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Xbox 360 To Profit Next Year, Says Bach
An anonymous reader writes "Robbie Bach, president of Microsoft's entertainment and devices division, has stated he expects the company's console business to finally break even some time in 2008. After years of losses from the games division, this would be a significant breakthrough for Microsoft's efforts in the games industry. '"Xbox is the hardest piece of consumer electronics hardware to produce in the world, no debate," he said, admitting that "costs are a little higher than we'd like." Microsoft doesn't expect to make a profit on hardware alone, but "we'll probably be gross margin neutral on that over the life cycle of the product, and try to break even on that."'"
Should it be news that a company is going to break even or start making money on a product line?
I understand the loss leader strategy, but it seems a little insane that a company has to wait several years before they can start making money on a product.
Nintendo seems to be the only company who is actually generating a profit from their system. And the demand is still so high that they predict it'll be selling out like hotcakes till 2008.
I wonder if MS and Sony are learning anything from this... Not to say that breaking even would be a major financial loss to (especially) Microsoft, but are they really concerned one way or another about this?
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... their games division is going to make +$5 billion between now and next year? I think he meant to say "in 2008 we expect that we will stop hemorrhaging cash out of every orifice."
...I have to admit, they've made a lot of smart moves getting into the console industry. The original XBox faced many difficult challenges in gaining sales. However, they learned much from where things went wrong, and came out strong with the launch of the XBox 360. Perhaps their biggest advantage has been the availability of the XBox 360 at retailers during the times of Wii and PS3 shortages. Even if they haven't made a profit up to this point, the amount of market share they've picked up along the way leaves them with a very bright future.
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Microsoft and Sony are learning something this generation, mostly that throwing the most powerful hardware you can buy at the consumer sells systems, but not at the rate you could be if you lowered your costs. I think we'll see a change in at least one of these juggernauts next round.
As for profiting, good for them, but seriously, just keep delivering good games and people will buy your system. I don't own an Xbox 360 but there's a few games coming out this year (GTA, Halo, Mass Effect, Burnout) that have me considering. I've owned a Wii, and it was great, then the supply of games I was interested in fell off, so I sold it to my brother in law. I'll probably buy another when the games I want to play start coming, mostly just Smash Bros. at the moment.
Reviewing just the first hour of video games.
I recall reading an article a short while ago that suggested one of the main reasons that they're currently not profitable is because of the extended warrenty that they offered and the number of console replacements that they've had to make. I don't know how prevalent the problem is, but I've heard stories of some people having to send the console in for repair three or more times. I'm not sure how much of this is true, or if it's just Sony or Nintendo fanboys trying to rip on Microsoft.
I do believe that the main problems are faulty DVD drives that result in a scratched disc due to a missing component in some of the drives by a certain manufacturer and either a solder point failing or some component on the motherboard becoming unseated after the board warps slightly due to cooling related issues. I don't know if the Elite solves any of these problems by adjustments to any of the components, but I'd like to think that as they transition to 65 nm chips, they'll solve some of these other issues as well.
I haven't seen any hard figures, but I'd have to say that based on what I've read, the Xbox 360 is running into some of the same problems that the PS2 had, namely cheap hardware that fails early in the products life cycle. The disc drive on my PS2 has recently started to go bad, but I've had it for several years, but if it had happened early on Sony wouldn't have covered it. At least Microsoft is providing some good customer service. I think that everyone could save some money, however, if they'd spend more time designing and testing the product to begin with and not buying the cheapest parts available.
Well, things are going according to plan it seems. Microsoft knew they'd lose a lot on the Xbox generation but would position themselves for profit in the next, and that's exactly what they've done.
Microsoft has LOTS of money, and can afford to make long-term investments that are in the billions-of-dollars range. Keyword: investments; they are not just throwing money away here. Their business model seems to be working, so good for them. (As long as it means I get to play good games on my 360 ^_^ otherwise I don't care)
I wonder what position SONY is in... is SCE looking to break even on the PS3 at *any* point in the future? Maybe, maybe not... the money they've spent on marketing alone, coupled with the losses on each console... the PS2 is probably covering a lot of that but I doubt it's anywhere near all of it.
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Every year whoever is the latest person to be running the Xbox stuff says 'next year we will finally break even.'
The failure rate on Xbox 360s somewhere in the 30-40 percent range - and right from the latest quarterly report Microsoft indicates that having to extend the warranty period for current 360 owners and the cost of replacement units is a huge cost. The move to 65nm has been moved back to later this year and it remains to be seen if that will finally keep the 360s from failing. It has been a year and a half and from the failing 360 Elite units already it is clear that Microsoft still doesn't know what is wrong or how to fix the hardware problems with the system.
So what that means is by the time the hardware refresh hits the market there are going to be two years world of 360 units out there that are going to continue to have the red rings of death problem. That is going to be a gigantic and continuing source of losses for the division.
And then there are the moves to create a class action lawsuit for the 360 hardware defect problems. The insane prices for peripherals and the 50 dollars a year are lessing the financial blow but even that most likely won't get the division to the break even point by next year. If the break even point doesn't come before the next couple of years Microsoft is going to have a tough choice to make as they would need to start ramping up the very costly process of designing and putting in motion the next Xbox hardware.
With the dramatic drop in BluRay drive prices and Sony already moving parts of the PS3 to 65nm and quite possibly have the entire PS3 moved to 65nm before Microsoft does later this year you could very well see Sony breaking even before Microsoft does and actually paying less to manufacture the PS3 with its much more advanced tech. Sony most likely will be paying roughly the same price for a BluRay drive as Microsoft does right now for the much smaller capacity DVD drives by this time next year.
The execs up in Redmond are going to have some tough decisions to make about the future of the Xbox project. Anyone who follows the various Microsoft employee message board can attest to just how unpopular the Xbox project is with the other divisions at Microsoft.
Correct me if I'm wrong, but aren't they making a huge pile of cash off of XBox Live? I thought the idea was to sell the console below cost, and make money off of games and services. So whether or not the hardware is making money isn't really news?
"A vision does not take 7 years to finally break even on a yearly basis after you have lost $6 Billion."
First off, your numbers are off. The classic xbox launched 11/01. Work may have started earlier but you don't earn sales until the product comes out. Profitability is expected in 06/08, not 11/11. So you are off by 3.5 years when you say it took them "10 years" to make a profit.
Also, the last stat I saw said an estimated 5 billion lost, not 6 billion. Finally, the hardware is now making a profit for them, and the chip size reduction will only further that.
Even using your numbers of $6b over 10 years, that is only 250m per quarter. That's basically nothing to MSFT. If they can invest pocket change and get big returns down the road, why not?
"So investors would be right to be angry at Microsoft."
The last I checked, investors are pretty darn happy with MSFT's stock as a whole. As of today, they are within $1 of their 52 week high.
Maybe you should check your facts. I agree with above. It's typical US sentiment. Where is my instant gratification? I didn't get rich quick, any setback is certain doom, kill the show after two episode if the ratings don't meet expectations, etc. etc.
Kindly provide well founded evidence for the following of your claims:
- 30% - 40% failure rate of the XBox 360
- That failing elite units are a common occurance, more so than just the standard defect rate for any other electronic hardware
- That Bluray production prices have dropped "dramatically"
If you'd kept out the pro-Sony stuff, you could well have squeezed your pro-PS3, anti-MS troll post through, however the pro-Sony stuff is absolutely laughable, to suggest the PS3 has any chance at all of breaking even in the next few years - even if it starts selling is a complete joke. The fact that the PS3 loses far more per unit sold than the 360, and sells far less games per-unit as well as not making anything from it's online service demonstrates how utterly daft your claim is.
I'm not sure what you're on about when you suggest the 360 has extremely highly priced peripherals either, the 360 controllers are actually the cheapest out the lot, here in the UK a 360 wireless controller can be purchased for £19.99, a Wii-mote for £24.99 and a PS3 Sixaxis for £27.99. The 360 HD-DVD drive can be purchased with the premium console together for less than the PS3, in fact the only addon for the 360 that is rather extortionate is the wireless adapter which is a fair point.
XBox live is indeed pay for, congratulations on recognising that, but it's also a much better service, the term "you get what you pay for" really couldn't be more appropriate, pay nothing and get shite, pay something and get a decent service, seems like a fair compromise.
You do have some valid points, but unfortunately they're points that don't have anti-PS3 counter-arguments. It's not as if the PS3 is exactly default free when it also suffers overheating issues (which I'd argue is worse, at least MS' consoles outright fail so you can get them replaced, good luck getting an intermittently crashing PS3 replaced - you just have to live with it).
The irony of your closing statement is rather amusing, of all the players in this generation that are having to look at closing shop in the console business it is undoubtedly Sony, with the uncertainty as to whether they can turn a profit or even aquire a feasible userbase. Whilst Microsoft is starting to make money with the 360 and their general gaming division, Sony is beginning to lose it, and lose it fast.
You think its easy to build dvd drives that loud? Its not like they just buy drives off the shelf, none of them can meet their required noise level. They have to go to each dvd drive manufacturer and pick through their defect bin by hand to ensure that every 360 has that trademark sound. And we 360 owners reap the benefits. Clearly, my 360 must be super fast and powerful if its louder than my car.
"Xbox 360 To Profit Next Year, Says Bach" It's always good to see a world famous musician forecast when Microsoft's XBox division will become profitable.