Microsoft Loses $2 Billion Per Year On Xbox, Analyst Says

[james.sponge]

So basically this only confirms that Microsoft (along with Sony if we take into account news from the past few months) are in bad financial shape. Wonder what would be the end of the coming generation of consoles? A contest between valve and nintendo is inevitable?

 

[BloodSquirrel]

i'm not making a logical argument.

i'm simply stating reality.

I love the fact that you don't think these two have anything to do with each other. Oh, internet, will you ever stop breaking new ground in astonishing levels of nonsense?

and the reality here is this guy gets paid millions of millions of dollars to do a job which if he was bad at he wouldn't.

1) Where are you getting that this guy is getting paid millions and millions of dollars from?

2) You mean like the (actually getting paid millions and millions of dollars to do a job) guys who run Microsoft, and are supposedly losing money on a highly successful product?

 

[CriticalMiss]

That sounds like a lot. Like...A LOT. If they were losing that much per year wouldn't they have done something sooner? Even a massively successful company would want to fix their boat if it was leaking that much, just to give them even more top hats full of champagne.

 

[Lightknight]

I would love to see how this breaks down. From the comments here it appears that there could be some easy explanations.

I don't see how they could possibly be losing money at this point without them spending elsewhere.

 

[BloodSquirrel]

That sounds like a lot. Like...A LOT. If they were losing that much per year wouldn't they have done something sooner? Even a massively successful company would want to fix their boat if it was leaking that much, just to give them even more top hats full of champagne.

Well, they were losing something like a billion dollars a quarter on Bing for a while. But they were also reporting that fact. In fact, they've reported a lot of losses for a lot of products, so I don't know why they'd decide to hide Xbox losses.

Oh yeah, that's another thing- Microsoft is a publicly traded company. There are actually laws regarding what shenanigans they can and can not play with their books, and they have to put out numbers that are relevant to their actual stockholders who decide the fate of the company, not just for PR purposes.

Really, without numbers to back up this claim, there's really nothing to it. It's pure fantasy.

 

[JamesStone]

i used to just like you and a big fan of "logic"...not so much now...

it took 2 breakdowns due to the world "not acting like its supposed to" to cure me of that.

but hey whatever...knock yourself out trying to apply "logic" to the world (even tho doing so is recognised logical fallacy in and of itself ie "the just world fallacy")...i see there is little point in trying to impress upon you any alternative outlook...for now...

I've got to give you points for the emo way to lose an internet argument I've ever seen.

its simply the truth.

i'm pretty much an open book as a person.
therapy doesn't really work otherwise.

and i'm not having "an argument".

Oh, from what I'm seeing you surely are having an argument, by pure definition of the word. Sorry for interrupting and intruding in, but you are making a lot of assumptions based on, as your discussion partner crudely putted it, things taken "out of your ass", while your discussion partner is trying really, really hard to ignore the facts on the opposite side of his viewpoint.

Either way, both of you get out of the high horse, because your behavior on this argument has not given any of you the right to be there.

 

[C.S.Strowbridge]

Richard Sherlund is an Ex-Goldman Sachs partner who has been Wall Street's top-ranked software industry analyst for nearly two decades...Vs...some guy on a video gaming forum fighting his corner in the console wars...

Nice appeal to authority, but I've got a much, much better one: Microsoft's actual, official numbers which show the division being profitable.

He's not making an appeal to authority, he's quoting an expert, one that is backed up by someone who might be the next CEO of the company.

 

[Ryan Hughes]

Rick Sherlund has been campaigning against Microsoft's X-Box division for quite some time now.

http://www.escapistmagazine.com/news/view/124559-Analyst-Recommends-Sale-of-Microsofts-Xbox-Division

This is the statement from which Mr. Sherlund says EDD is reporting Microsoft's Android licensing revenue.

Entertainment and Devices Division
(In millions)
2013 2012 2011
Revenue $10,165 9,599 8,915
Operating income $848 380 1,261

So, in 2013, MS brought in over $10 billion in EDD. After expenses et al, they had a profit of $848 million. Mr. Sherlund is stating that the X-Box brand, the core of EDD, lost $2 billion while Skype, Windows Phones, and Android licensing (incl patents) would have to bring in over $13 billion in order to achieve the profit reported.

It's important to note that during this time, Microsoft has undoubtedly been doing R&D on the XBox One. In GAAP, R&D expenses cannot be capitalized until a viable product is available. So all the money MS has spent on designing the XB1 has been booked as straight expense, which certainly cuts into the bottom line.

Company-wide R&D expenses for Microsoft in 2013 were $10.4 billion, or 13% of their revenue.

Chances are Mr. Sherlund is attempting to include XB1 R&D expenses with the EDD operating income. There's certainly some cross-over between these two numbers (they're reported in different sections of the financials), but to say a brand has "lost" $2 billion based on R&D expenses is just poor analysis.

I'm still looking, but I can't denote any expenses that could be related to X-Box specifically that would make up the $2+ billion that Mr. Sherlund has provided. There's really only four types of expenses that could denote a "loss" though:

Cost of Revenue: the costs associated with the manufacture and distribution of a product. MS did report selling nearly $1 billion less in 360's than last year, but selling less does not imply a loss.

Research and Design: as discussed above, MS spend over $10.4 billion in R&D, which includes R&D payroll, programming costs, localization expenses, etc. The XB1 development is definitely reported in this expense category.

Sales and Marketing: It may be possible that Mr. Sherlund is counting the costs of the XB1 marketing campaigns. Of course, advertising a product that is not ready for sale will incur losses. This does not mean the product will lose that money "per year".

General and Administrative: CEO payroll, benefits, etc. Not directly tied to any one MS product.

IMO, Mr. Sherlund is attempting to say that the expenses MS has incurred during development and marketing of the X-Box One is reason for MS to sell the X-Box brand even before the new console goes on sale.

Honestly, I'm not following this "analyst's" reasoning here.

(Interestingly, MS reported a loss of $1.28 billion in their Online Services Division. Maybe they should sell their Bing, online advertising, and other Cloud services instead, hey Mr. Sherlund?)

Good point. To actually create a $2b dollar hole in this market for Xbox would require some serious mismanagement. Games for Window Live, however, may be a different story. Do the costs relates to upkeep and server maintenance go under the Research and Design, or the Administrative categories? I could see Xbox + GFWL losing 2 milliard altogether, though.

In any case, I do remember MS having to float Xbox $200 million back in 2001, before the release of Halo, in order to keep the entertainment division afloat. While Nintendo suffered under the dominance of the PS2 as well, but still managed to turn some profits in spite of everything. I suppose what I am trying to say is that the problem lies with the orchard rather than the trees, here. MS is too big, bloated, and has not had any real competition to speak of for almost 30 years. This is not a problem with Xbox, per say, but a problem with the larger company structure and lack of discipline.

In this case, it could be possible for Xbox to lose that much money despite their market position. Highly unlikely, but possible. MS has proven time and again that they have no real idea of how to run a game console manufacturer. They stumbled onto gold when they bought Bungie, but the similar purchase of Rare did next to nothing for them. The Xbox 360 did not win this generation thanks to its solid manufacture quality, that is for sure. Really, to me it seems like a confluence of being first out of the gate with a powerful machine, and the trend towards the FPS genre we have seen since 2003 or so that lead to their success. If the financial side of the company is managed as poorly as all that, then, we could see some losses despite their market position.

 

[Frezzato]

[...]They stumbled onto gold when they bought Bungie, but the similar purchase of Rare did next to nothing for them[...]

Did you ever hear that story about how when Microsoft purchased Rare, some Microsoft execs assumed they owned the rights to Donkey Kong [http://www.examiner.com/article/microsoft-thought-they-owned-donkey-kong]?

 

[Strazdas]

Nice appeal to authority, but I've got a much, much better one: Microsoft's actual, official numbers which show the division being profitable.

Sherlund is making a claim for which he should be providing evidence, but he isn't. That's pretty much the beginning and end of any logical argument to be made here.

Microsofts actual, official numbers show small profits for a division that was unprofitable for a long time and operates on a sum total of over 3 billion loss it has accumulated over the years and are unable to push out with its current "profit".
And thats WITHOUT counting out the android royalties.

i used to be like you and a big fan of "logic"...not so much now...

it took 2 breakdowns due to the world "not acting like its supposed to" to cure me of that.

but hey whatever...knock yourself out trying to apply "logic" to the world (even tho doing so is a recognised logical fallacy in and of itself ie "the just world fallacy")...i see there is little point in trying to impress upon you any alternative outlook...for now...

The world acted logically and "the way it was supposed to". Its just that you lacked knowledge of all details to make logical conclusions and had to guess parts of it (liek you guessed that he earns millions of dollars). The world is run by Logic, its just that humans are too imperfect to see all the factors.

 

[Ryan Hughes]

[...]They stumbled onto gold when they bought Bungie, but the similar purchase of Rare did next to nothing for them[...]

Did you ever hear that story about how when Microsoft purchased Rare, some Microsoft execs assumed they owned the rights to Donkey Kong [http://www.examiner.com/article/microsoft-thought-they-owned-donkey-kong]?

I do remember that indeed. The director who said that may have been mistaken, but, one thing that I think is true is MS' hubris with the whole purchase. Rare had already lost David Doak, one of the main team from Goldeneye, who went onto make Time Splitters. Rare was also bleeding talent left and right as people moved onto other projects. When the purchase was announced, even more left. So, MS spent all that money for the rights to a few titles and only a handful of qualified, talented people. Nintendo knew that the talent was leaving, and decided to sell their stake in Rare, I assure you that Nintendo would have never sold the company if they thought it would make another Goldeneye or Banjo Kazooie.

 

[Saltyk]

Interesting. I guess this explains all the rumblings I keep hearing about shareholders and such wanting to sell off the Xbox brand. Then again, even if Xbox is turning a profit, I hear it's not as profitable as shareholders want. So, it's not just a question of turning a profit, but turning a good profit.

That's a question my own company is dealing with. We don't expect much growth in the coming year due to economic issues, so we're basically looking to maintain a profit by other means. Like reducing our freight claims which are a major pain due to the shippers constantly screwing up our shipments and getting material there damaged.

 

[theuprising]

So basically this only confirms that Microsoft (along with Sony if we take into account news from the past few months) are in bad financial shape. Wonder what would be the end of the coming generation of consoles? A contest between valve and nintendo is inevitable?

Oh no microsoft is not in bad financial state, while Sony is in TERRIBLE financial state. Sony's PS division could drown the entire company, while the XB division is another one of MS' many unprofitable divisions which doesn't even flinch MS b/c they are swimming in Money!

Though there are voices that say they want to cut out the XB division w/in MS, I wouldn't pay too much attention to them, the XB division is currently the only way MS can reach consumers in the living room, something important to a company seeking to diversify and jumping off the sinking ship that is PC software.

 

[caballitomalo]

I've always thought that the only company operating under a business model that looks and sound really profitable to me is Nintendo. Hate it all you want but the big N cashes in on the hardware, the games and the licensing on consoles and handhelds. M$ and $ony just seem to be on a battle of attrition to see how long it takes for them to keep pushing for harder to make and more expensive hardware every generation until they are the only ones left on the market.

 

[james.sponge]

So basically this only confirms that Microsoft (along with Sony if we take into account news from the past few months) are in bad financial shape. Wonder what would be the end of the coming generation of consoles? A contest between valve and nintendo is inevitable?

Oh no microsoft is not in bad financial state, while Sony is in TERRIBLE financial state. Sony's PS division could drown the entire company, while the XB division is another one of MS' many unprofitable divisions which doesn't even flinch MS b/c they are swimming in Money!

Though there are voices that say they want to cut out the XB division w/in MS, I wouldn't pay too much attention to them, the XB division is currently the only way MS can reach consumers in the living room, something important to a company seeking to diversify and jumping off the sinking ship that is PC software.

Makes sense, I imagine most of their income comes from selling OS licenses to companies. Still MS just seems to sink money in unprofitable ventures like phones, tablets and now consoles as well.