Topic: Analyst: "Gaming has been a disastrous endeavor for Microsoft"

[Arbok]

Let's get this kettle going:

http://ce.seekingalpha.com/article/32642

A financial analyst by the name of Roger Ehrenberg has wrote a pretty scathing report on Microsoft's progress with the Xbox, or lack there of as he puts it. The article focuses on the money side of things, with particular emphasis on the amount of money Microsoft has lost on the brand so far. To quote:

Quote
Well, after five years and over $21 billion invested all they've got to show for it is $5.4 billion of cumulative operating losses, and Xbox 360 doesn't appear to be the silver bullet to turn things around.

Overall, I thought it was a very good article, that talked about a lot of important points, some which are common fact now (like the Xbox selling better in the same time frame in Japan compared with the 360). My only problem with the article was that he started out by citing "Wikipedia.org" as one of his sources... bad idea there. So I'm interested to hear what others thought of it.

[Deguello]

He's right.  For all the hoopla and hullabaloo MS is getting from the gamer section, from a business perspective the Xbox 360 is a big flop.  It's almost like a CHARITY.

For reference, and AFAIK, MS has only ever had one profitable quarter, Q4 2004, They made about $54 million.  This required Halo 2 to sell about 4 million units.  The rest of the years losses brought their yearly total back down to loss.

Here's a record of all companies gains and losses:

FY*       Sony**              Nintendo    Microsoft
1998    974,000,000    629,000,000
1999   1,130,000,000    645,000,000
2000    730,000,000    421,000,000
2001    -409,000,000    726,000,000
2002    623,000,000    800,000,000   -750,000,000
2003    939,000,000    560,000,000   -1,191,000,000
2004    650,000,000    316,000,000   -1,215,000,000
2005    404,000,000    777,000,000   -485,000,000
2006    75,000,00         894,000,000   -1,262,000,000
2007   -1,057,000,000  1,150,000,000   -384,000,000
Totals  4,059,000,000   6,918,000,000 -5,287,000,000

See how MS has never made one cent on this entire endeavor?  If they do have a profit strategy, they had better enact it soon.  Microsoft has other troubles.

[Ian Sane]

"For all the hoopla and hullabaloo MS is getting from the gamer section, from a business perspective the Xbox 360 is a big flop."

Yeah but from the self-centered perspective of a gamer that doesn't matter.  Yeah the Cube was profitable but did that benefit the Cube owner?  It assured that Nintendo would continue to make consoles in the future but it didn't result in more games.  Meanwhile although the Xbox was losing money Xbox owners benefited as the console sold.  The third party support grew as the time went by.  You said it dead on about being a charity but I doubt Xbox owners cared if MS couldn't afford to continue in the next generation as long as they benefitted in the here and now.

Not that this is a good strategy for MS.  It's kinda insane.  It just makes for a more satisfied userbase.

I think their strategy was to force Sony and Nintendo out of the market and then once they had their monopoly customer satisfaction would go out the window and profit by any means necessary would take over.  Nintendo making a crazy comeback out of nowhere has probably f*cked all that up.

[that Baby guy]

I could have sworn I read a report that stated Microsoft was finally making a profit from the sales of a 360.  I guess not.

[Smash_Brother]

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Originally posted by: Ian Sane I think their strategy was to force Sony and Nintendo out of the market and then once they had their monopoly customer satisfaction would go out the window and profit by any means necessary would take over.  Nintendo making a crazy comeback out of nowhere has probably f*cked all that up.

Correct.

MS's only winning strategy is to hold the market with an iron 90% while their "competition" holds a measly 10%. This is their strategy because that's what they did with the OS market and that's what they THOUGHT they were going to do with the gaming industry.

It was arrogant for them to assume they could just waltz into the gaming industry and buy the whole thing out in the first place, but what they REALLY failed to understand is that, every five years during the generation shift, EVERYTHING goes up in the air again. It's not like the OS market where people will be forced to buy their garbage every year: the game market actually functions on quality and every five years, you need to earn your customer base back ALL over again.

MS is too accustomed to a market which equates shooting fish in a barrel. The gaming market is the open range.

[NinGurl69 *huggles]

On individual sales, maybe.  But paying off their initial investments?  Hardly.

They're finally getting some money back on each sale of bottled water.  But it hasn't paid off everything they spent to get the water into the bottle.

[Arbok]

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Originally posted by: thatguy
I could have sworn I read a report that stated Microsoft was finally making a profit from the sales of a 360.  I guess not.

Could be possible, although I also assume such a statement would ignore marketing costs and other aspects of selling the system, which are probably tremendous.

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Originally posted by: Smash_Brother
It was arrogant for them to assume they could just waltz into the gaming industry and buy the whole thing out in the first place, but what they REALLY failed to understand is that, every five years during the generation shift, EVERYTHING goes up in the air again. It's not like the OS market where people will be forced to buy their garbage every year: the game market actually functions on quality and every five years, you need to earn your customer base back ALL over again.

Bingo, we have a winner. MS went into this stating they would be in the red for the first two generations and go into the black for the third... so it's very clear they had something close to this concept in mind. However, the goodwill they earned with the Xbox has not expanded their sales very much compared to the former in the same time frame, which had tougher competition from the PS2 as well.

I'm sure Nintendo leaping from third to a likely first, and Sony doing just the opposite, is having them now wondering if their strategy to tackle the market for the long term is actually going to pay off in the end.

[Smash_Brother]

Like I said, MS's strategy assumes that they are the market leader. Nintendo was brilliant for having a strategy which works even if they're last place because it allowed them to survive this long.

Ian is also right in that they didn't predict the Wii doing what it's doing now, and we're already seeing games which were originally 360-bound heading over to the Wii (NIGHTS, and I'm sure there are others).

If MS can't pull off first place this time either, then I wonder if they'll try a 3rd time. How long can they go on before someone at MS HQ says, "That's it!" and pulls the plug?

[GoldenPhoenix]

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Originally posted by: Smash_Brother
Like I said, MS's strategy assumes that they are the market leader. Nintendo was brilliant for having a strategy which works even if they're last place because it allowed them to survive this long.

Ian is also right in that they didn't predict the Wii doing what it's doing now, and we're already seeing games which were originally 360-bound heading over to the Wii (NIGHTS, and I'm sure there are others).

If MS can't pull off first place this time either, then I wonder if they'll try a 3rd time. How long can they go on before someone at MS HQ says, "That's it!" and pulls the plug?

Hopefully not soon because I love the Xbox 360 and the original Xbox.

[Arbok]

Quote
Originally posted by: Smash_Brother
Like I said, MS's strategy assumes that they are the market leader. Nintendo was brilliant for having a strategy which works even if they're last place because it allowed them to survive this long.

Hmm... now that I think more about it, perhaps the latest, more expensive model of the Xbox 360 was an attempt to mover closer to profitability? A small glimpse of what could be in store if the company were at #1? I originally thought this was their attempt to fight off the PS3 by moving the 360 closer to its price range so that consumers don't disregard it (price = quality to many who don't research a purchase), however it could have been just the company moving slowly toward their desired price for a system like this instead. Getting the market ready, if you will, for the price hike of its successor, assuming they take #1.

Who knows though, but it sure did make them seem even less desirable to joe average who now sees an even more expensive model, making his choice harder and making the Wii's price point seem ever better.  

[that Baby guy]

Well, I disagree, to an extent.  IIRC, Microsoft never made a profit on the individual Xbox sales, but now, they are making profit on each 360.  This means, that relative to last generation, rather than losing money on three main things, advertising, box sales, and wooing third parties, they now only lose money on luring 3rd parties and advertising.  This switch from loss to at least breaking even on box sales happened dramatically faster than anyone expected, I'm sure.  It doesn't hurt to suspect that Microsoft does have a plan here, and it is a great possibility that they do, when you look at their relative success against the PS3.

I think it depends on whether or not Microsoft can establish that the Wii and 360 cater to different markets.  If they cannot remain individual entertainment systems, then they don't have much hope.  A lot of that depends on whether or not Nintendo can garner what was going to be exclusive support for the system, which is still up in the air.

To sum it up, Microsoft's existence in the gaming sector will probably be entirely dependent of keeping their games away from Nintendo, so they are their own entity.  If we see R* games on the Wii, if we see DMC whatever on Wii, and games to that extent, they won't have anything.  If they can maintain those licenses to only the more hardware intensive systems, Microsoft can make it.

[Arbok]

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Originally posted by: thatguy
It doesn't hurt to suspect that Microsoft does have a plan here, and it is a great possibility that they do, when you look at their relative success against the PS3.

Sony tripped on their own feet and are a bad example here with the PS3. The best one is to compare the 360's sales to the original Xbox's in the same time frame, which looks bad for the company, especially considering the 360's massive head start. Let's not ignore the fact that the PS2 is still outselling the 360 in most markets too.

[that Baby guy]

What are the sales numbers?  I found a comparison chart for the first four months, but I know Microsoft was limited in supply for 360s that time.  Does anyone have a comparison chart for the first year and four months?

[GoldenPhoenix]

Quote
Originally posted by: Arbok

Quote
Originally posted by: thatguy
It doesn't hurt to suspect that Microsoft does have a plan here, and it is a great possibility that they do, when you look at their relative success against the PS3.

Sony tripped on their own feet and are a bad example here with the PS3. The best one is to compare the 360's sales to the original Xbox's in the same time frame, which looks bad for the company, especially considering the 360's massive head start. Let's not ignore the fact that the PS2 is still outselling the 360 in most markets too.

Why is PS2 outselling 360 that important? The system still has a sizeable game library is less than half the price of the core Xbox 360 model!

[MaryJane]

I'm just going to add my two cents in and remind everyone that as of now Microsoft IS #1 in the "next-gen" console race. At least for now. However, it is likely that once Nintendo can ship as many Wii consoles as there are X360's sold, they will no longer have that advantage. Every move they make from now until then, they are making as the current market leaders.

As someone mentioned before me, if MS can keep Nintendo in the "new-gen" territory they will have a much better chance at success. If there isn't a difference in game titles between them except for 1st party titles, Nintendo is the clear winner.

[ShyGuy]

The PS2 outselling the 360 wouldn't matter if Microsoft was only interested making a profit selling its product. They are interest in being #1, so having the PS2 #1 in a competitive field is a bad thing.

[Ceric]

Quote
Originally posted by: Smash_Brother

Quote
Originally posted by: Ian Sane I think their strategy was to force Sony and Nintendo out of the market and then once they had their monopoly customer satisfaction would go out the window and profit by any means necessary would take over.  Nintendo making a crazy comeback out of nowhere has probably f*cked all that up.

Correct.

MS's only winning strategy is to hold the market with an iron 90% while their "competition" holds a measly 10%. This is their strategy because that's what they did with the OS market and that's what they THOUGHT they were going to do with the gaming industry.

It was arrogant for them to assume they could just waltz into the gaming industry and buy the whole thing out in the first place, but what they REALLY failed to understand is that, every five years during the generation shift, EVERYTHING goes up in the air again. It's not like the OS market where people will be forced to buy their garbage every year: the game market actually functions on quality and every five years, you need to earn your customer base back ALL over again.

MS is too accustomed to a market which equates shooting fish in a barrel. The gaming market is the open range.

I can't believe that because I'm pretty sure that MS is turning a profit in the PC accessory arena as well and I'm fairly sure they don't dominate that arena or come even close.

*shrug*
If the whole IPTV thing gets popular I can see their being a turn around on that side of things.  Though MS is probably thinking from a broad perspective.
Also I do believe that they are no longer losing money on each console sold.  Thats already better then last go around.

I'm not getting into the quality debate again.  I know who you are referencing.

[Arbok]

Quote
Originally posted by: thatguy
What are the sales numbers?  I found a comparison chart for the first four months, but I know Microsoft was limited in supply for 360s that time.  Does anyone have a comparison chart for the first year and four months?

They were roughly a million ahead from the total sales of the first Xbox last month... or projected that way, the NPD will give a clearer image when it comes out for last month.

I could stir the kettle further by raising into doubt what the defect rate is on the 360 compared to the original system, and how that might further play into the actual consumer base of the two... but there isn't much data there to go off of anyway.

Quote
Originally posted by: GoldenPhoenix
Why is PS2 outselling 360 that important? The system still has a sizeable game library is less than half the price of the core Xbox 360 model!

Because it has been a year now, and it's still happening, and not just in one market. On the other hand, the Wii IS outselling the PS2.

EDIT: Or was, until last month in the US when the PS2 took 2nd.

Quote
Originally posted by: ShyGuy
The PS2 outselling the 360 wouldn't matter if Microsoft was only interested making a profit selling its product. They are interest in being #1, so having the PS2 #1 in a competitive field is a bad thing.

Bingo. That is their #1 objective. Let's not ignore the recent reports either that Microsoft might have dumped a ton of consoles onto the market to meet their "10 million" shipped target last holiday... which sales still haven't caught up to that mark yet:

http://news.softpedia.com/news/Xbox-360-Microsoft-Mugged-Their-own-Sales-Figures-51980.shtml

Clearly this company is out for market share and perception at this point, and being beaten by a last generation console more than a year after launch doesn't look good, period. It's not a strong sign that Microsoft's offering is going to take #1 for this generation, as many had predicted if the PS3 had stumbled.  

[that Baby guy]

You forget there is a question mark, there.  That is just speculation.  Additionally, around holiday times, the console makers usually attempt to flood the market with their console, so everyone gets one.  That article is purely speculation, and has little basis to support an argument, especially considering the behavior the article suggests Microsoft is taking is the same approach Sony has always used in respect to consoles sold.

[Jin-X]

See "MS lowers June shipment forecast" and the fact that they still haven't sold 10 million.

[couchmonkey]

The silver lining in the MS cloud is that the company is preventing Sony from taking control of the set-top-box market.

Looking at Sony's strategies, perhaps PS3 would have been a failure no matter what...then again, if there was no 360, maybe Sony wouldn't have felt the need to advance the arms race quite so much, and there also wouldn't be any cheaper alternative for "next gen" graphics.  From Microsoft's perspective, it's worthwhile to continue jabbing at Sony, otherwise people might have a mass-market videogame system that surfs the web, answers email, downloads television, movies, music and games, all from the living-room couch.  What do you need a home PC for anymore?  Word processing and doing taxes...but a used PC with Windows 2000 can handle that job for years to come.

Microsoft is already feeling some pain because the PC market doesn't have much room left for expansion - the last thing it needs is for that market to start eroding.

I guess the other thing is that although I totally agree with this guy so far, he's taking a bit of a limited view.  Microsoft has built up some brand popularity and if the company keeps at it, the whole thing could become very profitable in a couple of years.  In fact, looking at Deguello's handy-dandy stats, 2007 has produced the smallest loss so far and with Halo 3 coming I wouldn't be surprised to see MS break even for once.  

All that said, I'm still glad to see someone calling MS out for all the money it has lost instead of applauding it for (barely) buying it's way to second place last generation.

Edit: relevant to this topic: the cash-grabbing Elite is receiving all kinds of preorders, apparently.

[Shift Key]

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Originally posted by: couchmonkey
The silver lining in the MS cloud is that the company is preventing Sony from taking control of the set-top-box market.

After sitting through a speech from a Microsoft tech "evangelist" at GO3 a few weeks ago, it surprised me how much Microsoft is focusing on the services and products around the home. Microsoft TV, Microsoft File Server, mobile phones, computers with Vista as well as the 360 indicate that they are looking to fill as many gaps in the average home. The set-top box is just part of it, but having all these items integrated is the selling point that Microsoft have that Sony doesn't.

I doubt that the losses of the original Xbox and now the 360 are concerning to the company, as they can afford to spend the money to build up the brand name and reputation. If the 360 hangs around for longer than the average console lifespan, it could certainly become profitable with the right games. Halo 3 will be a big hit later this year (they put out two new maps for Halo 2 as a download during the week and were promptly downloaded like mad) and the userbase will increase.

And yes, I read somewhere that Microsoft is now making some money from each console sold. Not bothering with finding the link, but that will certainly help with the long-term picture.

[Smash_Brother]

Microsoft is facing a bigger threat on another front right now.

If Apple does what they're rumored to be doing, then they've succeeded in eliminating the key difference between macs and PCs. It all boils down to the fact that Intel hardware in Macs is the same in PCs. Right now, I reboot my OSX laptop, hold option (or alt, for you PC types) and it boots up in XP and runs PC games better than most PC users machines will, all natively off of the Intel hardware.

The next version of OSX was delayed for reasons which people are currently speculating over, and one of those reasons is that Apple will have a version of Windows XP running in the background of OSX, meaning that Apple users can boot PC apps natively, meaning that the difference between XP and OSX is OSX's stability and that's about it.

It changes things pretty dramatically when buying a top-end Mac also equates buying a top-end PC. I know there's a vocal minority who hates macs, but this feature is aimed at working professionals who want to run applications from both OSes but don't want to pay for two computers, especially when they're moving around and need a portable computer and don't want to need two of them.

That doesn't hurt MS immediately because you still need a copy of Windows, but after people have started using OSX (like Penny-Arcade, for example), they tend to stay with it and will gravitate toward the Mac versions of these programs.

[GoldenPhoenix]

Apple gaining notoriety is proof that MS doesn't have a monopoly and that companies can be competitive, it is just harder. But that is for another day and another topic .

[SixthAngel]

What still gets me is the ridiculous amount of money ms has invested.  They will not recoup so much money unless they have a total monopoly of the market and if they looked at the trends they would know that it is pretty much impossible to have an iron clad grip on the market.

A huge problem with ms trying to create their consoles into set-top boxes and broaden it to other areas is that xbox is mainly doing well (and not very well) in the us.  It is absolutely tanking in japan (a huge money sink) and I don't think it is doing all that fantastic in europe.  This gives so many other companies the ability to enter the market they hope is coming and makes the xbox seem more ridiculous as a trojan horse.  This limitation also basically eliminates their chances of ever doing fantastic with the xbox.  Making a trojan horse device expensive, and specifically aiming at hdtv owners ontop of the previous limitation is also pretty foolish.  A niche product can only let the new product be niche as well.  Even the game library on xbox show how limited the users are, the only high selling games all tend to come from the same genres and ideas.

They are trying to get into tons of new areas but none of them seem to be taking very well.  They want to get the whole windows connects everything going but outside of a pc does anybody care about windows?  On a different device it loses its monopoly and even the cusomers' familiarity since it has a different interface.  Does zune still exist?

I had the first xbox and I wouldn't really care if they didn't make another console.  All the games they get will still be made, just for other systems.  The microsoft gamestudios will still be open and probably will stay the same quality since they existed before the xbox was even an idea.  Their consoles aren't exactly full of innovations either.   The xbox success is very insular.