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Xbox Division Posts Loss of $1.9 Billion

Zonk posted more than 7 years ago | from the quite-a-few-boxen dept.

XBox (Games) 150

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."

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New consoles suck (-1, Troll)

Gizzmonic (412910) | more than 7 years ago | (#19928811)

I am sticking to my Sega Saturn. Microsoft Xbox 360 has a design flaw which warps the motherboard, making it unusable. While your motherboard is warping, I'm using a pipe to warp-IN THE GAME. And it still works after 20 years!

Re:New consoles suck (3, Funny)

frakfrakfrak (1049468) | more than 7 years ago | (#19928837)

... Can I buy pot from you?

Re:New consoles suck (1, Funny)

Anonymous Coward | more than 7 years ago | (#19929055)

He clearly states he's using a pipe, so I don't think it's pot that he's working with.

Re:New consoles suck (4, Funny)

LKM (227954) | more than 7 years ago | (#19931195)

Actually, you can smoke pot with a pipe. Uhm... I mean... at least so I heard.

Re:New consoles suck (0, Offtopic)

Gizzmonic (412910) | more than 7 years ago | (#19929369)

No, but I have some mushrooms you might be interested in...

No love for Animal House quotes? (1)

wezeldog (982156) | more than 7 years ago | (#19929507)

Offtopic?

Re:New consoles suck (0)

Anonymous Coward | more than 7 years ago | (#19931617)

And it still works after 20 years!
I hope you don't really think your Sega Saturn is 20 years old...

This is clearly a sign. (5, Funny)

typobox43 (677545) | more than 7 years ago | (#19928947)

Overall, Microsoft announced revenues of $13.37 billion for the quarter and $51.12 billion for the full year, up 13 percent and 15 percent, respectively.
Microsoft's trying to fit in with the "cool kids" now.

Re:This is clearly a sign. (1)

RamblinLonghorn (1074873) | more than 7 years ago | (#19928971)

I immediately regret using all my previous mod points. This needs to be modded funny.

seems being first isn't what's important (2, Insightful)

tomstdenis (446163) | more than 7 years ago | (#19928953)

Being first to market with an unstable platforms seems to be NOT how to run a business. Taking notes....

Re:seems being first isn't what's important (4, Informative)

Broken scope (973885) | more than 7 years ago | (#19929015)

Actually its funny, but launch boxes appear not to have as many problems as boxes made in 2006.

Re:seems being first isn't what's important (1)

NoodleSlayer (603762) | more than 7 years ago | (#19932375)

Erm, considering how much noise there was of launch 360s failing. And considering that of my friends with Xbox 360s, the two that have broken, one was a launch box, the other was second wave made in December 05.

So while it's just anecdotal evidence, that's more then you have.

Re:seems being first isn't what's important (4, Interesting)

Broken scope (973885) | more than 7 years ago | (#19932691)

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.

Re:seems being first isn't what's important (1)

MaineCoon (12585) | more than 7 years ago | (#19932435)

My launch 360 just died with the Red Ring of Death. While I didn't play it regularly, I wasn't playing it that much when it started to fail, compared to when, say, Dead Rising and Viva Pinata came out. Hopefully it'll be repaired and back before Bioshock comes out.

Re:seems being first isn't what's important (3, Insightful)

jma05 (897351) | more than 7 years ago | (#19929121)

Why not? It worked with Windows.

Re:seems being first isn't what's important (1, Insightful)

Anonymous Coward | more than 7 years ago | (#19930507)

I'm confused at what your point is, because Windows wasn't first at anything. It wasn't the first GUI environment. It wasn't the first OS to support true preemptive multitasking on the PC. It wasn't the first OS to support virtual memory on the PC. It wasn't the first OS to support the Internet on the PC.

Windows wasn't first to anything, really.

What it was is cheap enough and popular enough to crowd out any competition.

In fact, if anything, the console analog of Windows would be the PS2 - it's not the best there is, but it's good enough and cheap enough that it has a large market share. The closest I could think of to the "Windows" console for the current generation is the Wii, although there are obviously flaws in that analogy.

But ignoring the controller, the Wii fits the "cheaper" and "good enough" qualifications that helped Windows to win as the dominant OS.

Re:seems being first isn't what's important (2, Interesting)

jma05 (897351) | more than 7 years ago | (#19931527)

Not technology wise. But MS is commonly criticized to ship first and worry about fixes later. This generally seems to have worked for them, at least with software.

Re:seems being first isn't what's important (3, Interesting)

ravenshrike (808508) | more than 7 years ago | (#19931685)

Yes, but software can be patched. Hardware is a much more expensive endeavor to fix.

Re:seems being first isn't what's important (0)

Anonymous Coward | more than 7 years ago | (#19929835)

This, and the worlwide success of the Wii (which I happily own and would never trade for a Xbox or PS3) shows also that a truly innovative and damn fun to play platform can beat much more powerful ones. When it comes to games there's something that can't be measured in pixels or frames per second: it's the fun factor, that thing totally unrelated to technology that can make a 40 years old pinball more attractive than the most powerful PC out there. The Wii simply crushes any opponent in this context.

Re:seems being first isn't what's important (1)

lessermilton (863868) | more than 7 years ago | (#19929943)

We didn't have time to do it right!


I guess we'll have to take the time to do it over.

Re:seems being first isn't what's important (1)

thepcgamer (1130881) | more than 7 years ago | (#19930185)

So is it better to sell the box for $100 less and than pay the cost for fixing it up, or build it right the first time?

Somehow I got the feeling that the home consumer still looks more at the price tag in the store than what he is actually getting.
If you look at the sales charts you'd see that being first to market and selling a BAD product for a cheap price is the way to run your business.

Re:seems being first isn't what's important (2, Informative)

CastrTroy (595695) | more than 7 years ago | (#19931269)

How so? If YOU look at the sales charts [vgchartz.com] , you'll see that the XBox 360 is very close to being outsold by the Wii. I'm guessing by September that the Wii will be well ahead of the xbox360, and that by the end of the Christmas season, the XBox will be left in their dust. Seems to me like Nintendo has the right way to run your business, which is providing and entertaining product that almost everybody can afford and that is actually reliable. Also, having it work right out of the box is a nice plus. Having to buy a game on top of the system for XBox360 and PS3 makes them even less appealing.

New Markets (1, Interesting)

Rolgar (556636) | more than 7 years ago | (#19928957)

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.

Additionally, reporting like this just promotes the same short sighted point of view of earnings and stock performance that we deride Enron execs for. 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.

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, I'm glad to see another company willing to compete, which forces the companies I do buy from to try harder to earn my money. Thanks for that, if little else, Microsoft.

Re:New Markets (0)

Anonymous Coward | more than 7 years ago | (#19929169)

Hmm, Sony didn't have a problem breaking into the game market with the PS1. They're not exactly breaking into a new market now. They've been doing it for almost 7 years now.

Re:New Markets (1)

ZachMG (1122511) | more than 7 years ago | (#19929993)

and it wasn't the PS1 it was the PSX, remember the PS1 is the skinny one.

Re:New Markets (4, Informative)

CronoCloud (590650) | more than 7 years ago | (#19931181)

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.

Re:New Markets (4, Insightful)

ivan256 (17499) | more than 7 years ago | (#19929287)

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.


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.

Oops... (2, Informative)

ivan256 (17499) | more than 7 years ago | (#19929495)

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".

Re:New Markets (1)

Rolgar (556636) | more than 7 years ago | (#19931099)

Sure, Microsoft is losing money. But it's been pretty much accepted by everyone (except Nintendo) that when you launch new hardware, you're going to lose money earlier on and make some back later when you have a larger install base to milk for cash. But I think video games are chump change to Microsoft. But Microsoft and Sony aren't in this battle as just a video game system. Microsoft and Sony want to take out Netflix, Blockbuster, Cable company by turning their machine into THE TV/Home Theater and of the future, and rake in $30-$100 a month in entertainment subscriptions. These companies have time to wait, and they want to make sure they control the distribution channel that everyone will be using for entertainment content in 10 years. If this takes of, Microsoft would probably use a Media PC for folks that don't want a 360. Of course, Apple and Google, TiVo, and the cable companies are also preparing to compete for this as well. Again, a good thing as long as their are low barriers to switching, and most of the content is available through most systems.

Re:New Markets (1)

metamatic (202216) | more than 7 years ago | (#19931267)

But it's been pretty much accepted by everyone (except Nintendo) that when you launch new hardware, you're going to lose money earlier on and make some back later when you have a larger install base to milk for cash.

Yeah, but they didn't make money back later on the Xbox, and I can't see them doing it on the Xbox 360. I mean, last financial year (thru June) they had basically zero competition from the Wii and the PS3, so how on earth do they expect to do better this coming year when the Wii is already outselling the Xbox 3:1, and Wii software is already outselling Xbox software in spite of the smaller install base?

Re:New Markets (1)

Rolgar (556636) | more than 7 years ago | (#19931677)

Well, I'm just saying what Microsoft's plan is. If it doesn't work, or they fail in the execution, well maybe that's something Microsoft will have to deal with in a few years. But that doesn't mean it's a bad move. We as customers, and advertisers spend tens of billions per year to for us to consume content at home or in theaters. Microsoft is losing money now to guarantee having millions of pieces of hardware in place to capitalize on internet content distribution, if it should take off. Sure, they could try to compete to be profitable now, but all that is important to Microsoft is if they have the machine in your house. Is a 10 billion dollar loss good if it has a possibility of returning 100 billion in profit in the next 50 years? Getting that kind of an increase in revenue or profit is easy for a small company. For a company the size of Microsoft, it's darn hard. I admire Microsoft for having the foresight to do this 5 years ago instead of waiting and trying to buy in after TiVo or the Apple TV already owns the market. Not that I want them to win, but at least they are trying, which will push the market forward toward the electronic utopia we were all promised decades ago, even if they don't come out on top.

Re:New Markets (1)

king-manic (409855) | more than 7 years ago | (#19931317)

Sure, Microsoft is losing money. But it's been pretty much accepted by everyone (except Nintendo) that when you launch new hardware, you're going to lose money earlier on and make some back later when you have a larger install base to milk for cash. But I think video games are chump change to Microsoft. But Microsoft and Sony aren't in this battle as just a video game system. Microsoft and Sony want to take out Netflix, Blockbuster, Cable company by turning their machine into THE TV/Home Theater and of the future, and rake in $30-$100 a month in entertainment subscriptions. These companies have time to wait, and they want to make sure they control the distribution channel that everyone will be using for entertainment content in 10 years. If this takes of, Microsoft would probably use a Media PC for folks that don't want a 360. Of course, Apple and Google, TiVo, and the cable companies are also preparing to compete for this as well. Again, a good thing as long as their are low barriers to switching, and most of the content is available through most systems.

Myth: With the exception of Microsofts two machines and Sega's last offering no one has taken a loss on a console for any significant period of time. Nintendo isn't the exception they are the rule. MS is the exception. Also, nothing official about a loss has come out about the PS3 but the PS2 was sold at a loss only for the very first month according to Sony.

Re:New Markets (1)

fwarren (579763) | more than 7 years ago | (#19931565)

You're going to lose money earlier on and make some back later when you have a larger install base to milk for cash

Let me know when the XBox 1 install base hits that point

Then find me again, after the XBox 360 stops bleeding money (let alone making a profit)

Re:New Markets (4, Insightful)

Blakey Rat (99501) | more than 7 years ago | (#19931647)

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.

Re:New Markets (2, Insightful)

ivan256 (17499) | more than 7 years ago | (#19931843)

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.

Re:New Markets (2, Insightful)

Blakey Rat (99501) | more than 7 years ago | (#19931885)

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.

Re:New Markets (1)

ivan256 (17499) | more than 7 years ago | (#19931937)

It doesn't need to be either/or. They can both be cause for concern.

Re:New Markets (1)

kripkenstein (913150) | more than 7 years ago | (#19931873)

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?
Wrong perspective, I think. The reality is, Microsoft doesn't care about losses in its 'entertainment' division. It cares about overall profits. If the XBOX project helps maintain their other monopolies (meaning mainly Windows here), then it is worth it. For example, XNA helps bolster gaming on Windows by tying PC and XBOX development; ditto XBOX success gets more people developing for DirectX and less for OpenGL (and yes, I know they aren't the same category of tool, but you know what I mean); people buying movies via their XBOX keeps them from doing so through iTunes and perhaps buying an AppleTV. And so forth.

Microsoft can afford to lose $2 billion on 'entertainment' if it helps to maintain many more billions in profits from their other areas. Does the XBOX actually help that much? I don't know, but Microsoft apparently thinks that it does, or soon will.

Re:New Markets (1)

ivan256 (17499) | more than 7 years ago | (#19932077)

From Microsoft's perspective, I'm sure you're right. Even from Microsoft's investor's perspective, since I'm sure that the stockholders trust Microsoft to know what their doing given their track record... I do have my doubts that this has payed off for them in any manner so far, but the potential is certainly there.

But there are other perspectives. It is illegal in the US, and in most industrialized countries, to try and profit not by merit, but by making the market less accessible to your competitors. You can make tons of money that way, sure. And that's great for Microsoft. But it's not good for anybody else.

I have no doubt that you are correct, and that Microsoft sees this as a wedge to brace their Windows monopoly, and even as a means to establish new monopolies in the area of digital media technologies. But that's exactly what everybody without a huge stake in Microsoft should be concerned about. As somebody who enjoys games, and affordable access to non-pay-per-use digital media, I'm certainly concerned.

Re:New Markets (3, Interesting)

fistfullast33l (819270) | more than 7 years ago | (#19929305)

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?

Re:New Markets (-1, Flamebait)

mrchaotica (681592) | more than 7 years ago | (#19929809)

And yet, it's a damn good piece of hardware.

No, it had the potential to be a damn good piece of hardware. Unfortunately you can't access the GPU from Linux, so it isn't.

Re:New Markets (1)

Talgrath (1061686) | more than 7 years ago | (#19932625)

Holy crap! I can't play all the GREAT Linux only games on my PS3 like umm...well...uhhh....nevermind; stupid troll.

Re:New Markets (3, Interesting)

samkass (174571) | more than 7 years ago | (#19929527)

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.

Re:New Markets (0)

samkass (174571) | more than 7 years ago | (#19930263)

(Flamebait??? My post was on-topic and completely true.)

Re:New Markets (-1, Offtopic)

jZnat (793348) | more than 7 years ago | (#19930461)

Some wanker thought it would be funny to mod everything he could in this story flamebait. Take a look around. :/

Re:New Markets (3, Informative)

ronin510 (1113835) | more than 7 years ago | (#19929627)

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 [wikipedia.org] 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.

Re:New Markets (4, Informative)

Kelbear (870538) | more than 7 years ago | (#19929983)

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 [wikipedia.org]

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.

Re:New Markets (1)

Dan Ost (415913) | more than 7 years ago | (#19930027)

It is a bit of an oversimplification, with Sony shooting themselves in their own foot with the disaster the PS3 has become.

Let's not get ahead of ourselves. The PS3 is actually selling quite well if you treat the Wii as an outlier. It's selling better than I expected it to, given the price point.

It always takes a year or so before a new console gets its first generation of games that actually know how to use the hardware. So why don't we give it another year before we write the PS3 off as a disaster.

Re:New Markets (4, Informative)

Chosen Reject (842143) | more than 7 years ago | (#19930631)

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. [vgchartz.com]
The PS2 (how many years old is that now? Seven?) is selling the same as the X360 each week. [vgchartz.com] 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.

Re:New Markets (1)

ravenshrike (808508) | more than 7 years ago | (#19931821)

Of course, the PS3 was meant to have a life cycle of 7-10 years, with the 360 having a life cycle of half that. Which is a really, really bad sign for MS. As it goes now, they might break even by the end of the 360's life cycle. Maybe. If they're lucky, and if the release of more and more exclusives on the Wii and PS3 doesn't end up burying them completely, which in the short run for the Wii it seems to be doing, and in the long run for the PS3 it probably will end up doing.

Re:New Markets (1)

ucblockhead (63650) | more than 7 years ago | (#19932329)

They won't "knock Sony out of the game", at least, not in the short term. Sony was profitable last year, lost $2 billion on the PS3 launch and had overall revenue of just over $60 billion. Microsoft was very profitable last year, lost $2 billion on the XBox 360 and had overall revenue of just over $60 billion. Sony can easily prop up an unprofitable PS3 as long as Microsoft has already propped up an unprofitable XBox, and if you look at the history of the PSP, you can see that Sony is quite willing to push a device for years to stay in the market. (All ignoring the fact that Sony still sells a ton of PS2s.)


Also keep in mind that the sales of the PS3 over its first eight months of sales are about the same as the sales of the XBox 360 over its first eight months of sales. I find it really amusing the way slashdot proclaims the XBox a success and the PS3 a failure when they have done about the same in the market.


But regardless, both Microsoft and Sony are massive companies that have extremely profitable divisions that can prop up losing game divisions. The only console maker that would be in trouble selling at a loss is Nintendo, as they don't have an OS division or a TV division to prop up the games. They're just games. Which is why they don't sell at a loss. The only competitor in the console that's might potentially be out of the game in the next five years is Nintendo, and given the way the Wii and the DS-Lite sell, that's extremely unlikely.

Re:New Markets (4, Insightful)

badasscat (563442) | more than 7 years ago | (#19929637)

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.

Re:New Markets (1)

dasheiff (261577) | more than 7 years ago | (#19930589)

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.

See, I'm not convinced the idea is to make money. What if it's just advertising for the microsoft brand?

Re:New Markets (1)

Rolgar (556636) | more than 7 years ago | (#19931403)

How did the Enron execs break the law? They produced false financial statements, to get people excited and bidding up the price for just long enough for the insiders to sell their shares for a nice tidy profit, instead of building a solid business and turning a profit. If Microsoft can use this to gain control of electronic content distribution, they'd have a chance at becoming the video download system hooked up to your TV. Sure, Microsoft is losing money now, but if they win and have their hardware in 30-50 million homes, you might start to see independent films and new shows be released exclusively on the 360 bankrolled by fans or for a low cost. Simultaneous movie releases between the theater and your 360. People dumping their cable provider and paying Microsoft to provide only the programs they're interested in if they can get it at a better price than cable.

Microsoft can't guarantee this is going to happen, but they think it is too big of a risk not to bet billions of dollars to make sure they're the ones to win. If the potential is to rake in billions in profit a year 20 years from now, how can we really say Microsoft is doing the wrong thing.

Re:New Markets (1)

DrXym (126579) | more than 7 years ago | (#19929705)

I think Microsoft's misfortune is that not only do they have to swallow the costs of launching a console, but they've been beset by a series of hardware faults - overheating PSUs, scratched discs and red rings of death. On top of that, they haven't captured the market the way they wanted. Now they've got the Wii and PS3 breathing down their neck too. I think they'll be extremely lucky if they're still first this time next year. Not that I think the PS3 will be either, but I think the 360 really needs to turn things around or even the PS3 will overtake it.

Hey now! (1)

Palshife (60519) | more than 7 years ago | (#19928959)

Let's go easy on the rounding! 1.89 billion (as mentioned in the summary) and 1.9 billion is a difference of $10,000,000 :)

Re:Hey now! (1)

BlackCobra43 (596714) | more than 7 years ago | (#19929057)

and US10M$ is pcoket change to Bill Gates...so the difference is meaningless and the rouding justified.

Re:Hey now! (1)

Devir (671031) | more than 7 years ago | (#19929555)

At that level of loss/gain $10 million difference is like being short changed 4 cents..

Re:Hey now! (1)

LKM (227954) | more than 7 years ago | (#19931395)

Most people read 1.89 as "1.8something," so 1.9 is closer to reality. It's like all those things that cost 9.99.

Lots of Numbers (3, Interesting)

Alaren (682568) | more than 7 years ago | (#19928965)

Would someone care to explain how all this accounting mumbo-jumbo translates to "Overall the Entertainment division did well, as sales of the Zune, consoles, and Xbox titles helped push revenues higher?"

I know businesses have to do this song-and-dance for shareholders and the IRS and all. It's also quite clear that posting a $1 billion loss on the warranties now does not mean MS has actually spent or will ever actually spend $1 billion on their replacement plan. There's a lot of fancy numbers being tossed around and frankly I don't know which ones represent cash and which ones represent accounting magic.

So why not some of your accountants out there answer me this very simple question: based on how much real, actual money MS has spent, over the life of the XBox and the XBox360, on getting into the console business, and based on how much real, actual money they've earned by being in the console business, has the total "console project" broken even yet?

Re:Lots of Numbers (5, Insightful)

pete-classic (75983) | more than 7 years ago | (#19929113)

I don't know which ones represent cash and which ones represent accounting magic.


I think it's adorable that you think those are two different things.

-Peter

Accounting Magic (2, Interesting)

Anonymous Coward | more than 7 years ago | (#19930657)

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.

Re:Accounting Magic (1)

Control Group (105494) | more than 7 years ago | (#19932285)

First, I'd like to encourage you to get an account and post under it; this post is well-reasoned and interesting, but it's sheer chance I was bored enough to set my threshhold low enough to see +0 posts.

That aside: my limited exposure to accounting (two mandatory semesters in college) leads me to believe that, in large part, what makes public (GAAP) accounting so inscrutable to most people is that it's tightly regulated. That is, everything needs to be accounted for in a very specific way, which, if you speak the language, means that everything is perfectly transparent. That very specific way, however, is highly obfuscatory to the layman.

By contrast, private accounting (which is done by companies for internal use only, or by private companies who aren't required to maintain public accounting records), is far simpler, because its goal isn't to follow rules, but to sensibly account for everything.

All that being said, there's no doubt that within the highly specific set of rules for public accounting, companies make use of whatever wiggle-room they've got to present the best face they can. Even if they didn't, however, the results would still seem obfuscatory to the layman, because the system itself is fairly arcane.

In this case, I don't have anything like enough knowledge of either GAAP or MS to comment accurately on how close to "common sense" the statement of a $1.89b loss is.

There is an interesting side effect to the nature of accounting principles which might be what the GPP is alluding to, which you mentioned in your first sentence. Since everyone knows what the rules are, and accepts them as the way that money is accounted for, there really isn't any difference between "real" money and "accounting magic." The money you can account for having (assuming you're compliant with all appropriate regulations) is, in fact, money you actually have - since everyone will credit you with having that much money.

Re:Lots of Numbers (1)

Stanistani (808333) | more than 7 years ago | (#19929137)

>as sales of the Zune... ...helped push revenues higher.

This surprises me a bit... as I've never seen one of the things, and hardly ever see an ad for one.

Anybody here ever buy a Zune?

Re:Lots of Numbers (3, Insightful)

EggyToast (858951) | more than 7 years ago | (#19929569)

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.

Re:Lots of Numbers (1)

ShadowsHawk (916454) | more than 7 years ago | (#19930859)

The Zune and Sansa are advertised like crazy around certain college campuses.

Re:Lots of Numbers (1)

LKM (227954) | more than 7 years ago | (#19931423)

Is the Zune adding profit, or is it just adding revenue?

Re:Lots of Numbers (2, Insightful)

BrerBear (8338) | more than 7 years ago | (#19929311)

Would someone care to explain how all this accounting mumbo-jumbo translates to "Overall the Entertainment division did well, as sales of the Zune, consoles, and Xbox titles helped push revenues higher?"
It's Zonk-atorializing in action.

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.

Re:Lots of Numbers (2, Informative)

ergo98 (9391) | more than 7 years ago | (#19929815)

It's Zonk-atorializing in action.

Microsoft's SEC filing [edgar-online.com] says--

EDD revenue increased primarily due to increased Xbox 360 console sales, Zune sales, and increased Xbox accessories and video game sales. We shipped 6.6 million Xbox 360 consoles during fiscal year 2007 as compared to 5.0 million consoles during fiscal year 2006. Xbox and PC game revenue increased $650 million or 19% as a result of the increased number of Xbox 360 platform sales, partially offset by decreased sales of the first generation Xbox console and related accessories and video games. Zune, consumer hardware and software, and TV platforms revenue increased $539 million or 65%. Mobile and Embedded Devices revenue increased $138 million or 28% driven by sales growth in Windows Mobile software and Windows Embedded operating systems.

Re:Lots of Numbers (1)

BrerBear (8338) | more than 7 years ago | (#19932001)

Microsoft's SEC filing says--
Yes, the numbers are in the SEC filing. It's the "Overall the Entertainment division did well" commentary that is Zonk's editorial.

It's a strange definition of "well".

Re:Lots of Numbers (4, Interesting)

AKAImBatman (238306) | more than 7 years ago | (#19929391)

I know businesses have to do this song-and-dance for shareholders and the IRS and all.

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.

Re:Lots of Numbers (2, Interesting)

tbannist (230135) | more than 7 years ago | (#19930199)

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.

That 8.4 billion comes from:

By 2005 the Xbox had lost $4 billion.
(http://www.forbes.com/home/technology/2005/09/12/ microsoft-management-software_cz_vm_0913microsoft. html)
In 2005 the entertainment division lost 391 million.
(http://www.microsoft.com/msft/earnings/FY05/earn_ rel_q4_05.mspx)
In 2006, the Xbox 360 lost $1.26 billion
(http://www.videogamesblogger.com/2006/10/13/micro soft-lost-126-billion-launching-the-xbox-360.htm)
In 2007, Microsoft has lost $2.76 billion
http://www.microsoftmonitor.com/archives/2006/10/m icrosoft_fisca_6.html [microsoftmonitor.com]
http://www.cinemablend.com/games/Microsoft-Loses-2 89-Million-in-Q2-With-Xbox-360-2544.html [cinemablend.com]
http://www.gamesindustry.biz/content_page.php?aid= 16432 [gamesindustry.biz]

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.

Re:Lots of Numbers (2, Informative)

tbannist (230135) | more than 7 years ago | (#19930275)

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.

Caught between a Brick and Red Rings of Death (2, Insightful)

MintMMs (909563) | more than 7 years ago | (#19929031)

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.

Re:Caught between a Brick and Red Rings of Death (1)

powerlord (28156) | more than 7 years ago | (#19931413)

I'm glad that MS is trying to protect their user base, but don't for a minute think they actually care about you (any more than Sony or Nintendo).

The amazing thing in your post though is that you admit to having shipped back your 360 twice, yet seem happy about it.

Personally I've never had any consumer electronics product that I had to send in for servicing once in its lifetime, let alone twice within a year and a half (and I'm assuming you bought yours soon near launch).

To me that smacks of a product that WILL break right after its warranty runs out, and MS can't keep extending their coverage forever, can they?

Re:Caught between a Brick and Red Rings of Death (1)

MintMMs (909563) | more than 7 years ago | (#19931591)

No, I'm not happy that I had to send it back, it meant that there were several weeks that I was without it. And yes, I got it near to launch.

And I agree that they may not necessarily care about you or me, but it seems that they are proud enough of their product that they want it to work well for people and are willing to spend a billion dollars to make it a good product.

And you've never had to return any electronic thing to the store when it didn't work when you got it home???

how does that work? (0)

Anonymous Coward | more than 7 years ago | (#19929049)

how do falling sales mean your revenue falls when you make a loss on each console, surely it would be better at least in the short term

Re:how does that work? (1)

Applekid (993327) | more than 7 years ago | (#19929303)

If they sell at a loss of $100 per console (just easy numbers), that means they sell it for $100 less than it cost to make. If the console gets made and no one buys it, instead of a net of $-100, it's a net of the entire cost to make. i.e. $400 sale price on a $500 console, so if it's not sold they have a net $-500 loss out of it all.

That being said, except for potential warranty costs, current 360's are sold at cost or at a slight profit. They haven't been under cost for a few months now, a little more than the Elite has been out.

Looks like the xbox got owned (0, Flamebait)

imbaczek (690596) | more than 7 years ago | (#19929259)

look here for proof! [justgotowned.com]

Clearly a Sign (4, Interesting)

RevHawk (855772) | more than 7 years ago | (#19929273)

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...

Re:Clearly a Sign (1)

Fengpost (907072) | more than 7 years ago | (#19929357)

I read some where that MS nets about 1 billion dollars USD per month. That is almost their 2 month net profit!!! I wouldn't say it did not phase MS. It is just they swallowed it well.

Re:Clearly a Sign (2, Insightful)

Defector!!! (49874) | more than 7 years ago | (#19929567)

Actually it shouldn't be a sign of that at all. In fact quite the opposite; when a company can sustain losses in certain divisions yet still post an overall profit it sounds like capitalism is working pretty well.

Think of it this way; if Microsoft was some other company and the X Box 360 was a research project, wouldn't the capitalistic system have to be working for them to sink $2 Billion into it in hopes of a return?

Just cause you hate M$, don't try and blame larger forces (the government, capitalism, whatever).

Re:Clearly a Sign (1)

Chirs (87576) | more than 7 years ago | (#19929669)

The word you're looking for is "faze"...

Wait... (1, Funny)

TALlama (462873) | more than 7 years ago | (#19929351)

Overall the Entertainment division did well, as sales of the Zune... helped push revenues higher.

They sold Zunes? Really?

Re:Wait... (3, Funny)

ucblockhead (63650) | more than 7 years ago | (#19929409)

Since Zunes are actually sold at a profit, even selling one "pushes revenues higher".

Re:Wait... (1)

phildo420 (827619) | more than 7 years ago | (#19930607)

The sales of anything pushes revenue higher. I could sell you a $1000 laptop and my revenue goes up exactly $1000 dollars.

The important metric is profits = revenues - costs. Selling a Xbox360 pushes revenues up, their costs are just higher than their revenue on them is, currently.

I'm glad Microsoft is sticking it even with those losses. It puts pressure on Sony and Nintendo to fight harder for their market shares, and gives them incentive to encourage good game production values. Who cares if they fail? It just helps the consumer in this case.

Re:Wait... (1)

ucblockhead (63650) | more than 7 years ago | (#19931001)

It's putting pressure on Sony. I don't think Nintendo is feeling particular pressure these days. (Other than the pressure to manufacture faster.)

Re:Wait... (2, Insightful)

phildo420 (827619) | more than 7 years ago | (#19931061)

The Wii was their response to dropping market share and being third in a market they dominated prior to Sony.

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.

Re:Wait... (1)

everphilski (877346) | more than 7 years ago | (#19929617)

Supposedly, over 1 million so far, all for a profit.

Consoles and/or software sales? (1)

anduz (1027854) | more than 7 years ago | (#19929615)

I this loss on the x360 hardware alone or hardware and software?

That's misleading... (4, Informative)

imstanny (722685) | more than 7 years ago | (#19929781)

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.

Re:That's misleading... (0)

Anonymous Coward | more than 7 years ago | (#19931563)

and they'll still have a ~$900 million loss if they don't spend a dollar of that $1 billion. It's not like a theoretical $1 billion pushed them from black to red, it doubled the red.

Re:That's misleading... (1)

h4ck7h3p14n37 (926070) | more than 7 years ago | (#19932419)

From what I understand it's not a quality control problem, it's a design defect. One of the heat sinks inside the unit is not large enough. If you hunt around for stories of people who have had their systems repaired due to the three red circles problem you'll see that they get a system back with a much larger heatsink on one of the components.

Even though it is not directly monopoly power (1)

joeflies (529536) | more than 7 years ago | (#19930053)

It certainly is telling when you have enough revenue from windows and office to basically spend whatever it takes to enter whatever market you want. Hard to imagine there are many established companies or startup companies that can incur those kinds of losses to enter or take over whatever market they feel like without going bust or the board of directors shutting the place down.

Now you know why Moore left... (1)

Metroid72 (654017) | more than 7 years ago | (#19930141)

Family... hmmmm...
The ability of high-level execs to get their bonuses (most of the time a bigger number than their salaries) is tied to the performance of their respective divisions.

Case closed.

Bizzare (2, Insightful)

mgabrys_sf (951552) | more than 7 years ago | (#19930235)

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.

And now for something... (1)

Torodung (31985) | more than 7 years ago | (#19930917)

...completely different.

This is a business article by a person named "Graft." Isn't that a conflict of interest?

Remember how long it took the Genesis to succeed, guys? All they have to do is keep the thing on the market. MS is still making the right moves, and the race is far from over. It's only just begun now that the other major players have entered.

--
Toro

Re:And now for something... (1)

Talgrath (1061686) | more than 7 years ago | (#19932797)

The Genesis also was sold at a profit; unlike the X-Box 360; it was a different time of course, but every console sold meant profit in Sega's pocket. What's more, Sega immediately had a great lineup of games, the 360 is a year in and they've only got two games that aren't also going to the PS3 or PC that I would want to play, Mass Effect and Halo 3 (note that Gears of War has been announced for the PC); though my bet is that both of those will hit the PC in the next year or two. Lost Odyssey might be good as well, but I haven't seen enough of it to make a decision one way or another. The point is this: I don't think Microsoft has enough exclusive games to keep people interested, their Halo fans have bought the console immediately, and now it comes down to the rest of the market. The rest of the market, is unimpressed. That aside, this a huge hit to take for Microsoft's game division, my bet is that the 360 MUST turn a profit by the end of its lifespan, or Microsoft will back out of the console market.

It's shocking... (3, Insightful)

AlphaOne (209575) | more than 7 years ago | (#19931281)

It's shocking, simply shocking, that Microsoft's hardware products follow the same methodology as their software products: ship it now, fix it later.

B-School case study time (0)

Anonymous Coward | more than 7 years ago | (#19932173)

So if you were in charge of Microsoft, what would you do to turn the 360 division around? Slash console prices? Push a Wii-style controller onto the market and shift strategy to targeting the casual crowd? Stay the course and hope things get better with the introduction of games like GTA IV and Halo 3? Kill the division?

What I'd do, I'd say shove off to the ESRB and introduce a line of hentai-style porn games. That'd move some units, figuratively and literally.
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