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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."
Actually its funny, but launch boxes appear not to have as many problems as boxes made in 2006.
You mad
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.
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
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.
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.
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!
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.
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.
Comment of the year
Odd I got moded informative, I also didn't type "I think" like I meant too.
Anyways, I have anecdotal evidence too.
At my college our "games club" has about 21 360 owners, 9 got theirs at launch (day 1 till late about December 05), 8 of them got their boxes at various times from February till around august 06, the other 3 got their boxes this year.
2 people who got theirs early on (1st run, maybe the second run) have had theirs break. The ones who bought their boxes later on, all but one poor bastard has sent there back, most of them more than once, always the 3 rings of death issue. 4 of them got it back and sold their boxes in disgust. The first problems started happening in july of 06 for our little group.
Not to mention the fact that I constantly hear see online "My launch box is still just chuggin away." or things to that effect.
I'm just finding it funny. One guy in our group is convinced it is something to do with the Solder used and RoHS compliance. I think its a possible reason, but MS and its manufactures should ahve had plenty of time to solve the problem.
You mad