Microsoft’s online services division revenue increased modestly year over year, rising to $566 million. That’s about a $2.2 billion run-rate. And that’s the good news.
Microsoft’s online services division losses exploded to $713 million, up from $411 million a year ago. That’s almost a $3 billion loss run-rate.
Some of the increase in losses resulted from “transition costs” associated with the Yahoo deal, so we’ll assume they are one-time. Most of the rest of the increased losses appear to be normal operating expenses:
OSD revenue increased primarily as a result of increased online advertising revenue, offset in part by decreased Access revenue. Online advertising revenue increased $81 million or 19%, to $502 million, reflecting an increase in search and display advertising revenue, offset in part by decreased advertiser and publisher tools revenue. Access revenue decreased $14 million or 33%, reflecting continued migration of subscribers to broadband or other competitively-priced service providers.
OSD revenue for the three months ended March 31, 2010 included a favourable foreign currency exchange impact of $13 million.
OSD operating loss increased due to increased operating expenses, offset in part by increased revenue. General and administrative expenses increased $154 million due mainly to transition expenses associated with the inception of the Yahoo! Commercial Agreement. Research and development expenses increased $74 million or 33%, primarily due to increased headcount-related expenses and reimbursement to Yahoo for certain of their costs incurred prior to migration to the Microsoft platform. Sales and marketing expenses increased $69 million or 30% due to increased marketing activities. Cost of revenue increased $64 million or 15%, primarily driven by higher online traffic acquisition costs.
It’s hard to describe how awful this business looks in isolation. We’re talking about a business with plenty of scale–more than $2 billion of revenue–that is still losing more than it generates in revenue. This in an industry sector in which even the WORST competitor, AOL, is still making plenty of money.
If this business weren’t hidden within the belly of a monstrous cash-generation engine (Windows/Office), shareholders would have long since have revolted and shut it down.
Here’s a chart of all the money Microsoft has lost for the past four years. This quarter’s loss, which is not yet reflected, will almost set a new quarterly record again.
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