Beginning in FY'07, which started July 1, 2006, Microsoft will report its finances in five business segments, as follows:

Business Division. This segment consists of the following:

• The former Information Worker segment, which includes Office, Project, and Unified Communications products
• The former Microsoft Business Solutions segment, which includes the Dynamics lines of business management applications.
• Exchange Server and related Client Access License (CAL) revenue, which was formerly counted in the Server and Tools segment.

Entertainment and Devices Division. This segment consists of the following:

• The former Home and Entertainment segment, which includes Xbox, consumer software (such as Encarta and games) and hardware (such as keyboards and mice), and TV platforms
• The former Mobile and Embedded Devices segment, which includes embedded platforms, such as Windows CE and Windows Mobile.

Online Services Group. This is the new name for the MSN business segment, which includes MSN and Windows Live Web sites and online services. The composition of this group is not changing.

Server and Tools. This business segment will remain unchanged from today's segment of the same name, except that it will no longer include Exchange Server and related CAL revenue. Server and Tools will still include Windows Server, SQL Server, management servers, development tools such as Visual Studio, and enterprise consulting and services.

Client. This segment remains unchanged from today's segment of the same name and includes all versions of the Windows desktop OS.

Reasons and Effects of the Change

The shift aligns the company's financial reporting more closely with its organizational structure: the Business and E&D Divisions were both created in late 2005 as part of an effort to streamline Microsoft's business by splitting it into three large divisions. (A third Platforms and Services Division was created at the same time, but its financial results will be divided between the Client, Server and Tools, and Online Services segments.)

From a revenue perspective, the new segments will look quite similar to the old ones: MBS accounted for less than 3% of Microsoft's revenue, and Mobile and Embedded contributed less than 1%. However, the moves will obscure certain details. For instance, MBS was formed primarily from the acquisitions of Great Plains (in 2001) and Navision (in 2002), which cost the company about US$2.4 billion, and has suffered approximately US$1 billion in losses since FY'02 (the earliest year for which profit and loss figures are available). Even though MBS was profitable in FY'06, its absorption into the Business segment will make it harder to judge when (or if) the Great Plains and Navision acquisitions pay off.

Back to associated article: Volume Licensing Strong in Q4'06