Microsoft is reportedly subsidizing $100-200 per Xbox while Sony started breaking even more than a year ago, help me understand

[iroboto]

I agree, but you proposed R&D as being the reason.

Moving along.. there is definitely something amiss with Microsoft's hardware being subsidised by $100-200. I couldn't even wildly speculate how that is a thing unless Elon Musk is hand building every one.

Zaphod mentions it up above.

dictions have incorporated the basic concept of r&d as an (intellectual) asset for accounting purposes" (my paraphrase, I'd have to see if I could find it).

Of course physical assets may go elsewhere on the books, and I'm sure there are many exceptions around. I know some allow basic research to be written off as incurred and I've seen rules for getting "failed r&d" off the books. Out in the wild I'm sure that there is all sorts of technically legal/proper accounting shenanigans going on.

Edit: Seems the standard in the US is to expense r&d costs as incurred regardless.

IIRC it was because I thought I read an article or sets of articles that indicated in the papers https://app.box.com/s/6b9wmjvr582c95uzma1136exumk6p989/folder/135953042066
that R&D was an included cost for the consoles. I cannot find that specifically.

https://www.washingtonpost.com/video-games/2021/05/07/playstation-xbox-epic-games-apple/

 

[Nesh]

The likely senario is that this is akin to shipped vs sold. MS takes the cost of actually building and delivering the unit. Then they take the R&D they spent and divide it by the amount of consoles they expect to sell to find out the cost per unit of R&D .

Sony would have 2 advantages here. if sony expects to sell at least what the ps4 sold then they would be dividing up the R&D spread across a 120M units while MS would be spreading it across 60M units. Also sony only developed one console this generation while MS has developed both the series s and the x.

A lot of wild assumptions there

 

[BRiT]

A lot of wild assumptions there

This entire topic is nothing but wild assumptions so why single out only 2 posts? No one here has any more of an insight into this as anyone else. We're all simply trying to figure out what's going on for a throw-away statement during an interview.

 

[Silent_Buddha]

Since people are talking about these things and wondering...

WRT how R&D is accounted for in the US.

8.3 Research and development costs

Research and development (R&D) costs need to be considered to determine whether they should be capitalized or expensed as incurred. Additionally

viewpoint.pwc.com

R&D costs are accounted for in accordance with ASC 730, Research and Development. ASC 730-10-25 requires that all R&D costs be recognized as an expense as incurred. However, some costs associated with R&D activities that have an alternative future use (e.g., materials, equipment, facilities) may be capitalizable. See PPE 8.3.3 for additional information on costs associated with R&D activities that may qualify for capitalization.

Here's a link to the actual tax code for those that want to peruse it.

IRC 41 ASC 730 Research and Development Costs | Internal Revenue Service

The IRS has issued revised guidance for the allowance of the credit for increasing research activities under I.R.C. Section 41 for Taxpayers that expense research and development costs on their financial statements pursuant to ASC 730.

www.irs.gov

WRT whether or not R&D may quality for Tax Credits, they need to be a Qualified Research Activity (QRA) as defined by the US Government.

Audit techniques guide: Credit for Increasing Research Activities (i.e. Research Tax Credit) IRC § 41* - Qualified research activities | Internal Revenue Service

This audit techniques guide (ATG) sets forth the research credit technical advisors’ suggested guidelines for auditing research credit issues.

www.irs.gov

It can be difficult to determine whether R&D may or may not qualify. As well only R&D conducted within the Unitied States or its territories can qualify for the tax credit. Any R&D conducted outside of the US and its territories is exempt.

A more simplified explanation by a consultancy firm that specializes in determining whether or not a company's R&D may or may not quality as a QRA. R&D must qualify as a QRA before it can qualify as a QRE.

Qualified Research Expenses (QRE): A Complete Guide - Parachor Consulting

Does your business qualify for the R&D tax credit? Read this guide to find out what qualified research expenses (QREs) you can claim.

parachorconsulting.com

And a non-profits analysis of the R&D Tax Credit and whether or not it's been effective in encouraging companies to engage in more R&D.

Reviewing the Federal Tax Treatment of Research & Development Expenses

Simplifying the R&D credit, making it more accessible for smaller firms, and ensuring full cost recovery for R&D expenses by canceling the upcoming R&D amortization are three things policymakers should consider when trying to improve the tax code for R&D.

taxfoundation.org

I'm putting this here as they spell out the current maximum tax credit that R&D can qualify for as long as it qualifies as a QRE. The actual tax credit benefit will generally be much lower than the maximum as it is not an addition to existing tax credits that a company qualifies for, but instead raises the tax credit ceiling for QREs.

Regards,
SB

 

[Deleted member 11852]

Zaphod mentions it up above.

Zaphod explained why your idea of costing R&D into the final console was not a thing that's going on. As far as I can see he is none the wiser why Microsoft is burning through money on every sale.

This entire topic is nothing but wild assumptions so why single out only 2 posts? No one here has any more of an insight into this as anyone else. We're all simply trying to figure out what's going on for a throw-away statement during an interview.

You can watch the WSJ interview with Phil Spencer, its about 30 minutes long and talks about a bunch of things, including abandoned projects. This interview is why there was a speculation last week about increased in the cost of consoles and GamePass - it's all here. The WSJ asked almost all of the tech guests about the resilience of their respective tech industries during recessions.

The section relevant to this thread starts about 9m45s in. The WSJ ask Phil Spencer why, given Microsoft supported Epic railing against the 30% cut on iOS/Google mobiles stores but it keeps the same 30% cut on Xbox. His response is that the big cut is because of the 'subsidised' cost of the hardware. He talking about mobile gaming - and having on mobile - a lot more than Xbox.

 

[BRiT]

You can watch the WSJ interview with Phil Spencer, its about 30 minutes long and talks about a bunch of things, including abandoned projects

I know that. I linked it earlier in the topic, but that was without it embedding as a video thumbnail.

But its nice to have an exact TimeStamp for others to jump to. Also seems to be a better video player on the YT video too.

 

[BRiT]

The section relevant to this thread starts about 9m45s in. The WSJ ask Phil Spencer why, given Microsoft supported Epic railing against the 30% cut on iOS/Google mobiles stores but it keeps the same 30% cut on Xbox. His response is that the big cut is because of the 'subsidised' cost of the hardware. He talking about mobile gaming - and having on mobile - a lot more than Xbox.

Yeah, kind of seems like a bit more generalized explanation than an exact accounting breakout, which is why I'm not too fussed with not knowing what or where the extra costs are.

 

[Deleted member 11852]

Yeah, kind of seems like a bit more generalized explanation than an exact accounting breakout, which is why I'm not too fussed with not knowing what or where the extra costs are.

I'm not fussed either, but I am intrigued why Phil Spencer thought this was a good time to reveal that they are losing hundreds of dollars on each console sold when Microsoft have not reported specifics on the divisions financials for years. It's weird fact to drop in to an answer to a question that wasn't even digging into the profitability of Xbox hardware.

 

[BRiT]

I'm not fussed either, but I am intrigued why Phil Spencer thought this was a good time to reveal that they are losing hundreds of dollars on each console sold when Microsoft have not reported specifics on the divisions financials for years. It's weird fact to drop in to an answer to a question that wasn't even digging into the profitability of Xbox hardware.

They've said that same line previously, so it's nothing new. What I am surprised at is how that question was approved by Microsoft Legal/Financial/PR to be asked and answered last week because it puts them in one of those balancing acts, to justify the 30% transaction fees you got to say something while at same time you don't want to give anything for regulators to dig into.

 

[Zaphod]

I'm not fussed either, but I am intrigued why Phil Spencer thought this was a good time to reveal that they are losing hundreds of dollars on each console sold when Microsoft have not reported specifics on the divisions financials for years. It's weird fact to drop in to an answer to a question that wasn't even digging into the profitability of Xbox hardware.

Might be a conscious strategy to reinforce the narrative that they are the scrappy console underdog rather than some overwhelming big-bully monopolist looking to take away PS-owners toys?

 

[BRiT]

looking to take away PS-owners toys?

Been one of those days where I read that as "looking to take away PS EyeToys" and was rightfully confused.

 

[Deleted member 11852]

They've said that same line previously, so it's nothing new. What I am surprised at is how that question was approved by Microsoft Legal/Financial/PR to be asked and answered last week because it puts them in one of those balancing acts, to justify the 30% transaction fees you got to say something while at same time you don't want to give anything for regulators to dig into.

I believe WSJ's Tech Live events are live and unscripted, so none of the questions would be pre-cleared in advance. It's not a trick question, consoles are at a loss for a period, then for not much profit and the R&D and production costs have to be born somewhere - and that's the game libraries. His is right about it being different between consoles and phones, Apple and Google are just taking the piss.

 

[Shifty Geezer]

These are not good discussion posts:

yea but its more fun to believe that MS wouldn't be able to have amd make them a console at a similar price point than sony.

A question was asked. Platform-biased beliefs have no value in an answer.

A lot of wild assumptions there

Not wild assumptions but shared ideas from people who don't know to people who don't know. That's just normal discussion. If the interest is only in a super-informed answer, a general discussion board like this is no use and the OP should ask suitable accounting experts on Stack Exchange or something.

This shouldn't be viewed as Sony versus MS with some sort of winner, but a mystery, like a murder mystery. Everyone contributing should be happy to share their theories, have them criticised, and be open to alternative theories. If we're lucky, we'll find an answer that everyone likes. More likely we'll share contrasting theories without any real understanding of the truth until we get bored of the conversation and move on.

So the two real questions

1) Is there really a $100+ physical loss on each console sold?

2a) If so, what accounts for that?
2b) If not, how does the accounting work?

Regards 2b, the suggestion R&D cost is spread across a flat prediction of units sold means there'll never be a time when the console is not loss-leading. That's contrasted with XBOne where it was announced the consoles would be break even break a profit:

At $500, Microsoft Says The Xbox One Will Break Even Or Make A Profit

After months of policy reversals from Microsoft, there's only one major difference between the Xbox One and the PS4 at this point, the price differential, and the subsequent reason for the price differential. The PS4 retails at $399 while the Xbox One is $499, and comes with the Kinect sensor, [...]

www.forbes.com

"We're looking to break even or low margin at worst," he said. "As we can cost-reduce our box as we've done with 360, we'll continue to price reduce and get even more competitive with our offering. You've seen us over the years constantly be focused on profitability and improving year over year. If you look at 360 that platform lasted for seven to eight years and it's going to go for another three years. It's incredibly profitable now in the tail."

Of course, the statements culd be using different numbers in different contexts. Contrasting with Yusuf Mehdi telling us XBO would be proiftable and XB360 was very proftable, we have Lori Wright saying MS has never made a profit on any console hardware sold. I think that's one for the lawyers to argue over!

 

[dobwal]

So, since thus is now BeyondAccounting3D I'd like to get some feedback from specialists over here. What is the proper way to account for RnD expenses?

In terms of taxes, in the US, you incur them in the year they occur, amortize over five years (15 years for foreign companies in the US) or delay for 4 years.

 

[Silent_Buddha]

Regards 2b, the suggestion R&D cost is spread across a flat prediction of units sold means there'll never be a time when the console is not loss-leading. That's contrasted with XBOne where it was announced the consoles would be break even break a profit:

If the loss is purely due to R&D being accounted for over an amortized 5 year period, then after that 5 year period it falls back to mainly the production cost of the hardware. In theory that means that the console should be break even or able to account for a profit after that point even if the cost of the R&D hasn't been paid for yet (due to not moving X number of predicated units). Alternatively once the predicated number of units sold has been sold, then the R&D won't affect the accounting cost of those consoles after that point as the accounting was predicated on being "paid for" with X number of units sold.

If the loss is due to the cost of the hardware and just increased due to the accounting period for the R&D then no, it will always be loss leading unless the cost of manufacturing also goes down by the time the R&D is no longer being accounted for.

Regards,
SB

 

[dobwal]

Phil Spencer recently said this:



Source

While Sony's CFO back in August 2021 reported that the $499 PS5 was no longer being sold at a loss.



Source

The PS5 was turning a profit after only 8 months. The Xbox consoles are still taking a hefty hit per unit over 2 years later. What explains this disparity? Do keep in mind that Sony was making a profit before the move to 6nm which occurred recently so that cannot explain the difference. The difference in the BOM is pretty dramatic. I'd understand if the SX was a tier above the PS5 with its components but it really isn't. Furthermore, I believe the PS5's SSD also costs more to manufacture and the Dualsense as well. If that's true, then I have no idea how come Microsoft is losing so much money per unit.

Volume? Supply chain issues?

Definition can explain the difference or the lack thereof. There are a bunch of costs that components versus retail price doesn't cover. Sony has to pay for packaging, shipping, warranty, warehouses, marketing, sales/accounting/admin staff, hardware and software engineers. These are costs that Sony has to mostly recover through software, subscription and accessory sales.

I highly doubt the PS5 would be a profitable business if the only thing Sony could rely on was the margin difference between BOM and the retail price of the hardware.

I don't think you should conflate what Spencer is talking about with what Sony's CFO is talking about as there is a ton of context missing.

 

[Shifty Geezer]

If the loss is purely due to R&D being accounted for over an amortized 5 year period, then after that 5 year period it falls back to mainly the production cost of the hardware. In theory that means that the console should be break even or able to account for a profit after that point even if the cost of the R&D hasn't been paid for yet (due to not moving X number of predicated units).

Would that account for the wide range, $100-200, as that depends on how many units sell in 5 years?

 

[Silent_Buddha]

Definition can explain the difference or the lack thereof. There are a bunch of costs that components versus retail price doesn't cover. Sony has to pay for packaging, shipping, warranty, warehouses, marketing, sales/accounting/admin staff, hardware and software engineers. These are costs that Sony has to mostly recover through software, subscription and accessory sales.

I highly doubt the PS5 would be a profitable business if the only thing Sony could rely on was the margin difference between BOM and the retail price of the hardware.

I don't think you should conflate what Spencer is talking about with what Sony's CFO is talking about as there is a ton of context missing.

This is very true as neither has stated whether Cost of Sales is included in the discussion of whether or not their hardware is selling at a profit or loss. They are both telling the truth WRT the context of what they are saying but that context isn't being divulged along with their statement. IE - the statements from Sony and MS aren't necessarily talking about the same thing.

Regards,
SB

 

[Silent_Buddha]

Would that account for the wide range, $100-200, as that depends on how many units sell in 5 years?

It could also be XBS-S versus XBS-X. Without further explanation there would be a whole host of variables that may or may not be included in that range.

That's always the problem with public statements that are generally used for PR. They are always truthful, but the context of what the statement encompasses is almost never divulged.

Regards,
SB

 

[iroboto]

Would that account for the wide range, $100-200, as that depends on how many units sell in 5 years?

I was under the assumption that meant 200 on Series X and 100 on series S.