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Microsoft Games Losses Down, Still Substantial
Even though sales are up on the operating system side of things, Microsoft's games division is still struggling. The Entertainment and Devices division lost $315 million, with sales slipping some 21 percent. That's 22 percent down from last year. The quarter overall saw $929 million, down 21 percent over last year during the same quarter. "Microsoft says the drop in sales came primarily because of decreases in the sale of Xbox 360s. During the quarter, the company shipped a half million consoles, as compared to 1.7 in the third quarter of 2006, that being the first full quarter in which Xbox 360s became available. Sales of Xbox and PC games decreased 44 percent over the company's first three quarters to $393 million, which the company puts hand in hand with the decrease in console sales."
This console was released in November of 2005, so I'm really not sure how 3rd quarter of 2006 was the first full quarter they became available.
Is it normal for game divisions a year+ after their new console is released to still be in the red? Given Nintendo recently just reported record profits and Sony's Playstation division is still hemorraging money, it seems like Nintendo's on track to be the last man standing.
What's even more nuts to me is that with all the Live Gold subscribers they're still not making enough to offset losses. Are they still hedging all their bets on Halo 3?
Eggs in 1 basket much?
More Twoson than Cupertino
This is an interesting problem for Microsoft. Yes, we know - they can burn through this money and not lose it, they can take billion dollar losses every year on the Xbox and not care, blah, blah, blah - but sooner or later, profits *do* matter to your bottom line.
You don't really know how it affects their bottom line until you see the whole picture. All of their side business - how much money it made them in.. Windows sales? It's not so obvious is it.
Integration and convenience provides a natural lock-in effect. Microsoft knows that the way the industry is going, its Windows application lock-in is weaking last few years, and it's a trend that'll continue in the future.
What they do, all the time, is create plenty and plenty of auxiliary businesses that act like pathways leading in one way or another, to Windows. They can lose billions from XBox 360 every year and not care, but NOT because they've got money to waste, but because it helps them support their Windows market share.
It's similar to what Google, is doing last few years too. In lots of their free offerings they don't serve ads, Gmail pop3 access, Google News, Google Desktop Search, Picassa etc. So they don't turn profit there, they lose, because there's development and deployment cost for all this. But one way or another, indirectly, it brings you back to searching in Google more often, or watching their ads, which helps their bottom line.
One thing to keep in mind is that the Xbox360 is not just a game console, but basically the PC for the living room. You already can buy movies via XBoxLive and things might expand quite a bit in that area in the future. So the thing goes beyond games and that might be why Microsoft is willing to take some loss on the thing, since the "living room PC" is still a mostly unconquered market waiting for somebody to take it.
How, in this day and age, can a website have such a short limit on the subject line for a post?
Anyway, nearly a year ago iSupply claimed that Microsoft were making a profit on each console sold. This figure has been repeated ever since then, especially in relation to the PS3's huge loss per console. Yet the figures were weird, the console hadn't changed, no cost reductions applied, and iSupply thought it had gone from a $150 loss per console to a $70 gain. But people were very happy to accept this figure.
Now Microsoft's gaming (and music) division has made a $300+m loss for 500k sold, and presumably they're getting profits from online use, the games themselves (the attach rate is rising), and add-ons. Of course the Zune and other products are dragging them down too, and there's wages and future developments and all that...
Also 500k sold in a quarter, albeit a quiet quarter, is appalling at this stage in the game. You would think that if Microsoft COULD drop the price, they would have, to stimulate demand. But they didn't.
So in conclusion, I suspect Microsoft are still making losses on the 360 console, probably in the $100 per console ballpark. 65nm shrinks are really required - cheaper chips, cheaper cooling, cheaper power supply. I expect the 65nm introduction to coincide with a $50 pricedrop, and a static loss/console rate.
The 360 is supposed to be making a profit. If the estimates for the frequency they would need replacing had been correct. It's that, and the lower-than-expected sales numbers that caused the problem for the machine.
But yes, a dead-in-the-water Zune and associated marketplace are a big factor, too.
"I Know You Are But What Am I?"
since the "living room PC" is still a mostly unconquered market waiting for somebody to take it.
:) I want appliances that just do their thing, and do it well, and for a reasonable cost. There's a reason why so many people have DVD players. a) It's cheap and accessible. b) it's dead simple to use. c) There's easily accessible content that can be purchased or rented
Who says there is a market? Small niche market so far, what happens if it stays that way? HP has already stopped making their "living room PC". Maybe they have better foresight than others? I know from an anecdotal stand point, there's no market for such a device in my home
AirSpeak - http://itunes.com/apps/AirSpeak
Ha...I think they'd rather be Sony. Bad press and all, the PS2 has the largest install base, is still wildly popular, has hundreds of quality games, and is selling for 2 to 3 times what is costs to manufacture. The PSP is moving units and making money for the company, and the price of blue lasers just dropped, creeping the company closer to turning a profit on the PS3.
Every game company outside of Nintendo loses initially on a console, the hope is to make it up in licensing and longevity of the console to reduce manufacturing costs. Sony's game division has done that in spades over the years MS has yet to make a dime on the Xbox or Xbox360, (the object of these consumer products is to indeed make money you know) a lesser company would have gone bankrupt and bowed out of the game long ago.
Microsoft is embattled in a war for the entertainment market. They've won the office, but they're getting their asses handed to them in the living room and bedrooms of the world. Companies like Sony, Nintendo and Apple are vying for a huge chunk of change that's spent on music, movies and games. A chunk Microsoft wants a piece of.
The XBox is their foot in the door. It's not going to make Microsoft the dominant force in our living rooms, but with consoles taking on a more PC-esque feel they have every indication that their being left behind in a big way. If they don't do something, anything, to get themselves into the market now then when the tide turns and the choice for a home computer isn't between Dell or HP but a PS3 or a AppleTV, Microsoft needs to have their chips in place to have any stake at all in the new landscape.
And for that, they're willing to lose the few hundred million a quarter in the short term.