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Microsoft Loses $177m on Xbox in Three Months
Albanach writes "The BBC News are reporting in this story that Microsoft's Home Entertainment Division has filed a submission to the Securities and Exchange Commission reporting a loss of $177 million for the three months to 30 September 2002. The loss comes on revenues of $505m for the division that manufactures the Xbox games console. Microsoft are said to be prepared to spend $2 billion funding Xbox live over the next five years, suggesting it will be some time before the home entertainment division break into the black."
Like Sony is not a megacorporation that can't keep up with MS. Also, a $177million loss is not rediculous considering the poor economy and the nature of the console business (difficult market penetration for the "new kid ont he block"). Sony took huge losses on the PS1, and that was during a better economy and a less heated console war.
There is no longer anything that can be done with computers that is nontrivial and clearly legal. -- Paul Phillips
according to The Register's article here the losses are minimal, when compared with the operating income MS gets from Windows, Office and their Server products. The numbers are (quoting the register):
:)
Windows: $2.48 billion on $2.89 billion revenue
Office: $1.88 billion on $2.38 billion revenue
Servers: $519 million on $1.52 billion revenue
compare that with a loss of $177 (and microsoft lost on many other things, like CE/Mobility) and you'll see that the picture is not as bad as it looks (heh, for them, anyway)...
Slashdot is aiming for the sensationalism value again, but that's nothing new now, is it?
It's bad from a PR perspective. It's bad considering that Nintendo and Sony are now actually turning a profit on the consoles, a slim one but a profit nonetheless. Sony has managed to fit the entire Emotion Engine + CPU + sundry other parts onto a single chip, which reduces cost significantly. I'm not sure how Nintendo has pulled it off.
Xbox Live is doing better than expected, but the total numbers are pretty intimidating for MS. Last I checked (2 weeks ago), the score is:
- approximately 8 million GameCubes
- approximately 10 million XBoxen
- approximately 52 million PlayStation 2s
By those numbers, it's safe to say Sony has wrapped up this round, if you're looking for a 'winner'. 5X the market share is too compelling for game designers. The games go where the customers are.
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I like the Xbox, even if it is a little limited in scope. There's a completely different philosophy at work at Sony's computer entertainment division that I don't think MS really understands. The Xbox is basically a kickass 3D sandbox. The PS2 is a super-flexible games machine; by this I mean that the PS2 is oriented for all kinds of games, not just 3D. The PMUs for example, can generate procedural textures on the fly. Take the oft-lamented VRAM issue. VRAM holds lots of shiny textures. But what if you are generating textures from (basically) pure math? No texture overhead. (Bryce 3D, to name a weird example, gets away almost entirely without using graphical textures.)
And now we see Sony moving fast to innovate in areas that Microsoft basically can't... namely, they've gone and asked IBM for a radically different kind of chip. MS is in no position to do this, as part of their whole pitch is the fact that it's a PC in a box, with MS's x86 programming tools.
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If Jesus wants me it knows where to find me.
According to the 10-Q filing, the article is wrong. The $177M net loss is for all of home and entertainment, only a subset of which is Xbox. In fact, comparing it to last year, where the losses were at $68 M and there was NO xbox, you can conclude that total losses resulting from xbox activities would not be greater than $109 M, and in fact probably even less than that. There are many other things in the home and entertainment division such as Windows Media Center PC, UltimateTV, MSN TV, and so on, many of which were probably not profitable, and contributed to the overall losses.
Well, you're sorta right, but it does matter. Lose a little on a console, it takes fewer games sold to recoup the loss / start making a profit. Lose a lot per console and you have to sell more games. You still want to make your box as cheaply as possible in order to a) undercut your competition or b) shrink the breakeven point. Losing shedloads of money with a respectable, but still hugely smaller (now there's a contradiction of terms) base than the PS2 doesn't bode well. They're going to have to push the cost of the box down a lot more to even hope to do better (games that are must haves would be good too). Notice how MS and nVIDEA are having a nice spat about the price of nVIDEA's chipsets? Notice how VIA wants to get into the action with the XBoxII (by offering the CPU / Video / Bridge chipset as a package)? MS are making a concerted effort to lower prices.
/. crowd seem to have this "gloom and doom / inevitablitiy of MS taking over every segment of the industry" attitude. Yes they have lots of money to throw around, yes they can afford to try three times before they get something remotely right, but lets face facts: they suck with their online experience (and its bleeding red ink), they suck at "Big Iron" (and its bleeding red ink), they suck at Phones (and their biggest cheerleader gave them the boot after thier flagship product was on the market for a whole two weeks), they're still mildly stinky at PDAs (although less stinky than they were), they're lackluster in the games market (where, for the first time in their history they're on the hook for the hardware, and bleeding red ink), .net looks insteresing but in the business sense is no different than what's going on now (buy .net server software, buy a client to run .net programs), and the *new, improved* greatest things since sliced bread: The Tablet PC and "networked stuff" (see the upcoming Comdex), are (IMHO) going to be middling at best, i.e. a huge let down from the hype. The tablet is nice but unneeded outside of niche industries, and the Windows based toaster is going to do about as well as it has already -- i.e. Not. MS still doesn't get the embedded space.
OT: But isn't it interesting how MS really isn't doing well in anything other than Windows and Office? The
Don't get me wrong, they're still printing money with Windows and Office, and they will for the forseeable future. But MS have been pretty much losers at trying to break out from those two (incredibly large and profitable) niches. All things come to and end though (see Wang, IBM, et al) and one wonders just what's going to happen to those guys when the industry takes its next big shift.
Microsoft is merely taking a loss to produce a product at an equal rate. The only way they would be driving competitors out of business is if their product is truly superior.
That's not necessarily true.
You don't have to underprice your products to maintain foothold and eat away at competitors.
Let's say it's a bad year for some reason, and company X doesn't make a profit that year, but that's largely because it's a bad year and most companies aren't making a profit. This lack of profit hurts company X. Company Y, on the other hand, a monopoly, can take the loss because it has funds from another source--its monopoly. Company Y is able to deliver more goods, maybe develop new products during that year, at would be a massive loss for any other company because they are a monopoly.
In this scenario, in a sense, company Y is making a better product. In a more accurate sense, however, it is underpricing--or at least, engaging in unfair competition--because it is financing a product at a rate that would be untenable for anything but a monopoly.
The truth is, there's not much difference between underpricing goods typical of the market, and offering goods better than that of the market at the same rate if it is untenable for a nonmonopolistic company in the industry. In both cases, the monopoly is taking an unrealistic cost to undercut its competition. That is, the monopoly is using its monopoly to incur costs that an industry competitor never could.
In fact, one might argue that the ability of a monopoly to simply "try and try again" until they get it right is also unfair competition, precisely because it amounts to a cost that can't normally be incurred. Other companies competing against MS can't just keep on trying until they get it right, because "trying again and again" would cost them so much that they would get driven out of the market. The fact is, normally, one has to put a good product out, and if you can't, you bite the bullet. "Getting it right" after multiple tries doesn't mean that one is a good corporation--it means you're a poor corporation that has the funds to keep on trying to fix your mistakes without penalty until you catch up to the real leaders. In this regard, MS is like the incompetent rich kid who eventually gets to play with the team because they pay off the coach for extra attention.
Monopolies are bad because their monopoly buffers them against cost that would normally be incurred by a corporation. Don't be fooled for a second that because MS "gets it" after multiple tries, it's because it's a good company. It just means it doesn't have to worry about fucking up like other companies do. Think about it this way: if every one of MS's competitors could incur cost like MS, would MS's "better product" be better?
This is all part of MS's plan. The goal is to force Nintendo and Sony to drop prices until they go out of business, then raise the prices up again. The problem they're running into is that they CANNOT beat Nintendo and Sony with a mini-PC. It has to be distinct, otherwise when they raise the price people will ignore it and buy PCs. That's why they keep emphasizing that it's not a PC and that's why they won't publish titles (even award winning ones!) that started out as PC games unless changes and upgrades are made for the console. They want to harness the console|computer dichotomy for monetary gain (i.e. same hardware, more money because it can play games with the "console" DRM marking. As long as customers still feel there's a PC/console distinction, this won't raise any price fixing red flags).
And they WILL sink money into it. 15 billion dollars and four generations of console machines? Sure! Each iteration is cheaper (since they have more R&D) and each one teaches them more about how to cut price without screwing themselves.
In 10 years we'll look back and wonder why we let MS buy all the best console developers, use their money to force everyone else out of the market, and the practice absurd price fixing. The answer? "It looked like they were screwing up! We didn't know it was a plan!"
As far as American law is concerned, there's an ongoing trade dispute over stumpage fees charged by the Canadian government to Canadian softwood producers. The US government has lost in the courts 18 times, but still fights it, arguing that the lower stumpage fees allow Canadian companies to sell lumber at below actual cost, and hurts American producers.
In British Columbia (A Canadian Province), the stumpage fees go to the government. The government then uses the money to ensure adequate regulation of the companies. Cutblocks get re-planted, streams are protected, roads are deactivated. The problem is that in the US, they have a auction systems for timber. Private landholders auction their lumber from their private land holdings. Not only do they have to do their own re-planting (adding expense) they also require a profit. (Adding more expense)
When you look at the lumber barons who are doing the lobbying in Washington, most are from the southeastern US. They sell inferior quality wood compared to BC softwood. THeir product is also higher cost, mainly because they refused to spend the money to upgrade their mills. So they produce a low grade, high cost product (very labor intensive) that simply cannot compete in the marketplace. The BC mills spent billions upgrading their mills to be highly efficient. Now they are being penalized for their foresight.
Inevitably, whenever a US industry gets into a non-competitive situation where they can't dominate, out come the lawyers and the lobbyists. (steel) The WTO will overturn this tariff. Until then, thousands of workers and business' in British Columbia will suffer.
Did I mention that the average new house in the US is costing $3K-$5K more? They don't tell you that in Businessweek do they?
Fascism should more properly be called corporatism, since it is the merger of state and corporate power.
I object to the American populace losing ~$100M of tax money from Microsoft because Microsoft purposefully and deliberately priced the Xbox so low they knew they would have this loss.
Look at from a longer-term view. Microsoft does not intend to lose money forever. They want the books to be positive at the end of the day. The government allowing Microsoft to deduct losses now is an attempt to help Microsoft to become profitable in the future. Profitable in the future means revenues to the government. It doesn't do the government any good if they kill companies in the start-up phases before they get a chance to produce taxes.
$100M could do a lot towards fixing our schools so there aren't 55 kids in a kindergarden class. It's a start...
Two things to say about this:
1) It wouldn't do anything for the schools, since this is mostly federal taxes. Schools are locally financed (although, the feds have been sticking their nose more and more where they shouldn't lately)
2) I'd rather have Microsoft grow and create jobs for the parents of the children, rather than have the government take MORE of our money. The government has more than enough money to fix the schools. Insist on efficiency, not higher taxes.
Sometimes it's best to just let stupid people be stupid.
No, Sony does not and never has sold at a loss. Please stop perpetuating this myth.
Info here.
To sum it up, most people (at this point) believe that Sony still makes at least $50 per console sold, Nintendo is just about breaking even, and Microsoft is still losing at least $70 per console sold. (this is taking into account drops in production prices, drops in sale prices, etc).
-[Blaine]- "'Oh dear,' says God, 'I hadn't thought of that,' and promptly vanishes in a puff of logic."
VividU - Halo was only released for the Xbox because MS brought out the company when they realised that most PC gamers couldn't wait to get their hands on it. That's an example, not of innovation, but of good business sense. However such an approach can also stifle innovation - thus can be bad for gaming in general in the long term.
Therefore I don't think gamers, even those with Xbox's, will be won over with that argument.
Unreal Championship just doesn't play that well on console, in fact I would go so far to say that FPS's in general don't play that well on consoles. I have a copy of UT 2003 on my PC; it's the same game. It's also a slightly disappointing game, and I am looking forward to the mods and maps that will be made for it.
In contrast, I prefer the Game Cube, with such amazing games as the resident evil series, Metroid Prime and Eternal Darkness, and such charmers' (for the young and young at heart) as pipkin and Animal Crossing, in a PORTABLE, beautifully-designed console with controllers that beat the Xbox monstrosities hands down.
"The Xbox is a great piece of tech. Real gamers know it. That's why in the states it's outselling the Game Cube"
Implying "Real gamers" only live in America? How do you figure that? Also, the Xbox is basically a computer, that's not exactly innovative. There are few attempts at miniaturisation, it has design flaws (eg, inadequate cooling).
We hear a lot about Halo and how we should buy the Xbox to play it, rather than wait and see it on the PC which it was originally designed for (and play it with a mouse and keyboard, the way it was meant to be played) But if people haven't brought the Xbox for that title by now, they are unlikely to do so for Halo 2, imo. The Xbox needs more kickass games like Halo in more catagories to win people over.
You misunderstand the dumping law. Basically you cannot sell the same item in the US as another country and have a huge difference in price. So if Nintendo decides to "dump" in the US it's gamecube for $50, they would have to sell it for an equivelant amount in Japan to not be considered dumping. So that means they can take a loss selling in the US if they also take a loss selling in Japan, but they can't sell in Japan for $100 and in the US for $50.
Revenue and Income doesn't take into consideration R&D costs. Just because manufacturing costs of software is low (this doesn't apply to MS) doesn't mean R&D is also low. Recent news has stated MS is boosting R&D to $5.2 Billion for fiscal 2003.
MS stated they were going to spend $500 million in advertising during the first year. The numbers you're looking at now are related to what, the current quarter? (Lost $177m in 3 months ended Sept 30th.)
When do you think they spent most of that $500 million? That's right, the launch events, the pre-release hype, and everything leading up to that first day. (Think of all of those campus tours and giveaways and what not.)
This is talking about the losses of the box for the most recent quarter. Marketing expenditures for the XBox have decreased dramatically since then.
In fact, losses accelerated when they clipped $100 off the price tag. They've managed to do some work to decrease the cost of the box since then but nowhere near a 33% cost reduction.
--- I wish I could hear the soundtrack to my life. That way I'd know when to duck.
Many of you seem so surprised by this per unit loss yet every cell phone company in North America "subsidizes" phone handsents - creating such a loss. Do you think the cell provider gets your phone for 9.99 ? Do you know why GSM phones in Europe at generally start over US$200 yet in North America they are $19.99 with a contract? This is a common practice in many service industries, broadband internet providers do the same. They subsidize the modems and other hardware - wireless providers do this to such an extent that many have limited growth based on capital available. Anyone who thinks this is abnormal or illegal is not aware of common business practices as the list of examples is immense.
Under the original Sherman Anti-Trust act, being a monopoly was punishable by breakup. Only later was the law changed to allow "good" monopolies.
Compare the current MS situation to the Micron/Hynix court cases recently. Micron is wanting the Feds to punish import of Korean ram because the government of Korea has bailed the memory maker out with tax breaks, bank loans, etc. Just like the US govt bailed out Crysler several years ago.
By the Feds not acting Punitively, and denying the "fruits of the crime" they are allowing the same thing to occur here. But is is a US company so I guess that's ok. Just too bad Uncle Sam's not getting his taxes out of 'um.
I'm sorry, but this is a pet peeve of mine. Every idiot in the world speaks authoritatively about dumping when they have no idea whatsoever what it actually is.
Here's a hint: "Selling a product at a loss" is not dumping. Not even a little bit. If you produced a product and gave it away for free, that still wouldn't be dumping.
Dumping is very simple: It is selling a product in a foreign market for less than you normally sell it for in your domestic market. If you don't believe me ask the World Trade Organization. So unless you believe that MS is selling the Xbox cheaper overseas (hint: they're not), MS is not dumping.
You may now all return to your ignorant, dogmatic lives.