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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