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

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

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Analyst Rick Sherlund believes that staggering losses on the Xbox business are being masked by Android royalties.

It's hard to make money making game consoles but the assumption, as I understand it, is that if a company can power through the lean early years, it'll eventually figure out how to start turning a profit on the things - not a lot of profit, perhaps, but at least a little bit.

According to Nomura analyst Rick Sherlund, however, Microsoft isn't quite over that hump just yet. It is, in fact, bleeding money at an alarming rate, but nobody's noticed because the losses are masked by Android licensing revenues.

"If we start with the overall traditional [Entertainment and Devices Division] business that actually loses money before corporate allocations and back out the nearly $2 billion 95 percent gross margin Android phone royalties, we conclude that Xbox platform plus Windows phone and Skype lose about $2.5 billion per year, and we estimate that the Xbox platform may account for roughly $2 billion of this," Sherlund said.

That staggering loss, he added, "is concealed by the hugely profitable Android royalties" that come out of licensing deals Microsoft has with makers of Android devices, which were forced by Google's infringement on various Microsoft patents during the development of the Android OS. Xbox is a "cool" product and successful consumer franchise, Sherlund said, "but it also loses a lot of money and we think is a distraction to the more enterprise strengths of Microsoft."

Sherlund isn't alone in this view: In January, Forbes analyst Adam Hartung also described the Xbox business as a distraction and today it was reported that Stephen Elop, one of the candidates to replace outgoing Microsoft CEO Steve Ballmer, said he will sell off the division if he gets the job.

Source: GamesIndustry International

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You would think that, with this, they would want to avoid bad press like herpes.

I could have told you this years ago. Well, probably they lost less per unit then, but the same effect. X-Box is not a lucrative item.

It's been known for awhile now that since inception the Xbox brand has bled money for Microsoft rather than turned them any profit.

The original Xbox beat the Gamecube by 2 million units, and despite that Nintendo still posted a profit on the console while Microsoft posted some huge losses.

They only now just started to see profits with the Xbox 360. I think I saw a graph somewhere that stated that the Xbox line has only gained Microsoft 2 billion in profit, and in light of the fact that they lost 5 billion dollars on the system.
That's a lot of wasted money. Especially when Microsoft is struggling in other places, it wouldn't surprise me if this gen doesn't see the X1 posting big profits, the Xbox brand will be one of many ventures that Microsoft will trim the fat off of completely.

"Sell Off" The division?

Oh right, because investors line up down the street to buy a business losing $2billion per year. If that statement is even remotely true, Xbox is going to die and die soon, we're over a decade into it now and it's still bleeding cash, although it's clearly not as bad as the Zune was.

Then again, this could be stuff and bluster.

No one notice because of Android Licencing?

HAHAHAHHAHAHHAHA

No, XBox fan boys have been unable to understand MS annual reporting magic for the last decade.
Not a single reputable analyst would have said the XBox was ever profitable. They know that MS has a Magic "loss" line that they can use to hide a divisions failures.

The android number is just another line that MS has been able to use to mask its failures. Most people assumed, for good reason, that it was mostly Windows and Office, but with Windows and Office teetering the Android revenue has become more obvious.

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

Soon as I get my weekly report out, I'll do my own analysis of Microsoft's financial statements. Screw work, this is business!

OK, from MS's FY13Q4 10K statement (as of June 30, 2013):

Entertainment and Devices Division ("EDD") develops and markets products and services designed to entertain and connect people. The Xbox entertainment platform, including Kinect, is designed to provide a unique variety of entertainment choices through the use of our devices, peripherals, content, and online services. Skype is designed to connect friends, family, clients, and colleagues through a variety of devices. Windows Phone is designed to bring users closer to the people, applications, and content they need, while providing unique capabilities such as Microsoft Office and Xbox LIVE. Through a strategic alliance, Windows Phone and Nokia are jointly creating new mobile products and services and extending established product and services to new markets. EDD revenue also includes revenue from licensing mobile-related patents.
Principal Products and Services: Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 video games, Xbox 360 accessories; Xbox LIVE; Skype; and Windows Phone.

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?)

That bad? I mean... are they still making Xbox 360s?

I mean, because the 360 is being sold for far less than it costs to make. All consoles are, really, but game sales are supposed to make up for this. It's the system, we all know this, but I'm really questioning this analyst's fancy guess that most of the company's loss is on the Xbox.

I'd love to see Elop get the job and then try to sell off Xbox, though. That would make for interesting news for the week he'd keep his position...

MinionJoe:

[snip]
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.

Good analysis, but if you're going to be in the console business then unless this is your very last console R&D costs for the next gen are always going to be a constant expense. Now yes there should be a steep decline/rise as people stop buying the old console a year in advance of the new console which will bring a huge spike in sales, but overtime that should all average out into a consistent gain/loss direction.

fix-the-spade:
"Sell Off" The division?

Oh right, because investors line up down the street to buy a business losing $2billion per year. If that statement is even remotely true, Xbox is going to die and die soon, we're over a decade into it now and it's still bleeding cash, although it's clearly not as bad as the Zune was.

Then again, this could be stuff and bluster.

they could sell off aspects of the console. software, hardware, schematics, licensing, the entire XBL service would be lucrative to any advertising agency.

But to be honest, right now I doubt any company would buy the Xbox division, just because those that could make use of it already have console divisions themselves.

Maybe to bring in more developers and workers, but that's a long stretch.

I'd like to see how Microsoft accounts the indirect costs of the xbox brand; also how they account fixed costs to the division. The claim that they can make a profit from hardware sales alone for the x1 is rather odd, it may be that they are moving costs around and eating them in other places. Then there are events like the rrod or graphics card overheat errors from the 360's first... several runs.

Considering the high failure rate, this has got to be hurting the brand's bottom line, but again, you can account it away by having the response be independent 'initiatives' or 'projects'

RandV80:

Good analysis, but if you're going to be in the console business then unless this is your very last console R&D costs for the next gen are always going to be a constant expense. Now yes there should be a steep decline/rise as people stop buying the old console a year in advance of the new console which will bring a huge spike in sales, but overtime that should all average out into a consistent gain/loss direction.

Thanks! Did a bit more digging (still haven't gotten that report out though :/) and found an interesting footnote:

Fiscal year 2013 compared with fiscal year 2012
Research and development expenses increased, reflecting a $460 million or 6% increase in headcount-related expenses, largely related to the Entertainment and Devices Division.

Half-a-billion increase in R&D between 2012 and 2013 directly attributed to EDD headcount (ie employee) expenses.

R&D was reported to be $9.0B in 2011, $9.8B in 2012, and $10.4B in 2013. Each year was a constant 13% of revenue.

Sales & Marketing was reported as $13.9B in 2011, $13.8B in 2012, and $15.3B in 2013. About 19-20% of revenue each year.

EDD had revenue/income of $8.9B/1.3B in 2011, $9.6B/.4B in 2012, and $10.2B/.8B in 2013. The change in income from 2012 to 2013 was an increase of 123%.

There were quite a lot of footnotes, mostly saying that 360 expenses have decreased dramatically, XBox Live royalties have increased, and R&D for Skype/XBox had increased.

Still not seeing anything that can explain this analyst's claim that X-Box is losing $2 billion per year.

Pebkio:
I'd love to see Elop get the job and then try to sell off Xbox, though. That would make for interesting news for the week he'd keep his position...

it is the board that would hire Elop...and he's making no secret of what he would do...he's saying these things because it's fairly well known there is a sizeable chuck of MSs board want to go in that direction (that and he and he wants the job)...and he's almost definitely not the only one...the fact is the corporate shareholders on the board have been wanting MS out of the (always less profitable than software) hardware business for years.

you may like games. you may like the xbox. but the fact is it's not the core of MSs business by any stretch of the imagination. that would be OSs and business software. boring ? yes...but a near global monopolistic hegemony that holds the potential to near constantly print money...which MS currently then wastes pointlessly trying to conquer every up and coming product in "the tech sector"...

Sega (remember them ?) took "a boardroom decision" to get out the console market because software is fundamentally more profitable...and MS has been betraying two of it's founding principals (ie that software is far more profitable than hardware and that MS should sell software to everyone) in pursuit one of the others...unfortunately that one other is, many would say, a fundamentally misguided and unachievable monopolistic vision...

i think perhaps the key thing to understand about MS problem atm is just how bad a state the company is in...simply put the kitty has run dry...it has no more working capital to purchase up and coming companies in order to continue to give the illusion of innovation...which is what it has been doing for the last few decades...that and following other peoples leads...rather than being a "market leader"... ( good article here http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer )

the non "old guard" members of the board know all this (and the "old guard" themselves are getting seriously old...) and whatever happens at MS come the new CEO the chances of it keeping the same management direction going forward are almost non existent...

selling off the xbox division may seen "inconceivable!" here...but it is probably decidedly less so on "wall street"...

Pebkio:
That bad? I mean... are they still making Xbox 360s?

I mean, because the 360 is being sold for far less than it costs to make. All consoles are, really, but game sales are supposed to make up for this. It's the system, we all know this, but I'm really questioning this analyst's fancy guess that most of the company's loss is on the Xbox.

Xbox 360s are sold at a profit now and have been for years. Consoles are generally sold at a loss early on yes, but manufacturing costs go down over time. Plus I believe Wii and Wii U were never sold for net loss, but Nintendo is kind of a special case.

Anyway, I doubt this analyst. I'd refer you to MinionJoe's posts.

MinionJoe:
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

Soon as I get my weekly report out, I'll do my own analysis of Microsoft's financial statements. Screw work, this is business!

OK, from MS's FY13Q4 10K statement (as of June 30, 2013):

Entertainment and Devices Division ("EDD") develops and markets products and services designed to entertain and connect people. The Xbox entertainment platform, including Kinect, is designed to provide a unique variety of entertainment choices through the use of our devices, peripherals, content, and online services. Skype is designed to connect friends, family, clients, and colleagues through a variety of devices. Windows Phone is designed to bring users closer to the people, applications, and content they need, while providing unique capabilities such as Microsoft Office and Xbox LIVE. Through a strategic alliance, Windows Phone and Nokia are jointly creating new mobile products and services and extending established product and services to new markets. EDD revenue also includes revenue from licensing mobile-related patents.
Principal Products and Services: Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 video games, Xbox 360 accessories; Xbox LIVE; Skype; and Windows Phone.

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?)

Thank you for your research. This goes alot further than my original intention of just saying I think this analyst is full of bull. Well done, sir! :)

Linked article doesn't contain any source to his numbers, or anything else to substantiate what looks a lot a claim straight out of his ass.

Frankly, it looks to me like he's just trying to come up with an excuse for his "sell off Xbox!" warcry.

+1 for the Sony fanboys who, for some reason, can not sleep at night unless they think that the Xbox is operating at a loss.

BloodSquirrel:
Linked article doesn't contain any source to his numbers, or anything else to substantiate what looks a lot a claim straight out of his ass.

Frankly, it looks to me like he's just trying to come up with an excuse for his "sell off Xbox!" warcry.

+1 for the Sony fanboys who, for some reason, can not sleep at night unless they think that the Xbox is operating at a loss.

Richard Sherlund is an Ex-Goldman Sachs partner has been Wall Street's top-ranked software industry analyst for nearly two decades...he is also a close friend of Bill Gates and was Microsofts "point man" at Goldman Sachs...Vs...some guy on a video gaming forum fighting his chosen corner in "the console wars"...

...the same "warcry" is being also issued by one of the main contenders to get the CEO spot at Microsoft : http://techcrunch.com/2013/11/08/elop-is-going-to-do-what-now/ ...but hey i'm sure they are just "Sony fanboys"...right ?...

Sleekit:
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.

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.

BloodSquirrel:
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.

i'm not making a logical argument.

i'm simply stating reality.

and the reality here is this guy gets paid a lot of money by very rich people to do a job which if he was bad at he wouldn't.

that he won't show you the analysis largely comes down to the fact that you are not one of those very rich people.

regardless there is one thing you can almost be certain of : he did not make this statement because he has some kind of stake in gamers "console wars".

Sleekit:
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...

For the record, I'm "some guy on a video gaming forum who happens to have a degree in Accounting and is currently working as a Fiscal Analyst for a state university system."

;)

Granted, most of my day-to-day work involves fund-based accounting, so I'm working with GASB more than GAAP, but I can still work up all the performance ratios for Microsoft if you're really interested. But I can tell you now that there won't be anything in there that says "Microsoft is losing $2 billion a year on the X-Box brand!" Because Microsoft does not provide that level of breakdown on their financials. Mr. Sherlund is speculating in his "analysis".

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? ;)

Sleekit:

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?

Sleekit:

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?

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.

BloodSquirrel:

Sleekit:

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?

rhetorical logic has very little to do with reality.

it's merely an attractive crutch for (usually young) people "who think they have it all figured out".

but please feel free to try and use it in your favour the next time a personal relationship breaks down...

you should have paid more attention to Spock : " Logic, logic, logic. Logic is the beginning of wisdom, Valeris, not the end."

BloodSquirrel:
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?

1) i surmise that (fairly securely) because of his status.

2) in case you missed it the CEO of said company (a man who has been repeatability labelled "the worst CEO in tech industry") basically just got shown the door...as did the guy in charge of the xbox (Don Mattrick)...

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.

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.

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.

BloodSquirrel:

Sleekit:
logic has very little to do with reality.

it's merely an attractive crutch for (usually young) people "who think they have it all figured out".

but please feel free to try and use it in your favour the next time a personal relationship breaks down...

Thats... a really nice attempt to sound grown up and all, but it isn't going to fool anyone who has actually graduated high school.

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...

BloodSquirrel:

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.

Yup! A publicly-traded company cannot even publish their financial statements unless they've been audited first. According to the 10Ks, Microsoft uses Deloitte & Touche LLP. :)

Just going over these financial statements in general, I'm actually surprised at how much Microsoft earned in FY13. They had a net income of $21.9 billion and their earnings per share went up nearly 30%!

They did lose $1.28 Billion on Bing and other online services last year though.

Yeah, here's a business article where Rick Sherlund's statements directly contradict what was published in Microsoft's financial statements:

http://www.businessinsider.com/microsoft-earns-2-billion-per-year-from-android-patent-royalties-2013-11

He's saying Android made $2 billion, but X-Box, Skype, et al lost more than that. Yet we can clearly see that the EDD had over $10 billion in revenue and nearly $1 billion in income/profit in FY13.

Rick Sherlund is full of shit. If you look at his Bloomberg news site, you can tell he's probably got something against Microsoft:

http://topics.bloomberg.com/rick-sherlund/

(Can't find any information how much he made while at Goldman-Sach, nor how much he's now making with Nomura Securities. Sorry.)

BloodSquirrel:

Sleekit:
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".

Sleekit:

BloodSquirrel:

Sleekit:
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.

BloodSquirrel:

Sleekit:
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.

MinionJoe:
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.

fix-the-spade:
"Sell Off" The division?

Oh right, because investors line up down the street to buy a business losing $2billion per year. If that statement is even remotely true, Xbox is going to die and die soon, we're over a decade into it now and it's still bleeding cash, although it's clearly not as bad as the Zune was.

Then again, this could be stuff and bluster.

The funny thing is on the investor news websites, its all a bunch of geezers who don't understand technology saying how its makes "millions and billions" hand over fist and how they want in on that action. How the xbox must be making money otherwise "they wouldn't waste money on it."

They even think the gaming industry is very healthy and growing exponentially with businesses propping up everywhere for consoles. They seriously believe publishers and indies are popping out of the woodwork to make games for consoles. They have no idea how wrong they are.

So there are people stupid enough to buy a moneypit, a lot of them, just look to older and more ignorant investors wanting quick easy cash off "children."

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