For most of us that have an Xbox 360 (that works), we love it. In fact, I'd say for most gamers nowadays in the North America regions, the 360 has more or less become the next-gen console of choice -- maybe mostly due to the fact that both Nintendo and Sony haven't caught up software wise in this new generation.
Well, according to an old and crusty financial type, Microsoft isn't doing anything right when it comes to video games. Speaking through his Forbes blog, Mr. Roger Ehrenberg (Forbes has a blog now?) says that Microsoft has been on a "disastrous endeavour." He goes on to say the following, while shaking his cane in the air:
After taking a step back and looking at some objective numbers (taken from Microsoft's (nasdaq: MSFT - news - people ) own financial statements and comparative console sales figures extracted from VGChartz.com and Wikipedia.org), I have concluded that gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective.
The seeds of this failure are evident from its sales performance in Japan, particularly when comparing its 18-week sales figures (which is about how long the Wii and PS3 have been out relative to those of the most successful console releases).
More ramblings after the jump.
But why is it a failure, really? The old man speaketh:
Let's first consider Microsoft's Home & Entertainment Division ("H&E"), which includes Xbox 360, Xbox, Xbox Live, Consumer Software and Hardware Products, and IPTV. Making money, i.e., the creation of long-term shareholder value, has got to be the ultimate driver of Microsoft's gaming (and H&E) strategy, right? 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.
I think it is also interesting to note that Microsoft's actual disclosure shows only revenues and operating losses--I backed into and show expenses below for explanatory purposes. Why might it be that Microsoft has strayed from the classic "revenues minus expenses equals profits (losses)" disclosure? Perhaps because it doesn't want investors to focus on the fact that more than $21 billion has been invested in a business that has performed so poorly, with unclear prospects for improvement.
Sometimes these cold, stark facts seem to get lost in the shuffle. Xbox 360 (a meaningful part of H&E) might be a fine product, but if so, why is it so financially disastrous to its maker? I understand the concept of selling a console at a loss in order to lay the foundation for recoupment of original investment, plus operating losses, plus attractive financial return through gaming, but what is it going to take to turn things around? Nothing short of a tectonic transformation in perception of Xbox 360 relative to its competitors.
The target audience is to blame then?
Sure, the Xbox 360 can be righteous and cool with hard-core gamers, but this is not a sufficiently large user base to recoup the magnitude of investment Microsoft has made in its gaming platform. So if this is Microsoft’s strategy, it’s got a problem. And if the strategy is really more mass-market, then it’s got some serious repositioning to do relative to the Wii, which is both cheaper and more accessible to Ma and Pa and Timmy and Tammy gamer. In short, I am at a loss. Correct that: Microsoft is at a loss. $5.4 billion and counting.
As far as Japan’s role here, consider that over 19 million PS1s and 20 million PS2s were sold in Japan alone, close to the total worldwide sales figures for the original Xbox console. Success in the Japanese market is a key part of getting the game developers to buy into a platform, for which they invest substantial sums and create titles. Plus, people want to buy consoles with better game libraries. Success in Japan is frequently a precursor to success globally, which makes it particularly attractive for game developers who are looking to amortize their development costs over as large an installed base as possible.
If, for instance, the Wii is hot, you get shops like EA turning themselves into pretzels to build their title libraries for the Wii console. And if your particular console isn't hot? Well, let's just say that developers aren't going to be laying out big bucks to invest in the platform.
It is instructive to look at where the last major console releases were 18 weeks after launch in Japan. Basically, if you did well in Japan during this time frame, you had a chance to have a blow-out product. If you didn't, well, you didn't. The Xbox did better than the Xbox 360, and even the PS3 has done better than the Xbox 360. But success in Japan is not a guarantee of a runaway success, as the GameCube proved. Without question, Japan is an important and critical market for building a globally successful gaming platform, and an early read of the tea leaves does not bode well for the Xbox 360.
And this is clearly not lost on Ballmer's Boys in Redmond. Microsoft's vision of the gaming console as the window into the living room is a big, big bet, and one that clearly hasn't paid off thus far. The emphasis on HDTV as being a key factor driving broad-based console sales kind of misses the point. Is the Wii successful because of its zippy graphics and technological superiority? No. It is successful because it is fun. And because it appeals to a broad audience. And because it is comparatively cheap. The Microsoft strategy sounds more like a niche strategy for hard-core gamers, in which case it's investment in a console strategy should be smaller and more targeted.
Microsoft needs to take a long, hard look at its gaming strategy--and, in fact, its entire H&E strategy. At what point, regardless of its virtually endless financial resources, does it say "enough is enough"? Would we have been better served by returning the extra cash to shareholders rather than investing it in a franchise that seems to have questionable prospects for turning around? These are the kinds of questions Microsoft management should be asking. And hopefully, for shareholders' sakes, they are.
Contest:
12:25 PM on 04.20.2007
| 
Hands 5 dollars to Robert*
Go get yourself something nice
Seriously though stop posting, and have some fun!
BTW how old are you now?
He's absolutely right. From an investment standpoint it has been a disaster. Most gamers don't care about this and that's fine. This could turn into a good investment in 20 years or so, but for now, no sane person can look at the xbox division and call it anything other than a horrible investment. Keep in mind this does not reflect on the quality of the hardware or anything like that.
BTW how old are you now?"
29.
I was planning on taking the day off, but the lure of bringing you guys news is too great. It'll probably be like a half day for me.
Happy Birthday! 29? You're old!
;)
My Xbox 360 is the most radical, sick, twisty tie, anti-whack thing out there. It's the antithesis of whack. It is dope, poppin' fresh, whiggedy-whiggedy-whack, jiggy, all that, AND a bag of chips.
No old man from Forbes (My portfolio is at 2%!!) magazine is going to tell me otherwise.
And he somehow gets away with making racist "tea" comments about Japan. Where's Al Sharpton when you need him?
"If, for instance, the Wii is hot, you get shops like EA turning themselves into pretzels to build their title libraries for the Wii console. And if your particular console isn't hot? Well, let's just say that developers aren't going to be laying out big bucks to invest in the platform."
OH! That's where the PS3 library went to... Okay.
Maybe this would be an issue if MS didn't have enough money to turn the world's oceans into chocolate, but they do, so they're here for the long haul.
right now the 360 may be a failure (from an investment standpoint). i still stand by my statement that the xbox line of products is merely a trojan horse.
ms puts another box in a room you may not have a pc. a reasonably priced, attractive lookin box, with tons of muscle.
ms, google, apple, all tryin to get up in your living rooms. up in your bedrooms. up in your office. xbox is MS's equivalent to apple-tv.
iptv is the future. anyone whose installed media center and played with the few available internet channels can attest to the fact that user programmable tv is the future. whoever can pull that off successfully first, stands to make mucho dinero. since you already have the reciever in your living room via the 360, and numerous windows pc's at work and home, doesn't ms solution look like the obvious choice?
douchebag.
The services MS are providing are costly to develope and market, but the payoff will be well worth it. I think I'm going to invest in them just to spite that turd.
For you...
Hope you get a cake slightly more appealing than these.
That comment goes great with Nex's avatar.
I was digging around on Forbes' intranet (don't ask) and I found this dude's ID card.
Now we know the face of the enemy.
I'm not really surprised by this article or his facts.
MS knows what they are doing.
I am surprised he didn't take Sony's PR money to throw in "And the official word on Wall Street that the 360 also causes cancer!"
I don't think MS spent 4 billion advertising the Zune or offering $100 rebates on purchases like the 360 was this past year.
As you sit and contemplate your substantial age I would give you one piece of advice; Though Death is fast on the straight aways he has trouble taking corners, use this to your advantage.
Hugs and Cocks,
Arrested Developer
Sony: "The PS2 will replace the Cd player, DVD player and PC"
MS: "What was that last bit? I'll take 35% of the video game market share with my Xbox." (Thank you Halo.)
Well, not 15 years, but yeah, they said it's was gonna take a while to get one penny. I think they said like after 2008 or something.
Also, specifically looking at Japan, the region where MS has historically done bad is nothing more than stacking the deck to make his argument look better.
I would say the one really in trouble is Sony. The PS3 is a monumental loss of money. Even though (for now) the ps2 is giving Sony a bit of breathing room (in the gaming sector) the trend is not a good one so far for the ps3. They are losing their bottoms on it.
Anyway, I think MS is holding their own with the 360. Other than some sketchy hardware, the software and services on it are second to none this round. It may not do better than the Wii, but it will certainly crush the ps3.
I would buy you a cake and a beer, but I'm stuck in Orlando.
If the Xbox becomes a good investement for Microsoft 20 years for now, and turns a profit in an industry they weren't even in before, then it's a good investment. Not a "horrible investment now." The fault lies in your short-term focus, not their long-term plan.
Seriously. If my current employer hadn't been willing to operate at a loss for over five years, we wouldn't be turning a profit today and for years to come. That's the very idea of an investment.
This attitude only causes problems. CEOs have to turn results in MONTHS or they're fired. Their VPs have to turn results in weeks or they're canned. Their subordinates have to show numbers that make the VPs feel good about themselves in days or they're out. Any wonder why corners are cut, why everything seems so immoral and short-sighted?
Microsoft knows what they're doing, believe it or not. What is it worth to be the #1 name in the living room for the forseeable future? Is it worth six years of operating losses for one division? They seem to think so.
granted, it can be a bit pricey, and my circle of friends includes a retail clerk, a local college professor who may or may not have time to really enjoy an xbox, a student, and a nintendo fangirl. 2 of them (in addition to myself) already have wiis, one of them (the student) isn't really interested, and the college professor wants one, but doesn't have the time to go camping for it.
the only reason i was able to afford to get a 360 already is due to a gambling windfall last summer on a family trip to vegas, where I turned $100 into $800 using only a few decks of cards and some blackjack statistics.
I'd love to hear what the old guy has to say about the PS Triple. Probably something like "Let us first consider the price ta-ZOHMYFUCKINGGODD ITS $600!!!!!!!!!!!!" during this time his visage would be not unlike a Ghostbusters action figure of yore. I'm just guessing though.
(so... not funny... must... crawl into dark corner and die...)
One thing I think is missing from this issue is PC gaming. Quote of this old farts:
"I have concluded that gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective."
Excuse me? Let's not forget that Microsoft pretty much has had a stranglehold on the PC gaming market with it's line of Windows OSes for, oh, I don't know... [i]over a decade perhaps?[/i} It's gotten now to where if the Windows users don't get it then, chances are, you Mac and Linux users don't have a snowball's chance in hell of getting. With that unbelievably big hold on the PC gaming arena, I wouldn't say it's as disastrous as this guy makes it look. Maybe it terms of consoles MS may be losing, but I don't think that overall it's entirely true.
Also, I heard from somewhere, although I don't know if it is true or not, that the Xbox was created partially as a way for MS to combat the problem of the PS line eating away their hand on the gaming market when they were PC only. So more people were going for the PS1 instead of Windows PCs and MS didn't like it so they created the Xbox as a way to kick Sony back in the balls and regain more of a hold on the gaming arena. I'd believe it too as Sony, I've been saying for years has been trying to destroy the PC as a gaming platform, and more recently before the launch of the PS3, some Sony guy said something like "The Playstation 3 is a computer... We don't need the PC...". It just proved what I was thinking all along.
But now Sony has been losing a little bit of their hold on the gaming arena as can be shown by the relatively lackluster sales of the PS3 game system as compared to the 360 which worlwide is kicking Sony's ass in like, what is it, a 3 to 1 lead? What's even worse is that this guy is making it look like as if when it doesn't succeed in Japan then chances are it won't be successful period. While generally this rule is true and the PS3 has massively outsold the 360 in Japan, worldwide it says something different. The 360 has outsold the PS3 just about everwhere else as far as I know. So the only way it seems like to me that the Sony is really still keeping in the gaming arena is with the PS2 instead, but then again, how long can they really survive on a game system as old as that is?
All in all, Sony is going to be soon, I predict, no longer the top dogs but essentially dead last with MS and Nintendo on top with theirs and going head to head. As to which one will be on top is up for debate. With MS you have the attraction of a centralized online service, XBL, used for multiplayer services, pay-and-download services, extra content for games and whatever else they may have planned in the future as well as they have the graphical capabilities of the 360 itself and an increasingly large library of games to choose from already out there as system sellers. Nintendo has it's motion sensitive controllers, cheap system price, and PR oriented towards an "everyone is included, not just the hardcore gamers" mentality (thus the name Wii) as well as the exercise potential itself is being exploited. Not only are we talking about these senior citizens and senior centers playing Wii Bowling, but also the fears of various parents that they're kids will turn into some fat nerdy loser if they buy into their competitors systems where you just sit there and don't move your whole body.
Sorry for trailing off, but I just said this because this guy does seem to have a point but I don't think it's exaggerated as he says. I don't think Microsoft's loss is going to take as long to be covered due to Sony starting to lose some ground and those figures he gives off may or may not include certain info, including but not limited to if Microsoft is making any money in other regards to make up for that loss.
Anyways, the only way I can see Microsoft losing more in the future is if Nintendo continues a lot of success they seem to have had, but Sony I doubt is going to be able to win this round against the 360.
But then again, don't call me an expert because, hell, I could very well be wrong and a stupid ass that is full of crap about what I say. I mean I don't know anything about finance so I can't really come up with a great explanation for everything. Just gathering my own conclusions is all.
/rant
"For most of us that have an Xbox 360 (that works), we love it." lol, Boy I miss live.....But I guess I needed an excuse to
finish Zelda TLP, You see down here, at the bottom of the
civilised world (NZ) Super Paper Mario hasn't even got a
release date.
Oh wait, yes they do, and numerous times MS has said that they offer these machines at a loss to gain a place in the market, the original Xbox was a loss of money with every machine sold(it posted a profit around the time Halo 2 came out), as it was said here, this is an invesment for MS and I for one am quite happy with 4th 360 in less than 5 months.
Thank god for warranty.
1) The fact the PS3 is doing badly (and not turning a profit presumably) doesn't somehow make the 360 losing money 'okay.'
2) The fact you like the 360, or think it's doing the best in the console wars, whatever, it's irrelevent. This article isn't about the consumer.
Tthis article is talking about why this has been such a bad investment. Yes, Microsoft has more money then Jesus and Tony Stark put together, but they are still a business, and investors/stockholders/etc. do not like to hear that they are losing money because Microsoft is chasing this.
And this isn't coming from a gaming organization; this is coming from Forbes. Of COURSE they're all about the dollar. There is nothing wrong with what this man (who infact, ISN'T an old geezer as Summa is painting him to be) saying that "I have concluded that gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective" when he's totally right.
Guys, I know this is the internet, and I know that big numbers can sometimes not seem so impressive, but $5.4 billion of cumulative operating losses isn't something you want to show investors. That's a lot of zeros!
Compare it to Nintendo, who's made a profit off of nearly everything, including their Gamecube. If you're an investor (and keep in mind, this is what this article is about), which would you rather sink your money into? A section that has spent the last 5 years losing money, or a company who is making buckets of money, even when they 'lose'?
Hey, from a consumer perspective, yes, the 360 has done a LOT right. Again however, this article isn't about the consumer however.
- Eddie
They have NEVER made money. NEVER making money isn't good. The timeframe to get an ROI is also pretty long. Even nintendo would have trouble filling a 5.4 billion dollar gap.
The failure of the original xbox is really hurting MS right now. If the XBox1 turned SOME kind of profit at least it would prove the MS knows how to make a game division profit.
Sony is in bad shape right now but they still have the #1 console by software sales. If the attach rate of PS2 is .5 games per year sony makes out well. So that is how they float the PS3 losses. In comparision MS need an attach rate of approximatly 36 titles per xbox to break even.
Nintendo bitchslapped MS. MS doesn't really know what to do. They beat sony and can't figure out why they aren't #1 They can not compete with Nintendo by spending more. Nintendo is consistently making a profit.
With the kind of investment MS made in the XBOX platform and the consistent losses MS can't afford to be second. They need to be first for a while to let the billions pour in.
MS is like the guy in college who would max out his credit cards to buy cool things to get more friends. Maybe daddy MS is footing the billion dollar bills while waiting for junior to graduate but how long they are willing to do so is a big question.
And I'll mention it anyway, for the non-existent street-cred I'll never get. That's how I roll. Hypothetically speaking.
Mr. Scroogenberg acknowledges the industry norm of console losses being compensated by software sales, but ignores the fact that 2007 will be a hugely successful year for Microsoft. Not only due to the fact that so many blockbuster games will be released in the next several months, but that Microsoft owns the publishing rights to many of these games. XBOX Exclusives? Halo 3 alone should be the answer to any of shareholder doubts. It may be a year or more until the explosion of software sales reaches the pockets of MS's investors, but when they do, there will have been some pretty pennies floating around Redmond.
Maybe Roger should do a little more research before making outrageous claims. The good readers of Forbes are being mislead.
@ Mr. Summa - B+W Photo + "shaking his cane in the air" = hilarious lolz.. almost as good as NEX's shareholder puppy launcher
There are still only 10 million xbox360's in consumer hands. With only 10 million consoles it is hard to make your money back on a game. You also need a VERY high attach rate to break even, Something on the order of 15+ games to a console. Even if MS doubled it's market this year, each owner would have to buy around 7-8 games.
As in investor Halo3 won't answer any doubts but it will make it more likely that 2008 may break even once they get to 25 million consoles they will only need 4-6 games per console to break even.
That means in 2009 the gaming division may turn a profit. given Sony isn't going to quit and Nintendo is getting a large market share no company is going to have the runaway PS2 level of profits.
Except Nintendo. From an investment standpoint HOLY $#%&!
If they start to pay dividends I'll do the Mikinos dance of joy.