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WINTEL SIMULATION

NAME: Ashutosh Kumar; ROLL NO: 2015PGP061; SECTION: Section-A

Q1: What drives Microsoft business model?

Cost:

manufacturing and distribution costs for products sold and programs licensed;

operating costs related to product support service centers and product distribution
centers;

costs incurred to include software on PCs sold by OEMs and drive traffic to its websites;

costs incurred to support and maintain Internet-based products and services, including
datacenter costs and royalties;

warranty costs;

inventory valuation adjustments;

costs associated with the delivery of consulting services;

the amortization of capitalized software development costs.

Research and development (R&D) expenses include:

payroll, employee benefits, stock-based compensation expense, and other headcountrelated expenses associated with product development;

third-party development and programming costs;

localization costs incurred to translate software for international markets;

the amortization of purchased software code.

Sales and marketing (S&M) expenses include:

payroll, employee benefits, stock-based compensation expense, and other headcountrelated expenses associated with sales and marketing personnel;

the costs of advertising, promotions, trade shows, seminars, and other programs.

General and administrative (G&A) expenses include:

payroll, employee benefits, stock-based compensation expense, severance expense, and


other headcount-related expenses associated with finance, legal, facilities, certain human
resources and other administrative personnel;

certain taxes, and legal and other administrative fees.

Impairment, integration, and restructuring expenses include:

costs associated with the impairment of goodwill and intangible assets related to
Microsofts Phone Hardware business;

employee severance expenses and costs associated with the consolidation of facilities and
manufacturing operations related to restructuring activities;

systems consolidation and other business integration expenses associated with Microsoft
acquisition of Nokia Devices and Services (NDS) business.

Pricing:
Microsoft generates revenue by developing, licensing, and supporting a wide range of software
products, by offering an array of services, including cloud-based services to consumers and
businesses, by designing, manufacturing, and selling devices that integrate with its cloud-based
services, and by delivering relevant online advertising to a global audience.
Microsoft customers include individual consumers, organizations, OEMs (original equipment
manufacturers), and application developers.
Individual consumers make own buying decisions for the devices they use at work or home. They
obtain Microsoft products through distributors, resellers, and OEMs. Microsoft generates revenues
from individual consumers through Office Consumer, Devices, Gaming, and non-volume licensing
of Windows operating system.

The main driver for Microsofts growth in this industry was because of the Operating Systems, be
it: Basic, MS-DOS, or Windows 3.0. These took the PC industry by storm when it emerged as the
preferred interface for IBM compatible PCs.
OEMs began bundling their computers with both DOS and Windows pre-installed, effectively
doubling Microsofts OS revenue per PC.
Microsofts own products enjoyed the added advantage of direct OEM distribution
Differentiation:
Microsoft serves organizations of different sizes, including large global enterprises, small- and
medium-sized organizations (SMEs), public sector institutions, Internet service providers, and
Academic institutions. The company offers tailored license programs, enterprise-wide support,
consulting services, and other specialized services to the organizations. Microsoft generates
revenues from organizations through Office Commercial, Volume licensing of Windows operating
system, Microsoft Dynamics business solutions, server products and services, enterprise services,
and advertising.

Office Commercial includes volume licensing to Microsoft Office for business and
subscriptions to Office 365 Commercial and services such as Microsoft Office,
Exchange, SharePoint, and Skype for Business, and related Client Access Licenses
(CALs).

Microsoft Dynamics business solutions include Dynamics ERP products, Dynamics


CRM on-premises, and Dynamics CRM Online (Microsoft Dynamics).

Server products and services include Windows Server, Microsoft SQL Server, Visual
Studio, System Center, and related CALs, as well as Microsoft Azure.

Enterprise Services include Premier Support Services and Microsoft Consulting


Services.

Advertising include MSN Display advertising and Bing Search Advertising.

Microsoft distributes software through OEMs that pre-install software on new PCs, tablets, servers,
phones, and other intelligent devices that they sell. The largest component of the OEM business is
the Windows operating system pre-installed on computing devices. Along with Windows OEM
licensing (Windows OEM), Microsoft also generates revenue through Windows Phone licensing,
patent licensing, and Windows Embedded.

Microsoft serves two broad categories of OEMs. There are Direct OEMs such as Acer,
ASUSTek, Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, and Toshiba. Microsoft manages
relationship with these OEMs through a direct agreement. Then, there are lower-volume PC
manufacturers, which source Microsoft software for pre-installation and local distribution primarily
through the Microsoft distributor channel rather than through a direct agreement with Microsoft.
The company also generates revenues from application developers through developer tools and
training and certification on various Microsoft products. Creating a strong developer community is
an important element of Microsoft business model. This helps them create platform-based
ecosystems that can benefit from the same-side and the cross-side network effects among users and
application developers. The network effects help in accelerating growth and creating a strong
competitive advantage.
-----------------------------------------------------------------------------------------------------------------------Q2: What drives Intel business model?

Cost:

Manufacturing and distribution costs for products sold and programs licensed;

Operating costs related to product support service centers and product distribution
centers;

R&D cost: R&D is also a crucial part of Intels business, as its future depends on
replacement cycles, or replacing older technology with new technology. The company
has adopted various strategies to diversify its capital needs and continue to grow without
giving up on R&D.

Pricing:

Intel relentlessly pursued Moores Law, doubling the number of transistors on its CPU
every 18 months, continuously evolving so as to stay on top.

Intel Inside The Intel Inside campaign was the most successful campaign by Intel till
date which has led to brand recall in the mind of end-users, initiating a trigger in the
minds of consumer wherein they preferred buying Intel processors over AMD or other
competitors.

Intel Architecture Lab (IAL) This played a crucial role in driving new industry
standards and broadened Intels role in the industry.

Differentiation:
Intel offers its products as platforms. A platform consists of a microprocessor and chipset, and may
be enhanced by additional hardware, software, and services. Intel sells these platforms to the
following customer segments:

Original Equipment Manufacturers (OEMs) and Original Design Manufacturers


(ODMs) that make (a) computer systems (b) cellular handsets & handheld computing
devices (c) networking communications equipment. ODMs provide design and
manufacturing services to branded and unbranded private-label resellers.

PC & network communications product users (which includes individuals,


businesses, and service providers) who buy PC component & board-level products and
networking & communication products through distributors, resellers, retail, and OEM
channels

Industrial and communication equipment manufacturers

Q3: What are the similarity between Intel and Microsoft business model?
Business Model Interdependence:
Business models of two companies are interdependent when some consequences are
common to both companies models.
The following simple representation captures the essence of the dynamics of Intels business
model (at a high level of aggregation).
The representation stresses two choices: heavy investment in new generation microprocessors and
relatively high microprocessor prices:

Microsofts business model is fundamentally different to Intels because in addition to deriving


revenue and profit from sales of PCs (every new PC sold has a Microsoft operating
system), Microsoft also derives profit from selling applications and upgrades to the installed base of
PCs. The following is a high-level representation of Microsofts business model. Choices are
underlined.

In this stylized representation we have included three main choices: investment in new
generation operating systems, relatively low operating system prices, and relatively high

application software prices. Notice that there are several virtuous cycles. As the installed base
grows, it is increasingly difficult for competitors to catch up with Microsoft. Over time,
Microsoft becomes stronger.
The diagram reveals that Microsoft has an incentive to set low prices for operating systems to grow
the installed base. Microsoft then sets high prices for the applications (mainly productivity
applications) and makes money from the large installed base of PCs.

The diagram above shows that Intel and Microsofts business models are linked together.
The diagram is strictly a combination of both companies business model representations
shown previously. The linkages are: willingness to pay for the PC and volume of PCs sold. The
figure makes clear that the ability of Intels (Microsofts) business model to generate profit
depends not only on the design and implementation of Intels model (Microsofts) but also on how
it interacts with Microsofts (Intels) model. In other words, Intel and Microsofts business models
are interdependent: Microsofts choices (i.e., OS pricing and investment in and timing of release of
new operating systems) affect the working of Intels business model, and vice versa.

Specifically, the volume of PCs sold at any given time depends on the prices set by Intel and
Microsoft for the microprocessor and operating system, respectively. Given a willingness to pay for
a PC, the more Intel charges for the microprocessor, the less value is left for Microsoft to
capture through OS prices (and vice versa). This implies that there is potential conflict between
Intel and Microsoft regarding pricing. Likewise, willingness to pay for a PC is highly dependent on
how well Intel and Microsofts microprocessor and operating system work together. This
depends on how well Intel and Microsoft coordinate the release of new-generation processors and
operating systems.

Q4: Where should you expect cooperation and where are the potential points of conflict?
Cooperation:
Through the Wintel simulation we realized that competitive strategies of firms in a particular
industry are highly dependent on the relation between the products. If the presence of one product
increases the value/usage of another product, then these products are complementary to the other.
For example, the software and hardware used in a personal computer (PC) are complementary
products and improvement in these products adds value to the primary product i.e. PC.
Overall value of the primary product (PC) drives the profitability of industry as well as the
complementary firms (i.e. Intel and Microsoft). Hence the strategy of the complementary firms
should be to compete and cooperate in order to create maximum value of the primary product.
Pricing strategy:
Depending on the objective function, the actions and responses of a firm should be aligned to
leverage the actions of the complementing firms for maximizing its own profits.
For example, when Intel releases a new version, Microsoft should reduce its product prices in the
initial phase (ref Appendix). This will help in increasing the overall PC base, which is essential for
Microsoft to maximize its profits. Though this strategy will reduce the initial profits of Microsoft, in
the long run the company will be benefitted.
Product strategy:
The product development and release cycles of a firm should depend on the strategy of
complementing firms. This will maximize the overall benefits that a firm can reap from its
investments.
In case of the PC industry, Intel tries to introduce a new product earlier than Microsoft. It benefits
Intel from the existing lower prices of the software. On the other hand, Microsoft tries to maximize
its profits from the older version by delaying the release of its new version. This also enables it to
maximize its benefits of an upcoming new version on a larger installed PC base.
Also, the firms' new product development should consider the capabilities of its complementary
products. For example, the expansion of 4G network usage depends on the availability of
supporting hardware devices, which is a complementary product.
Nash equilibrium:
The Nash equilibrium point of Microsoft and Intel alliance is (cooperate, cooperate), so the optimal
state of the alliance system can be automatically achieved. In static viewpoint, the monopoly profit
is the boundary of the negotiation set in one cooperation cycle. In dynamic viewpoint, with the
advancement of the technology and the increasing of the demand, the transition of Microsoft and
Intel Alliance's negotiation set will be continuous.

Points of conflict:
Although the two firms have complementary products, there can still be conflicts between the two.
One of the primary reasons for conflict arises because of different profit maximizing objective

functions. For eg. Microsoft's profits depend on the existing customer base whereas Intel's profits
depend on the new PCs bought by consumers.
Conflict also arises when product releases by the complementing firms are not in sync. For
example, if both Intel and Microsoft release their new products at the same time and at increased
prices, the price of the primary product (PC) will increase significantly and demand will decline as
the price elasticity is significantly high for this product. This will impact the sales of the primary
product, reducing profits for both companies.
Another reason for conflict arises when the research and development activities of both firms do not
complement each other.

APPENDIX

Figure 1 Payoff matrix for the pricing strategy followed by Intel and Microsoft after the release of
a new Intel product*
High price charged by High
price
Intel
Microsoft
Product Release Stage

4a

2b

Product Maturity Stage

2c

5d

charged

by

* The payoffs are qualitatively measured on a scale of 1-5, with 5 being the highest.
a: Intels objective function is to generate profits through each new PC sold. It charges high prices
in the initial stages to recover the marginal and release costs of the product launched. Hence, the
high payoff from increasing prices in the Product Release Stage.
b: Microsofts profit maximizing function depends on the installed PC base. In the initial years it
plays a co-opetitive role by reducing its prices to compensate for the high prices of Intel. The low
payoff justifies its less profits in the Product Release Stage.
c: Intel has recovered the marginal cost of its new product launch by the maturity stage. It plays a
co-opetitive role by reducing its prices to compensate for the premium charged by Microsoft.
d: Microsoft increases its prices in the later stages of the product lifecycle to gain from the
increased based in installed PCs. The payoff received by charging high prices is more for Microsoft
in the Product Maturity Stage.
REFERENCE
1) Competing Through Business Models by Ramon Casadesus-Masanell; November, 2007. IESE
Business School-University of Navarra
2) http://revenuesandprofits.com/how-intel-makes-money/
3) http://revenuesandprofits.com/how-microsoft-makes-money-understanding-microsoft-businessmodel/