Microsoft Q2 2010 Earnings

[baten]

They can charge a lot of costs outside the divison. One cannot be sure with such big companies.
But the point is - they are very comitted to the 360, they'll do whatever necessary to prevail.

 

[AmFreak]

Ild say the ones with the asterisks are the ones helping profits the most

Don't forget the license fee's, they were the biggest profit makers.

 

[Silent_Buddha]

Basically the E&D Division would be operating at a loss without X360 console business.

Now within that, it'd be hard to determine what the actually profit/loss on the core console hardware would be. But I think it's generally accepted that there's a balance between the loss leading Arcade and what the majority think is a profit making Elite. With MS most likely trying to keep that as a zero sum balance.

In other words, keep have the benefits of a loss leader (Arcade) without the drawbacks of actually generating a loss. The Elite will be attractive enough that enough people will buy it to offset the loss. And apparently it's possible that in 2009 the price of the Elite is close enough to the impulse buy territory that the ratio shifted a little more to the high end.

Interesting thought - It's possible the ratio might have been even more in favor of the Elite prior to Black Friday sales which prompted MS to partner with Walmart for that 100 USD off Arcardes (effectively 99 USD arcade). An effort to clear out stock of Arcade units that maybe weren't selling as much as they forecast.

Either way, I think MS is still using the rest of the X360 revenue streams to generate a profit while trying to keep a loss leader console without the loss.

Regards,
SB

 

[corduroygt]

Are you sure Mac Office is in Entertainment and Devices Division? I thought it was included in the Microsoft Business Division. Wouldn't make any sense to put it in there as it is neither Entertainment nor a Device.

One would think so, but here it is:
http://www.microsoft.com/msft/ic/segments_edd.aspx

Entertainment and Devices Division ("EDD") offerings include the Xbox 360 platform (which includes the Microsoft Xbox 360 video game console system, Xbox 360 video games, Xbox LIVE, and Xbox 360 accessories), the Zune digital music and entertainment platform (including Zune HD, which was released in September 2009), PC software games, online games and services, Mediaroom (our Internet protocol television software), the Microsoft Surface computing platform, Windows Mobile and embedded device platforms, and other devices. EDD leads the development efforts for our line of consumer software and hardware products including application software for Apple's Macintosh computers and Microsoft PC hardware products, and is responsible for all retail sales and marketing for Microsoft Office and Windows operating systems.

I call shenanigans, Office is insanely profitable, and every Mac owner I know (including myself) uses Microsoft Office, because there are no good alternatives to it. This would definitely skew their numbers.

 

[obonicus]

It's official: Macs are so much fun, even Office is entertainment.

 

[NathansFortune]

Are you sure Mac Office is in Entertainment and Devices Division? I thought it was included in the Microsoft Business Division. Wouldn't make any sense to put it in there as it is neither Entertainment nor a Device.

The X360 hardware is far more likely to be profitable than Zune. Zune hardware might be profitable per piece, but overall I don't think it's selling enough to make the Zune effort profitable. Although I might see it as somewhat viable if you broke down Zune Hardware and Zune - Other (loss). Where Zune - Other represents all other Zune related expenditures.

Regards,
SB

Yup Mac Office was stuffed into EDD to hide OG Xbox losses and early 360 losses. The fact that the division only made around $650m with XBL and Mac Office monies leads me to believe hardware is not yet in the realm of profitability (and why should it be, MS don't seem to be moving down the process nodes at any great speed, and they haven't had any internal redesigns for fear of flaring up RROD). Until 360 moves Xenon/Xenos down to 45/32nm I think losses will continue, yields can only contribute so much to savings...

 

[Silent_Buddha]

One would think so, but here it is:
http://www.microsoft.com/msft/ic/segments_edd.aspx


I call shenanigans, Office is insanely profitable, and every Mac owner I know (including myself) uses Microsoft Office, because there are no good alternatives to it. This would definitely skew their numbers.

Thanks for that link.

It also looks like they stuffed a lot of their R&D costs into EDD also. Basically any R&D not tied to a continuing (and established) software line is included in EDD.

Regards,
SB

 

[eastmen]

Yup Mac Office was stuffed into EDD to hide OG Xbox losses and early 360 losses. The fact that the division only made around $650m with XBL and Mac Office monies leads me to believe hardware is not yet in the realm of profitability (and why should it be, MS don't seem to be moving down the process nodes at any great speed, and they haven't had any internal redesigns for fear of flaring up RROD). Until 360 moves Xenon/Xenos down to 45/32nm I think losses will continue, yields can only contribute so much to savings...

But at this point office for the mac sales will be dieing out .In fact all sales for office should be flat. Office 2010 is coming very shortly and office 2007 is just that 3 years old.

I don't think that mac office is pulling in huge numbers but I bet later this year when 2010 launchs we will see huge increases in the amount of money EDD brings in.

 

[zed]

I just done the numbers (yes bored, its too hot)

since the sep quarter 2005, ED+D has lost a grand total of $1.894 billion(*), true the last 2 quarters have been profitable but unless something major happens, ED+D will not show an overall profit before MS's next console ships

(*)within 5-10%, as the numbers change over time
eg
last quarter had $2902 million revenue and $375 million profit
but in the next years report (comparing it to last years figures) these figures will differ

 

[Acert93]

RRoD pretty much ate any chance of any significant profits this generation.

But it seems reasonable that the 360, when discontinued (after 2015?) and residuals from the platform (360 software sales via DLC) the 360 will be profitable for the division for the entire lifetime. The biggest sales periods for the 360 still remain ahead--2010 should see significant profits unless MS makes a major price push.

Lastly MS got what they wanted: millions of paid subscribers to a vibrant digital distribution channel that includes games, music, and movies. Live, as a service, ties a lot of consumers to MS products. How many Live users who own Arcade games and DLC will want to up and switch platforms?

 

[eastmen]

Really xbox 1 got alot of people into the brand and xbox 360 should do the same. The RROD hurt them badly. But if it is just 1B or so they might be able to make it back and actually be profitable this generation.

We really don't know how much of EDD losses is 360 and what part zune and other parts make up. Though I'm sure losses on zune wouldn't be huge , it most likely has some.

 

[Silent_Buddha]

RRoD pretty much ate any chance of any significant profits this generation.

But it seems reasonable that the 360, when discontinued (after 2015?) and residuals from the platform (360 software sales via DLC) the 360 will be profitable for the division for the entire lifetime. The biggest sales periods for the 360 still remain ahead--2010 should see significant profits unless MS makes a major price push.

Lastly MS got what they wanted: millions of paid subscribers to a vibrant digital distribution channel that includes games, music, and movies. Live, as a service, ties a lot of consumers to MS products. How many Live users who own Arcade games and DLC will want to up and switch platforms?

Aye, if they can average a 300M per quarter profit, that would mean EDD would be making 1.2 billion a year.

However, I wouldn't be surprised if that number goes up in the future.

R&D for Natal will be coming to a close this year, so operating costs from that will be severly reduced. Of course, I wouldn't be surprised if MS shifted the R&D teams working on Natal to other R&D projects after it is finished.

As pointed out, this year "should" be an even better year for MS than last year with quite a few highly anticipated titles coming out.

Natal, of course, is the dark horse in the corner. If it's as successful as MS hopes it could do wonders, if it flops, it might tank the earnings for the year.

More users in Live will have the potential to sell more DLC, rent more movies, etc...

The only thing I see dragging down EDD this year would be the other non X360 related products and R&D.

Regards,
SB

 

[dobwal]

Yup Mac Office was stuffed into EDD to hide OG Xbox losses and early 360 losses. The fact that the division only made around $650m with XBL and Mac Office monies leads me to believe hardware is not yet in the realm of profitability (and why should it be, MS don't seem to be moving down the process nodes at any great speed, and they haven't had any internal redesigns for fear of flaring up RROD). Until 360 moves Xenon/Xenos down to 45/32nm I think losses will continue, yields can only contribute so much to savings...

The only thing mentioned about the Mac regarding EDD is that Mac software and hardware development is lead by EDD. It makes no mention of how MS office for Mac is recorded.

EDD seems to spearhead MS's retail business in terms of products and service meant for consumers and not businesses. Meaning if you can buy a MS product out a store, EDD has something to do with it even when it comes to Windows 7. Sales of Win 7 aren't recorded as revenue in EDD but EDD is paid a commission for marketing Win 7 to consumers.

Furthermore, MBD is where Office revenue is generated and recorded and the majority of the business is through OEM. And given that Office can come preinstalled on Mac and MBD lists Apple and its software suite as a competitor, its likely thats Mac Office is primarily recorded under this division. In contrast, Apple is only listed as a competitor of Zune and MS's window mobile software in the EDD segment description.

MS Office for Mac has never been mentioned in the reports (as far I have read) as generating revenue for the EDD division. Office for Mac is probably generating revenue for EDD in terms of commission paid by the MBD division for development and marketing work done for the software but not directly through sales. MS has put that line about development of Mac hardware and software in every annual report since 2006 where its more descriptive and included "such as the Encarta's lineup of software and services".

360 and PC gaming constitutes almost 75% of EDD's revenue its no way you can hide big xbox losses.

 

[Silent_Buddha]

Thanks for the better in depth explanation of how MS accounts for costs, sales, and marketing dobwal. Especially with regards to business oriented software marketed and sold to consumers.

Regards,
SB

 

[Squilliam]

So do you guys think they will bother with 45nm or go strait to 32nm/28 nm for holiday 2010 ?

At 32nm/28nm a single chip cpu/gpu/edram should be more than possible and would most likely drop costs on the current system ( 2 chips on 65nm with edram daughter die on one of them) greatly. Cooling , pcb cost , power costs and everything else . They could most likely also create an xbox slim to launch with natal also .

Im starting to doubt the concept of them combining the Ed-ram with the main CPU die, simply because doing so would involve additional manufacture steps which ramps the cost.

32nm will release next year at the earliest for availability. They would have needed to tape out around April to get enough chips/consoles available for Q4 this year, and 32nm technology outside of Intel isn't that mature.

 

[corduroygt]

But at this point office for the mac sales will be dieing out .In fact all sales for office should be flat. Office 2010 is coming very shortly and office 2007 is just that 3 years old.

That's WinOffice. Office for Mac's latest version is 2008, with 2010 coming at the END of 2010, probably named as 2011 to avoid confusion with the windows version, just like Office for Mac 2008. Office 2008 is very popular, because it's the native Intel version, and it doesn't need to run on the PPC emulator. This makes it much faster and less memory intensive.

Also, according to this report, Mac Office represents 20% of all retail Office sales in the US, and that was the crappy Office 2004 (PPC):
http://www.infoworld.com/t/applications/microsoft-office-2007-retail-hit-npd-says-217

Of course the real question is, how many people actually buy office at retail?
Anyone know if SYNC is also included in EDD?

 

[zed]

MS Office for Mac has never been mentioned in the reports (as far I have read) as generating revenue for the EDD division.

from various MS financial report of ~a year ago

EDD revenue decreased primarily due to decreased sales of application software for Apple’s Macintosh computers

EDD product revenue increased $169 million or 15%, led by increased sales of application software for Apple’s Macintosh computers and mobile and embedded device platforms.

Other EDD product revenue increased $216 million or 51%, led by increased sales of application software for Apple’s Macintosh computers, the Zune digital music and entertainment platform, and mobile and embedded device platforms.

In another report theyve also mentioned ED+D income was down since they sold less Mac software

 

[Silent_Buddha]

That's odd to think that only a year or so ago total EDD revenue was only about 650 million, and now it's almost 3 billion for a quarter. That's going by the statement that 216 million was only a 51% increase in revenue.

X360 sales (all inclusive) must have absolutely exploded in that year for EDD to go up almost 500% in ~a year.

Either that or that the "Other EDD product revenue" which application software for Mac is a part of is only a small fraction (20-25%) of total EDD revenue. Which would mean app. software for Mac would be just a fraction of that.

Regards,
SB

 

[obonicus]

Have we seen a growth YoY in software? I thought 2009 was in fact down from 2008. Because we know how many 360s they sold.

 

[Silent_Buddha]

Have we seen a growth YoY in software? I thought 2009 was in fact down from 2008. Because we know how many 360s they sold.

Profit and revenue was up, console sales was down. MS implied/stated that lower console sales was offset by a larger ratio of Elite vs Arcade selling. Implication being that revenue was either relatively unchanged or slightly up for the console hardware despite selling less consoles YoY.

Regards,
SB