Microsoft Posts Huge Xbox Losses

enron? lemme checky!

 

Oh yes, that enron!
MS and Windows are still around, so far Xbox looks like a good investment. 8)

 

You have to loose money to make money. Plain and simple. I really don't know what merc is talking about saying he "told everyone". Told everyone WHAT exactly? That MS is loosing money on xbox? Well DUH MS predicted how much they'd loose on xbox before it even came out!

Who cares if MS is loosing money anyway, as long as I get games I want to play i could care less. Some of the fanbois are too hung up on things like this.

 

I think the term is "Speculate to accumulate", Microsoft realised that they couldn't just drop a console into the market and have it be profitable immediately while also creating a large enough userbase for it to be worthwhile, so they are "speculating" that by spending money to create a market hold of any reasonable percentage for X-Box they will then be able to leverage that position when it comes time to launch X-Box 2 and can then begin to truly "accumulate" from that point onwards.

 

Wow, that's low! I figured they would have lost around $1 billion by now. That's great.

I expected MS to lose $1 billion in years one and two, break even in year 3, and make about $1 billion in years four and five, to break even overall. If they've only lost $528 mil in 1.5 years, they're sure to rake it in later. Great news for Xbox!

 

Wrong. The lost 528 million in 2 different quarters. The have actually lost a lot more than that total on the XBox.

I don't foresee them ever making money on the XBox. Especially as the US market becomes saturated as the Japanese market has begun to do.

They only forecast 7 % earnings growth next quarter. That's an all time low for MS. Its just a matter of time. If the XBox2 is just as unprofitable as XBox, and it will most likely be as MS is forced to keep up with Sony and they have to buy off the shelf products from Intel and NVidia, Microsoft will drop the XBox in 3 to 4 years time.

Now if Microsoft was run like a real company where its shareholders actually had a say in putting foolish business decisions like the XBox to bed like they should be ...

 

1) I highly doubt XBox2 will be as unprofitable as XBox has been so far, but then I also doubt XBox will remain as unprofitable as it has been so far. If you want to enter a new market which already has other dominant companies then you either have to be prepared to make the sacrafices to make yourself big, or not bother enter at all. The losses are all a part of Microsoft getting the product into position, XBox2 can be run as a proper product.

2) This is exactly why people with your train of thought will never start and run a truly massive corporation in a fast moving industry, to create a company like Microsoft in the first place you have to be prepared to take chances, you want to expand that business by any noticable margin then you have to be prepared to take chances. Microsoft will not be disappearing from this market anytime soon, and their having accepted the losses associated with XBox so far leaves them in a more than acceptable position when only just coming up to half way through this generation.

 

News of large losses on Xbox seems to please some people, because (I guess) they think it indicates that the Xbox's current success is unsustainable, and that MS will have to give up or scale back soon.

But if you belive MS went into the Xbox project knowing that it would incur these kinds of losses (and MS isn't dim), then another way of looking at it is that it shows the depth of MS's willingness to compete in the market.

I wonder why MS is willing to spend so much money to dominate the video game business? Does MS expect to make it back later? Or is this just a defensive move aimed at keeping Sony from getting too big?

I think that products like Xbox Live! show that MS has more plans in store than just trying to keep Sony from owning the living room.

In any event, competition is usually good for consumers, and in this case, I think the Xbox has had the following positive impact on the console market:

+ Xbox forced Sony to drive the price of PS2 consoles down faster than it would otherwise have fallen.

+ Xbox Live! proved that broadband console gaming works, and forced Sony to accellerate and improve their broadband plans.

+ Microsoft's developer support is so good that it forced Sony and Nintendo to significantly improve their developer support. (Which means better third-party games for PS2 and GC.)

+ Xbox made cross-platform games more profitable, and I think that the GameCube benefitted from the first generation of cross-platform games, because publishers said, "of course we'll do all three consoles". If it was just Nintendo vs. PS2, they might not have bothered.

In fairness, there are negatives, too:

- Cross platform games take longer to write (three platforms instead of two.) So they're more expensive than if there were just two platforms.

- Some good games (Halo) are exclusive to Xbox, and therefore are unavailable on other consoles.

- Its much harder for the second tier console vendors (Sega, Nintendo) to compete. Sega's already been forced out of the market, Ninendo may be forced out in the next generation.

 

I really don't think XBox's losses have peaked yet. Its probably going to get quite a bit worse before it gets better.

 

Perhaps you failed to read the stoory: XBox losses are increasing. It is becoming more unprofitable. Now exactly why are XBox losses going to decrease?

Potentially if MS was to increase their first party gaming revenue, they could decrease losses. Looking at the releases they have on deck, I don't see that happening. They have thus far put out some of the worst exclusives titles that console gaming has ever seen.

Rare will probably turn into one of the worst acquistions in gaming history. No one buys Rare type games (save maybe PD) on the XBox. The Rare execs are looking like the biggest f*ck ups ever: 80% of the top selling games on the XBox are FPSes, and they think they can make money on that platform? Total idiocy.

NVidia is still going to want their 50 bucks per console. Intel is still going to want its 35 bucks. Seagate still wants its 30 bucks. Who knows maybe their suppliers and manufacturers will want more. NVidia is certainly pissed at MS. Looking at Flextronics dismal earnings report, maybe they will want more or are very unlikely to be reducing the cut that are taking from MS.

MS can't reduce the cost of the XBox like Sony and Nintendo can on their hardware.

 

Why do you think that?

Hardware costs tend to drop over time, not increase, and software sales are at much higher volumes now with a larger userbase which generate tons of profit...

Plus round 2 of the 1st-party launch games (Halo 2, PGR2, etc) should buoy the bottom line very well...

Sure they can, transitioning to a smaller box. I'm fairly certain MS also made deals with Nvidia and Intel for the royalty fees based upon the process technology and/or Nvidia and Intel's cost for it. I would think the money MS forks over to Nvidia and Intel would drop once they move from 0.18/0.15 to 0.13 and shrunk the box...

 

Correct me if I'm wrong, but didn't they increase because for the first figure, the Xbox wasn't even available the whole time (only part of that quarter), whereas for the second figure the Xbox was available the whole time?

It launched in November 2001, remember...

 

Right certain types of hardware costs do drop over time. Its usually a matter of volume and commodity pricing dynamics.

However, its highly unlikely that the costs to produce a Pentium III 800 mhz is going to be dropping for Intel. No one except MS is buying these chips anymore. Its also highly unlikely that Intel will be shifting production of that chip to a newer smaller process. They economics for that transition make no sense. They will continue to produce the XBox CPU on outdated spare fab capacity. The costs will not drop.

NVidia has made public statements (perhaps not entirely truthful) that making the XBox hardware is actually costing them money. They won't be dropping the amount they charge MS anytime soon. They might even increase their bite out of the XBox2 considering they are having a hardtime convincing MS to pay for their current shipments.

 

Pentium IIIs are still in production for non-Xbox purposes, mostly for the ultra-low voltage mobile chips which are around 733MHz as well.

The Pentium III already exists in a 0.13 micron form, just with more cache than the XCPU's, it's not like they need to redesign the ENTIRE thing when they ditch half the cache to move it to 0.13 from 0.18. I think it'll most likely happen...

Are you thinking about when MS and Nvidia were in arbitration over pricing, and Nvidia said *IF* MS got its way they'd lose money...

 

bryanb, you're partially correct, but you're missing some important points.

You're correct that Xbox is more expensive than the PS2, and that it's harder to cost reduce. But you are missing some ways in which MS can cost reduce it.

Because they saw how the price of the PS 1 evolved over time, MS knew it needed to reduce the cost of the Xbox over its lifetime, so it probably negotiated multi-year contracts with NVIDIA, Intel, and other sole-source suppliers. that included built-in price drops.

Otherwise the sole source suppliers could hold a gun to MS's head by saying "hey, we won't give you any more chips unless you pay us way more money."

The contracts seem to be bothering NVIDIA, but they don't seem to be bothering Intel. I think this is because the Xbox CPU is now what is considered a "fab filler". That means it's cheap and easy to produce at older fabs that aren't needed for other production. Intel makes so many chips each year that it costs them very little to run off Xbox CPUs when they need to.

 

Current Pentium III production is entirely insufficient to apply volume economics to the production of the XCPU. And yes the costs of moving the XCPU to the smaller process cannot be offset by the gains in yields. There is always redesign required when moving to a smaller process. You don't know anything about microchip production do you? It all comes down to the fact that only 9 million XBoxes have been sold and there is no pending increase in the amount that people are purchasing. In fact, there is every chance that the US market will reach saturation as everyone's growth figures for that market have been shown to be too high.

No, I'm thinking of when NVidia had to ditch some 30 million in hardware cause Microsoft redesigned the security of the XBox to counter hacks.

 

Of course NVidia's cut from the XBox is reduced over the course of the contract. But the amount of the decrease pales in comparison to the price savings that both Sony and Nintendo can reap. NVidia was getting something like 45 bucks for each XBox early on and that number was reduced to the high 30s range.

Meanwhile, Sony is able to stick 2 of the PS2s chips into 1, a huge savings, and the Gecko chip in the GameCube was designed from the get-go to be a cost saver.

The only real savings that MS can do is to move production to China, which its supposed to be doing. But that's just peanuts compared to real component savings that Sony will see this year.

Sony is poised for the 149.00 price cut. Nintendo can manage the 99.00 price cut. MS is bleeding even deeper with an additional price cut come E3.

 

Xbox is in good shape. $528 mil in losses over 9 months is only $705 million over a year. That's totally acceptable. I figured they'd lose a billion in the first 12 months. Not bad at all.

Xbox being in the market has forced Sony and Nintendo to lose a LOT of money as well. Probably close to $1 billion in price reduction losses. If every time MS loses $1 billion their competitors lose $1 billion, then they will eventually drive the competition out of business. They can outspend anyone.

Bryanb

As for MS 1st-party software: It's rated higher than Sony's at gamerankings.com. You might not like it, but the media prefers MS 1st party to Sony 1st party.

Halo
Project Gotham Racing
Oddworld
Amped
Rallisport Challenge
MechAssault

These were all quality releases that scored well with reviewers.

Quantum Redshift and BLiNX were also solid, despite bad reviews.

Xbox had a rough 2002 if you didn't like Sega's releases (JSRF, Sega GT 2002, GUNVALKYRIE, Shenmue 2), but personally I thought these games were great.

Upcoming releases:

Brute Force
Kameo
Halo 2
Project Gotham Racing 2
Sudeki
Fable
BC

These should all be pretty good.

In summary:

Xbox is here to stay. 1st party exclusives are getting better all the time. Xbox will probably break even.

 

i think MS losses on xbox have easily surpassed 1 billion..

how is MS going to make bake the money it lost ?
how much money do you think MS makes per game ?
how many games would they have to sell ?

if i remember right, MS thought xbox live could bcome a big revenue stream ensuring big profits.. and if it doesn't happen ? online didn't save dreamcast..

 

Well, there are 9 million Xbox gamers out there who will be buying games for the next 3 years, for starters.

Hardware price reductions, higher userbase, more 1st party software sales.... wait until 2005 and you'll see it my way.