Microsoft overtakes Apple as the world’s most valuable company. Is it because of a focus on subscription rather than transaction?

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Subscription Case

Af Niels Vestergaard

It happened. Microsoft is now worth $2.89 trillion dollars. And that’s just enough to surpass Apple, which has otherwise (almost uninterrupted) held the throne since 2011.

And yes, it’s obviously a result of Microsoft having a significant stake in OpenAI and generally being ahead of competitors in actually making money on AI development, where we look at companies like Amazon, which still haven’t broken through the sound barrier with significant AI investments.

But as the name also suggests, Microsoft is primarily a software company. And even though a whole 19% of Apple’s revenue today comes from streaming and cloud, they are still predominantly a hardware company.

Over the past couple of years, Microsoft has managed to build recurring revenue streams, which have accumulated to an annual revenue of around $230 billion dollars. So it’s not just speculation that Microsoft is now taking over the top of the S&P 500.

Microsoft is almost exclusively a subscription business today

So where does the money come from? It comes from ongoing, monthly payments. Through Software-as-a-Service, Microsoft has quietly built a software subscription business that no one can compete with. The vast majority of revenue ($80 billion) comes from server products and cloud services like Microsoft Azure. Then comes the earnings from Microsoft Office ($49 billion), which has been a pure subscription product since 2010. In addition, there are revenue sources like LinkedIn and Xbox in third and fourth place. Both platforms that almost exclusively benefit from the subscription model. Lastly, of course, there’s the rapidly growing base of Chat-GPT 4 users at OpenAI, which Microsoft owns 49% of. This base currently counts about 2 million paying subscribers and a user base of more than 100 million weekly active users. So it’s quite a pond to fish for subscribers in.

The most profitable companies in the world use subscription models

I have previously in this article series expressed my enthusiasm for companies like Amazon, Spotify, and Netflix, which have proven that you can be a strong growth stock by using recurring revenue as the primary source of income. Amazon is particularly good because they do it across their retail business and Amazon Web Services, which is on its way to becoming one of the leading developer platforms in the market.

And this is where Microsoft and Apple come into the picture again. Microsoft has (like Adobe did a few years ago) proven that it’s better to sell software on subscription than on license. It’s this strategy that has given Microsoft the power back. And it’s certainly not a strategy that Apple has missed.

Over the past 10 years, Apple has shifted a large portion of their revenue from hardware to subscription. In 2012, only $3 billion came from Apple Services, today that number is 7 times higher (, 2023). If this trend continues, it’s certain that Apple can give Microsoft a run for their money.

The race is far from over

However, the AI wave has turned things upside down in the world markets. Microsoft may have the throne today, but companies like Nvidia, which produces GPUs for use in popular AI language models, have broken staggering records recently. After their annual report came out a couple of weeks ago, they added $277 billion to their market value in a single day. That’s about 1% of the US gross domestic product. In one day!

The AI wave will undoubtedly determine who wins the value-setting race in the next couple of years. And Nvidia and Apple are proof that hardware is still as important as software. And Apple has been notably quiet in the AI race that Google and Microsoft have fought over in the past year. Perhaps we can expect a surprise or two from the perfectionists from Cupertino soon? They are known for patiently waiting for others to make mistakes so they can swoop in and launch a well-developed and seemingly flawless product. They did it with the iPhone, they did it with the Apple Watch – and maybe they can do the same with AI?

Let the games begin…