literally, mentions LinkedIn of all things (“now home to 1.2 billion members”), while the firm also notes that it is “bringing AI agents into the core workflows of sales, hiring, and learning” before moving right on to games, which is discussed below. Bizarre.

As you might know, Microsoft has three core and top-level business units. And I think it’s relevant and notable that one of the biggest of those businesses, Intelligent Cloud, has absolutely nothing to do with consumers. In the most recent quarter, Intelligent Cloud delivered $29.9 billion in revenues, good for 39 percent of Microsoft’s total revenues.

But the other two Microsoft top-level business units both have consumer revenues.

Productivity and Business Processes: Microsoft 365

This business generated $33.1 billion in revenues in the most recent quarter, most of which came from commercial revenues associated with Microsoft 365 (including Windows licensing to businesses.) But it also includes what Microsoft calls Microsoft 365 Consumer products and cloud services, which is responsible for “Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other consumer services.”

“Microsoft 365 Consumer is designed to increase personal productivity and creativity through a range of products and services,” the annual report reads. “Growth depends on our ability to reach new users, add value to our core product set with new features including AI tools, and continue to expand our product and service offerings into new markets.”

This is probably obvious, but Microsoft sees its continued success in this productivity-focused market as being dependent, essentially, on Copilot capabilities keeping existing users on the platform while potentially bringing in new subscribers.

Microsoft has been tracking the shift from “perpetual” Office products to Microsoft 365 subscriptions for years, and the goal there is straightforward: Convert existing Office users to ongoing Microsoft 365 subscriptions, ideally with upsells to more expensive versions of the offering. But it’s ability to grow this business also hinges on “the demand for communication and storage through Outlook.com and OneDrive, which is largely driven by subscriptions and advertising.” In other words, these things feed each other: If you start filling up your free storage, you may subscribe to OneDrive storage or, better yet, Microsoft 365.

More Personal Computing: Windows, Surface, Xbox, and … Advertising

This business generated $13.5 billion in revenues and is notable for two reasons: It is by far Microsoft’s smallest top-level business and it exclusively sells consumer products and services. These are its “key consumer businesses,” Microsoft says.

Windows and Surface

And the biggest of those, of course, is Windows.

“The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their [PCs],” the annual report explains. “Windows OEM revenue [revenues from PC makers] is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell.”

Aside from literal sales volume, Windows revenues from PC makers is impacted several factors, only a few of which are consumer-related. They are:

• Growth of the AI PC category.
• Customer mix between consumers, small and medium businesses, and large enterprises.

And that’s it.

Microsoft also designs and sells devices, which for consumers include Surface and PC accessories.

“Our devices are designed to enable people and organizations to connect to the people and content that matter most using Windows and integrated Microsoft products and services,” the annual report claims. “Surface is designed to help organizations, students, and consumers be more productive. Growth in Devices is dependent on total PC shipments, the ability to attract new customers, our product roadmap, and expanding into new categories.”

I’m surprised that Surface is still concerned with new product categories given the history there and the recent scale backs. But who knows? The rise of natural language AI interactions may lead to a sudden shift in device usage and perhaps there are new form factors out there.

On the competition front, Microsoft sees “alternative platforms and devices” as threatening Windows. But it believes, and this one is almost hilarious, that “Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity.” This was a historic strength for the platform, for sure. But more people are getting work done on phones than on PCs these days, and emerging capabilities on iPad and Android tablets seem like a real threat to me, one that Microsoft doesn’t address here.

For Surface, Microsoft sees competition from “various computer, tablet, and hardware manufacturers who offer a unique combination of high-quality industrial design and innovative technologies across various price points,” which I read as “Apple.” So I guess it is awake to the threat. But “many of these manufacturers are also current or potential partners and customers, including our Windows OEMs,” it adds. And fair enough: Samsung, Lenovo, and others now sell productivity-focused Android tablets and 2-in-1s, and we know true Android laptops are on the way as well.

Xbox and gaming

Given the never-ending controversies that Microsoft Gaming and Xbox have endured (and in some cases, created) this past year, I was particularly curious how Microsoft would communicate this business, which is now essentially “Activision Blizzard and other game studios plus a hardware lineup no one wants,” to investors.

So this was amusing.

“Microsoft is expanding how billions of people globally access and play video games on PC, console, mobile, and cloud,” the annual report notes, channeling the “What’s an Xbox?” advertising.

Microsoft develops game content through a “collection of first-party studios creating iconic and differentiated gaming experiences.”

Microsoft continues to invest in gaming studios and content to expand our intellectual property roadmap and leverage new content creators, which sounds regulatorily impossible to me, but fine.

Its game content is “the cornerstone of Xbox Game Pass,” which Microsoft describes as “a subscription service and gaming community with access to a curated library of first- and third-party titles.”

Microsoft briefly explains its gamer-centric strategy and hints that it is looking for “new opportunities to attract gamers across a variety of different end points through our first- and third-party content and business diversification across subscriptions, ads, and digital stores.”

Microsoft now has hardware partners making Xbox branded devices for the first time, and this, plus “key PC and mobile end points” will help it expand the market and “help [it] empower gamers to play in a way that is most convenient to them.”

The focus for Xbox and gaming, Microsoft says, is “on growing the platform and expanding to new ecosystems to engage as many gamers as possible. Xbox enables people to connect and share online gaming experiences that are accessible on Xbox consoles, Windows-enabled devices, and other devices. Xbox is designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base.”

Honestly, that is one of the clearer rationales for the “Xbox everywhere” approach that has rattled so many fans. But the revenue and growth stories are interesting as it shifts to this new world:

• Xbox revenue is mainly affected by subscriptions and sales of first- and third-party content, as well as advertising.
• Growth of Microsoft’s Gaming business is “determined by the overall active user base through Xbox enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and reliability of the devices used to access our content and services, and the ability to create new experiences.”

The competition in this market is obviously strong. It consists of other console makers (Nintendo, Sony), many mobile game-focused competitors, other device types, and PC-based ecosystems from competitors like Steam and Epic Games. And a lot more. Leaving aside “other providers of entertainment services such as video streaming platforms,” this market is broad and deep.

“Xbox and our cloud gaming services face competition from various online gaming ecosystems and game streaming services,” is how Microsoft describes this in the annual report. “Our gaming platform competes with other console platforms. We believe our gaming platform is effectively positioned against, and uniquely differentiated from, competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong content from our own first-party game franchises as well as other digital content offerings.”

Well. That is very interesting. Microsoft’s current (Xbox) hardware isn’t all that differentiated, so perhaps it is alluding to a coming shift, whether the PC-based gaming handhelds that are just now coming to market or the expected shift to Arm. Hard to say.

But here’s the money shot, so to speak: “Across gaming, [Microsoft] has 500 million monthly active users across platforms and devices.” That’s a solid number. It’s about half the suspected Office/Microsoft 365 user base and roughly a third of the (suspect) Windows user base. But those customers are much more engaged than those who use Windows and Office, and that helps explain the importance of gaming to Microsoft.

Search and news advertising

I hate to even mention this, but Microsoft’s online advertising business, the part that is trying and failing to emulate Google’s successes, is part of More Personal Computing too. And this is relevant because Microsoft has chosen to enshittify Windows and Microsoft 365 for consumers with advertising in the products in addition to delivering more traditional online ads.

Our Search and news advertising business is designed to deliver relevant search, native, and display advertising to a global audience,” the annual report claims. “Microsoft Copilot is a digital companion designed to inform, entertain, and inspire. Our Microsoft Edge browser and Bing search engine with Copilot are key tools to enable user acquisition and engagement, while our technology platform enables accelerated delivery of digital advertising solutions. In addition to first-party tools, we have several partnerships with companies through which we provide and monetize search offerings. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content on advertising offerings.”

It’s astonishing to me that this quote transitions right from the advertising business to Microsoft Copilot, of all things. But Copilot, Edge, and Bing are all tied up with Copilot in Microsoft’s online advertising strategies. And I suppose one could effectively argue, as Microsoft does at the end of the above quote, that AI could be used to deliver more effective ads. There’s a Windows 11 feature that no is asking for.

?‍✈️ Copilot, like Savoir-Faire, is everywhere

Microsoft Copilot (and its growing list of related products and services) is spread between the three top-level business units in every way imaginable and is thus a poster child of sorts for how the complexity of this company gets in the way of understanding where the money comes from. But we can safely assume that consumer usage of Copilot is relatively small and then we’re enduring an era of rapid expansion specifically to reverse that trend.

What we do get from the annual report is another soft number: “Microsoft surpassed 100 million Copilot monthly active users (MAUs)” in the fiscal year, though that was across commercial and consumer (mostly the former). “Our Copilot family of products is helping people thrive at home, at school, and at work,” Microsoft also claims.

“On the consumer front, Copilot is now integrated across Bing, Edge, GroupMe [??], MSN, Windows, and Xbox,” the report continues. “We also refreshed our Copilot consumer app this year as a more natural, conversational, and personal AI companion. One highlight is Copilot Mode in Edge, which lets you chat directly with your open tabs.”

Highlight. Sure.

? Metrics that matter

Given the interwoven nature of many of its businesses, how Microsoft determines success gets a little fuzzy. There are a few instances in which we get direct numbers, and here Microsoft 365 consumer is unique because we routinely get user base and revenue figures at each earnings report. And growth is decent: This business generated $7.4 billion in revenues in FY2025, $6.6 billion in 2024, and $6.4 billion in 2023. So it’s trending in the right direction.

Revenues from Windows—Pro (business) are spread between two business units, while those from non-Pro (consumers) are only in More Personal Computing. Surface and PC accessories appear to be solely the responsibility of More Personal Computing, but we’re not getting any hard numbers for either.

For Xbox and gaming, it’s all about revenues across “Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, and other cloud services,” which is exactly what Microsoft doesn’t focus on in its earnings reports.

And revenues are it for search and news advertising, too, though “traffic acquisition costs paid to Bing Ads network publishers and news partners” eats into that. No matter. Only Microsoft 365 consumer has the data.

? It’s the future of Microsoft … today!

Looking to the future, Microsoft sees a potential for growth across all its consumer initiatives. But here, too, the details are lacking.

From the outside, Windows seems to be coasting on its established user base. But Microsoft says it will “leverage Windows to fuel [its] cloud business, grow [its] share of the PC market, and drive increased engagement with [its] services like Microsoft Edge, Bing, Copilot, Microsoft Teams, Microsoft 365 Consumer, Xbox Game Pass, and more.”

Oddly, there’s no talk of a future for Surface, and that business seems to be failing from the outside.

Gaming is … controversial. But Microsoft says that it will “invent new gaming experiences that bring people together around their shared love for games on any device and push the boundaries of innovation with console and PC gaming,” and so that business will remain a priority.

There is clearly a lot happening at Microsoft these days. But if you filter it all down to just the consumer offerings, a simpler story emerges.

Windows remains a big market for consumers, even though most have moved on to other devices and platforms for entertainment and consumption purposes.

Productivity is key to the success of Microsoft 365, obviously, but also to Windows. And while Microsoft no longer uses this language, it’s fair to say that Microsoft 365 works “best” on Windows today. This tandem is powerful and important.

Gaming is huge, and while the annual report doesn’t address any of the controversies, this is an area of potentially huge revenue growth if Microsoft can get the costs (mostly hardware-related) down and keep gamers engaged across whatever end points they use to game.

I would love to see hard data that demonstrates how healthy each of these businesses really is. But Windows, Microsoft 365, and Xbox/Gaming are big businesses with big user bases, and Xbox/Gaming, in particular, is Microsoft’s one potential bright spot for engagement, an area the firm has completely conceded elsewhere.

Interesting stuff.