Question

Please refer 2 items as below from Microsoft’s Letter to Shareholders as below. And refer them to Porter’s five forces.

Data and AI

Our customers will increasingly need to build their own AI to extract insights from the ever-increasing amount of data they collect — and we are investing to make Azure the best cloud for their comprehensive data estates. We are democratizing data science and AI with Azure Cognitive Services, Azure Machine Learning and data services such as Azure Cosmos DB — the first globally distributed, multi-model database — to help organizations of all sizes convert their data into insights and experiences for competitive advantage. In less than a year, Azure Cosmos DB has already exceeded $100 million in annualized revenue. Azure Database for MySQL and PostgreSQL makes it even easier to bring open source-powered applications to Azure, expanding our opportunity in this space. And we are seeing rapid customer adoption of Azure Databricks for data preparation, advanced analytics and machine learning scenarios. We are leading in the field of AI research, achieving human parity with object recognition, speech recognition, machine reading and — this year — language translation. But that is not enough. We are committed to translating these breakthroughs into toolsets our customers can use. More than 1 million developers have already used our Cognitive Services to quickly and easily create AI applications. Our Azure Bot Service has nearly 300,000 developers, and we are driving new advances in our underlying cloud infrastructure, building the world’s first AI supercomputer in Azure. Microsoft Translator brings AI-powered translation to developers where their data is, whether in the cloud or on the edge. Our pending acquisition of GitHub recognizes the increasingly vital role developers will play in value creation and growth across every industry, and will enable us to bring our tools and services to new audiences while enabling GitHub to grow and retain its developer-first ethos.

Gaming

We are pursuing an expansive opportunity in gaming — from the way games are created and distributed to how they are played and viewed — surpassing $10 billion in revenue this year for the first time. We are investing aggressively in content, community and cloud services across every endpoint to expand usage and deepen engagement with gamers. Xbox Live now has 57 million monthly active users, and we are investing in new services like Mixer — which blurs the line between watching and playing — and Game Pass, our new unlimited subscription service. The addition of five new gaming studios this year bolsters our first-party content development to support our fast-growing gaming services. And our acquisition of PlayFab accelerates our vision to build a world-class cloud platform for the gaming industry across mobile, PC and console. I’m excited about our opportunity in the fast-growing $100 billion gaming market and what’s to come.

Answer 1

Micheal Porter’s 5 forces theory helps in understanding the profitability level of different industries. These five forces are

1) Competition in the industry- Stronger competition in an industry can strongly impact a company’s performance in the industry as customers can easily find substitute suppliers

In the given case study Microsoft has acquired its competitor GitHub in Data and Artificial Intelligence segment and PlayFab in Gaming segment. This definitely boosts Microsoft’s performance by eliminating competition and absorbing them into the company and thus expanding the bandwidth of the company

Also, the company is investing heavily in technologies thus keeping a check on the competitors

2) Potential of new entrants in the industry- When the entry into a particular industry is easier for new entrants , then company within the industry have higher profitability risk.

The Data and AI segment is mainly dominated by Microsoft. These require extensive research and high costs to develop these technologies and thus threat of new entrants is comparatively lower in the segment.

However, since the gaming industry is ever growing and entry of new players is easy, there is threat by new entrants.

3) Power of suppliers- This force implies the power of suppliers of goods to escalate prices. It depends upon various factors like uniqueness of product, availability of the product. The lesser the number of suppliers in the industry, the stronger is the power of suppliers

Microsoft has invested heavily in developing Azure Cosmos DB and it has been accepted by more than 1 million developers in the Artificial Intelligence segment.

4) Power of customers- The power of customers implies the ability of the customer to bring down prices of the product. When there are few customers, they have higher power to bargain and bring down prices.

In the gaming industry the customers are powerful and they have lot of choices. So, the company has invested in developing new games and has also succeeded in gaining new customers by offering better gaming services.

5) Presence of Substitutes- When the substitute products exist there is high risk to profitability of a company where as companies with monopoly or unique products have lower risk.

In the Data and Artificial Intelligence segment, Microsoft is the world leader as it is gearing to build the world’s first AI supercomputer in Azure

The gaming industry is worth $100 billion and Microsoft revenue is about $10 billion. SO, there are substitutes available and the company is investing to increase the user’s gaming experience.