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Xbox Division Posts Loss of $1.9 Billion
Just when reduced manufacturing costs were beginning to turn Microsoft's Xbox division around, the weight of the warranty guarantee came crashing down on the company. The Xbox division of Microsoft Entertainment posted a loss of $1.89 billion for the fiscal year. Overall the Entertainment division did well, as sales of the Zune, consoles, and Xbox titles helped push revenues higher. Just the same, as Next Generation reports: "The fourth quarter in the EDD was down, with operating losses increasing 183 percent to $1.2 billion, again due to the billion-dollar-plus warranty charge. Revenues dropped 10 percent from a year ago to $1.16 billion due specifically to 'decreased Xbox 360 console sales.' Microsoft shipped 700,000 consoles during the quarter compared to 1.8 million for the same period a year prior."
... Can I buy pot from you?
Being first to market with an unstable platforms seems to be NOT how to run a business. Taking notes....
Someday, I'll have a real sig.
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Microsoft is in a tough spot with this and they did what they had to do to save the X-box brand. They had two choices, 1) save money and not do anything about the red rings of death and lose the advantage they have over the PS3 (an actual installed base) or 2) put out the billion dollars. I'm glad they did spend the money, to me it sounds like they do actually care about their product. And yes, I'm a 360 owner, and yes, I've had to had mine shipped back TWICE, both for free.
I think it's adorable that you think those are two different things.
-Peter
I'm sorry, but when a rather small DIVISION of a company can post a LOSS of $2Billion and not even phase the company, it's a sign that, well, some companies are simply too big or too comfortable, and normal capitalist/market forces simply are no longer working...
You're completely right, and as such this would be a complete non-story except that this has been going on for six years. At what point does it stop being short-sighted to question repeated 9+ figure (before the decimal) quarterly losses on a product? Could any company other than Microsoft have afforded to maintain "loss leader" status for so long? Could any company have avoided a lawsuit by their competitors over it for this long? The story goes out of the way to make it look like it's the warranty thing that is pushing them into the red, but last I checked $1.1 billion was $700 million dollars less than $1.8 billion... So they would have been eating a $700 million dollar loss even without the warranty thing. That's still a $350 loss per console even after accounting for the "profit" on the high attach rate.
Anytime you're breaking into a new market, especially one that has as many lock-in features as the video game market, you're going to lose money.
How is the 360 breaking into a new market? They broke into the market with the original Xbox. The 360 is supposed to be a mature platform at this point - Xbox Live ability, huge games library, multimedia features. The fact that not only did they ship fewer consoles than last year and lost money while doing so definitely can't be excused by them "breaking into the market." Instead, it looks like in their rush to dominate they seemed to favor quantity over quality, and even lost on the quantity part.
The funny part is that the criticism of the PS3 is that it's a high price for a console. And yet, it's a damn good piece of hardware. So I guess you get what you pay for?
The 360 warranty fiasco was approximated at a $1 billion loss, just from following the link he listed, but now we see:
1) A nearly $2 billion division loss for the quarter.
2) Revenues dropping 10%
3) Xbox 360 sales less than half the level they were a year ago
Clearly this leads to "Overall the Entertainment division did well", while Sony was ripped apart for its $2 billion loss.
I own all three consoles and don't take a particular side, but there's a lot of spin in this post.
Actually, it's more complex than that. By earmarking the money now, Microsoft is avoiding the problem impacting future returns. i.e. It would suck if in 2 years Microsoft is going gangbuster on sales, but its quarterly earnings show a loss thanks to the extended warranty two years ago. By doing it this way, Microsoft gets the loss out of the way in a single quarter, thus providing themselves and investors with a better understanding of how they're doing in the future.
Accounts payable vs. receivable may seem like the best accounting method, but in many cases it's not. Payables vs. Receivables is always in a state of flux, so you tend to try and account for known quantities instead. To a certain degree you do this yourself (or at least SHOULD be doing this!) when you record checks you made out in your checkbook. The balance reflected in your checkbook is entirely on paper and does not necessarily represent the actual contents of your account at any given point in time. The more checks you make out, the less likely the two sources are to be in sync. Which isn't really a problem as at the end of the day you still have the same amounts of money going in and out.
Javascript + Nintendo DSi = DSiCade
Since Zunes are actually sold at a profit, even selling one "pushes revenues higher".
The cake is a pie
Of course the story says "year" but my math assumes "quarter"... So my $350 number has to be divided by at least 4 to be accurate. Feel free to mod me down as "-1, Incorrect".
I'm no big MS proponent, but I don't have a problem with this as long as they don't successfully buy themselves a monopoly in the console/home entertainment industry
Which is exactly what they're in the process of doing. This division has lost billions and never made a profit. Which means, of course, everything from the original XBox to the Zune is sold at a loss and paid for by Vista and Office profits. Leveraging one monopoly to create another is conceptually illegal, but in practicality there's nothing really illegal about what they're doing, and gamers seem to be falling for it. Soon the console market will be like the desktop operating system market, with XBox (running a derivative of WinNT) subsidized into dominance and PS3 (running Linux) relegated to relative obscurity.
E pluribus unum
That's why they're making money, I believe -- they're not really advertising the thing. People who are generally anti-iPod, for whatever reason, know about the Zune. And some of them buy one, because it's got a nice screen and isn't an iPod.
I think MS knows that it can't really overcome the iPod at this point, but if it doesn't advertise them (or advertises very selectively), people will buy them and they'll not have to spend huge gobs of money trying to beat Apple's advertising.
Forgive my ignorance as I've only taken an intro economics class. I thought as a convicted monopoly, Microsoft has more rules imposed upon them than other companies. They've made billions upon billions of dollars with their Operating System and Office products. Now with that money and monopoly in one market, they seem to be using predatory pricing to capture a new one. They have the ability to lose more money than their competitors, to the point where they may even knock a competitor out of the game (Sony). They still haven't covered their expenses from the first Xbox (development, marketing, etc), let alone the Xbox 360.
Don't get me wrong, I love competition. It just seems they'll artificially lower prices to the point where their competition won't be able to compete. It is a bit of an oversimplification, with Sony shooting themselves in their own foot with the disaster the PS3 has become. Amd with Wii sales, though, this tactic may be offset.
Anytime you're breaking into a new market, especially one that has as many lock-in features as the video game market, you're going to lose money.
As others have said, that excuse may have worked in 2002. It's no longer very convincing in 2007.
Video games were a new market for Sony in 1990. Didn't take them nearly that long to start turning a profit.
Additionally, reporting like this just promotes the same short sighted point of view of earnings and stock performance that we deride Enron execs for.
We deride Enron for breaking the law. Not for a "short sighted view of earnings."
I don't know how Gates and and Co. view the current performance of the 360, but I'm sure they are pleased that they've held their own against the PS3 so far, primarily because Nintendo is eating Sony's lunch.
At some point, the idea is to make money. It's not a popularity contest. If that were MS's goal, it certainly would be "short sighted" and worthy of derision. Presumably, they are in business to make money, not just so they can waggle their fingers and say "nyah nyah!" at Sony.
So far, their Xbox division has been run like a charity. And it's not getting any better. They've been saying they're on the verge of turning a profit for years now, and they still say it. Well, guess what? A $1.89 billion loss is not due to a $1.1 billion charge. Where's the extra $800 million coming from? Those are real and continuing losses outside of the reliability problems. Additionally, sales of the system are way down from a year ago, they've missed their shipping targets by 400,000 systems, and revenue at the division is down a commiserate amount.
Combine that with the reassignment of J Allard and the resignation of Peter Moore, and it's all starting to look a bit like a ship that, if it's not sinking, is at least taking on water and listing badly.
A company like Microsoft allocates $1 billion dollars for warranties. But that doesn't mean they will use that $1 billion.
Take for instance a stock I am following. BRLC (They sell LCD TV's Olevia brand). The company last year allocated $16 million for warranties; a cost for them. But they only used $4 million in warranties. Thus, the following year they posted a $12 million rollover profit. If XBOX quality control is better than expected, a good chunk of MSFT's $1 billion will go back into their own pockets. And will help them boost earnings.
Microsoft's SEC filing says--
Predatory pricing has a perjorative connotation. The term is usually trotted out in the case of a dominant market leader in a market with low amounts of competition trying to squeeze out a fresh competitor by suffering temporary losses. Here it's a relatively fresh competitor trying to squeeze /into/ a market with low amounts of competition by suffering large losses. The carcasses of dead consoles line this industry, it is extremely hard to enter.
http://en.wikipedia.org/wiki/Loss_leader
Is what is being done. Predatory pricing is an established market power temporarily reducing their prices to loss levels to keep out competition. The difference here is that the fresh competition is taking loss levels first, in order to become competitive, which is good for the market overall(but risky for the company doing so, which is what I mean by those corpses).
And even with MS's huge pockets propelling them to #1 early this generation, it looks like Nintendo will be passing them by the end of the year, and leaving them in the dust by the end of the generation, and the company has never adopted a loss-lead strategy.
With 3 major players, gamers have it pretty good actually with the increased competition. The console gaming industry already has high levels of product differentiation which is sort of like a partial monopoly in that a company is granted some level of market power due to idiosyncracies of their product. You miiight be able to substitute between a PS3 and an Xbox360, but substituting to or from a Wii is much harder to justify. The three are not directly equivalent because of product differentiation, so they are able to wield power due to this inelasticity.
No, they need about $8.4 billion dollars in profit for the console division to recoup it's losses. As I understand it the consoles (including games, live and peripherals) themselves have never turned a profit, though the entertainment division has had at least one miniscule profit.
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That 8.4 billion comes from:
By 2005 the Xbox had lost $4 billion.
(http://www.forbes.com/home/technology/2005/09/12
In 2005 the entertainment division lost 391 million.
(http://www.microsoft.com/msft/earnings/FY05/earn
In 2006, the Xbox 360 lost $1.26 billion
(http://www.videogamesblogger.com/2006/10/13/micr
In 2007, Microsoft has lost $2.76 billion
http://www.microsoftmonitor.com/archives/2006/10/
http://www.cinemablend.com/games/Microsoft-Loses-
http://www.gamesindustry.biz/content_page.php?aid
Now there might be some overlap between Fiscal 2005, and the initial number but given the number's $8.6 billion, even an overlap of $200 million is insignificant to the final number. It is highly unlikely that the Xbox group will recoup those losses in this console generation.
Fanatically anti-fanatical
Atari loses 500 million in 1983, and Warner panics and promptly dumps the division. Even adjusted for inflation, Microsoft is losing more than this and are sticking it out? Amazing times.
Just to correct myself, I double counted Q1-3 for 2007, so that's only a $7.6 billion dollar hole. I misread the $1.9 billion loss as Q4 instead of end of year.
Fanatically anti-fanatical
Sony is not dead or dying or even fatally wounded. The PS3 is not selling as bad as some make it out to be. Take a look at some charts.
The PS3 is selling about the same as the X360 if you align the launch dates.
The PS2 (how many years old is that now? Seven?) is selling the same as the X360 each week. In other words, if you think thtat MS is about to knock Sony out of the market, you must be speaking from the far future or coming from a different dimension or something. The PS3 is not a disaster. It's not the success Sony wanted it to be, but if you think the X360 is doing great, then the PS3 is right behind it.
Stop Global Warming!
Just say no to irreversible processes!
I'm trying to decide if you're defending accounting practices or making an insightful point about the nature of money. Care to elaborate? I feel like you've got more to say and I'd like to hear it.
It seems to me that if the point of language is communication, then accountants (or perhaps more accurately, reporters who share accountant-speak outside its usual context) are a blight upon it. For example, if I say I've lost $5, I mean I had $5 and now I don't have it and besides, I've nothing to show for it. If I buy something for $5, I do not say that I've "lost" $5, I say that I've "spent" $5. If I'm being insufferable and aloof, I might say I had "expenditures" of $5.
But if you post an "operating loss" of $100, what does that even mean? My deductions were more than my income... which means my expenses were more than my revenues. But accountants basically exist to shift the numbers; instead of saying "this warranty plan is going to cost us $X over the next five years," MS writes on a piece of paper "lost $1 billion" and suddenly they're knocking on a $2 billion loss. My (limited) understanding of various financial laws suggests that deciding where and when to report your losses or gains is perfectly normal and somewhat regulated. While I couldn't tell you how, this "accounting magic" (or perhaps I should call it monetary time travel?) probably helps with economic stability, et cetera.
I just see it as also having a seriously problematic effect on the accurate and meaningful discussion of certain business ventures. As near as I can tell, MS has been working for years on this little console gaming project of theirs, and has yet to show a true profit from the endeavor. Maybe MS is good with that, maybe they want to control everyone's living rooms the way they have monopolized everyone's office space, and maybe they want it so badly that no expense is too great. But as a publicly traded company--and perhaps more importantly, as a company once recognized as a monopoly--I think we need to look at MS more carefully, and make it a point to cut through their accounting BS and discern exactly how their business is running and exactly how they are justifying the fiscal hemorrhage that is their entertainment division.
Because even with my limited knowledge of accounting, it looks to me like they are engaged in anti-competetive behaviors, basically throwing their OS and Office cash down a big hole in an attempt to hit their competitors where it hurts.
So, they're not feeling as much pressure anymore, but the pressure from Sony and Microsoft pushed them to take a risk and produce the Wii, much to everyone's satisfaction.
PSX was the old codename inside sony for the device officialy known as the PS1. Some magazines continued to use the PSX moniker after the release to prove how hardcore they were. "We were fans when we saw the prototypes" sort of thing.
But a few years back Sony released the PS2/DVR combo device called the PSX, but it wasn't released in NTSC U/C territory.
Actually, you can smoke pot with a pipe. Uhm... I mean... at least so I heard.
It's shocking, simply shocking, that Microsoft's hardware products follow the same methodology as their software products: ship it now, fix it later.
All opinions presented here aren't mine.
Who cares? As a consumer, as long as the product is good and comes at a reasonable price, then Microsoft's bank account is Microsoft's problem-- not mine.
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There are plenty of people who aren't consumers that care; investors, etc... But consumers should care too. Look at what has happened to innovation in other markets in which Microsoft has purchased their way into market share leadership. Assuming that Microsoft actually cares about the profit from a successful gaming division, consumers of gaming hardware shouldn't be looking forward to a stagnant future in which Microsoft has a stranglehold on the market. And that's a best case scenario. Worst case is that Microsoft doesn't even care about making a profit from this or future Xboxes, and they simply wish to use it as leverage to license their entertainment software tools(DRM, codecs, Embedded Windows, DirectX, etc)... In that case Microsoft's bank account doesn't have a problem at all, but yours will if you have any desire to use digital media.
Sure, nobody sees that happening this console generation because Nintendo's system is so popular. But if Microsoft makes the gaming market sufficiently unprofitable that Sony makes their exit this generation, they can turn their attention to Nintendo next generation. And you can be sure there won't be any new entries into the gaming console market now that Microsoft is in the game. There simply aren't any companies big enough to get a foot in the door.
If that's what you care about, I'd be a ton more worried about EA in the games industry than Microsoft. Sure, Microsoft's not small, but EA is huge-- and they have exclusive contracts with a disturbingly high number of sports leagues-- and they've attempted hostile takeovers of competitors in the past-- and they own 70%+ of the industry now.
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Trust me, it will blow you mind
Sorry to be pedantic, but PSX was the codename for the CD-ROM add-on that Sony developed for Nintendo to use with the SNES. The deal fell through, so Sony brought it to market as the Playstation. The PSX moniker not only stuck, but was somewhat accurate. :)
Karma: Chameleon (mostly due to the fact that you come and go).