Microsoft takes a $177M loss in 3 months on the Xbox

[Nite_Hawk]

As posted on slashdot:

http://newsvote.bbc.co.uk/1/hi/technology/2480001.stm

Interesting that we finally get to see the amount of money that Microsoft is loosing to keep the xbox afloat. They've certainly got the Money to do it as the title implies, but man that's still gotta be hard to swallow. I wonder if they'll be able to make it back in the long run. If this keeps up the xbox could easily cost them the 2Billion they claimed they'd be ready to spend to get it up and going.

If Nintendo is actually making money off the gamecube, I feel a bit better about them sitting in third place in the US as one of the other threads mentioned. Going up against a ~$60M/month loss leader is pretty stiff competition.

Nite_Hawk

 

[DeathKnight]

Wonder if they can swallow it? The profits they make on the OS side more than make up up for losses in their entertainment division.

The revenue they bring in is staggering and they are contantly turning a profit.

 

[BoddoZerg]

They musta spent much more than that developing Internet Explorer for free while Netscape remained dominant... Xbox is pocket change for Microsoft.

 

[Johnny Awesome]

Wow! That's way lower than most people predicted, including myself. That's only around $700 million per year, and that's after the price drop. Not bad.

 

[marconelly!]

They musta spent much more than that developing Internet Explorer for free while Netscape remained dominant... Xbox is pocket change for Microsoft.

I wouldn't be so sure about that. What exactly have they been spending on IE? Salaries, and that's about it. That really was a pocket change. For Xbox they have a truckload of hardware, servers, marketing AND salaries to pay for.

Btw, those are the losses for the whole division, that AFAIK consists of 7 parts, only two of which being profitable, and other five non-profitable.

It lost $177m, up from a loss of $68m in the same period in 2001. This loss is by far the largest of Microsoft's unprofitable divisions.

By comparison Microsoft's mobile devices division lost $33m and its MSN net service lost $97m.

 

[wazoo]

Wow! That's way lower than most people predicted, including myself. That's only around $700 million per year, and that's after the price drop. Not bad.

They could have lost much more if the xbox was selling at higher volumes. They are quite lucky.

 

[zurich]

I don't know about the rest of you, but MS losing money to push the Xbox in the end leaves me with a better feeling about my enjoyment of the system, rather than Nintendo making a profit and sitting in 3rd.

Kind of like... MS is providing me with the best possible experience vs. a company holding back so they can balance their books.

Granted, MS can AFFORD to do this, but I can't help feel that N shortchanges their customers.

 

[marconelly!]

Kind of like... MS is providing me with the best possible experience

Well that's the thing with their philosophy that I find rather deceiving. At first they will break their necks to appeal to consumers - until they gain enough monopoly on the market, and change the rules as they see fit.

 

[wazoo]

.

Granted, MS can AFFORD to do this, but I can't help feel that N shortchanges their customers.

I think MS will be very happy if the console market was something like "I put a billion on the table, then you put 1 billion on the table, then I put 1B on the table, then you put ... etc ... the first with no money lose"

 

[duffer]

Remember, however, that the $177M / quarter loss includes all the money-losing media and entertainment things that MS does (including MSN, interactive TV, and Windows CE if I'm not mistaken). The same quarter last year the same division lost $60 M. So the Xbox might not be responsible for all of the loss.

If an Xbox is made at a loss, I wonder when they record the loss. They could report the loss when it was created (e.g. in the summer for all the Xboxes they expect to sell this Christmas), or when it's sold (e.g. fall.) That would help us understand how much of the total year's production of Xboxes this number represents.

It's even possible that they record the expense when the console is made, and then record the income when it's sold. In which case this loss is greatly inflated, because it would be offset by a similar ammount of income in later quarters. I guess we'll have to watch future quarter's results to figure out what's going on.

Finally, it's difficult to compare MS's numbers with Sony and Nintendo, since MS uses US accounting standards, while Sony and Nintendo can use the somewhat different Japanese accounting standards. It's possible that if Sony and Nintendo used US accounting rules then they might report different numbers than then do now.

 

[zurich]

You mean if they used US accounting practices they'd be audited

 

[duffer]

Yeah, it hasn't been a good year for US accounting standards, has it?

Even if Sony is using US accounting rules, which I think perhaps they are because Sony is traded on the US stock exchange, it's possible that they account for their losses in different ways. For example, they invested $1B is a fab with Toshiba to build EE (or was it GS?) chips. Whereas Microsoft just pays NVIDIA, who pays TSMC for the use of their fab. The difference is that Sony gets to account for the $1B as an investment (and write it off over a longer term), while MS has to account for the money as an expense.) But $1B is still $1B, and Sony has to pay it whether it's an "investment" or an "expense".

 

[PC-Engine]

Kind of like... MS is providing me with the best possible experience

Well that's the thing with their philosophy that I find rather deceiving. At first they will break their necks to appeal to consumers - until they gain enough monopoly on the market, and change the rules as they see fit.

Ditto

Regarding IE, I don't think M$ put THAT much money into development initially. I mean isn't it licensed from Mosaic similar to Defrag from Symantec?

 

[Teasy]

Wow! That's way lower than most people predicted, including myself. That's only around $700 million per year, and that's after the price drop. Not bad.

How do you know that quarter was indicitive of all the other quarters so far for XBox? Seriously, is that indicitive of all the other quarters so far for XBox?.. if so how do you know?

 

[Nite_Hawk]

duffer:

I think the $177M was actually independent of the MSN and Mobile stuff based on the following:

In the quarter ending 30 September, Microsoft's Home and Entertainment division reported revenues of $505m.

It lost $177m, up from a loss of $68m in the same period in 2001. This loss is by far the largest of Microsoft's unprofitable divisions.

By comparison Microsoft's mobile devices division lost $33m and its MSN net service lost $97m.

I'm not totally sure what Microsoft's Home and Entertainment division consists of, but this seems to suggest that MSN and Mobile divisions lost an additional $130m in addition to the $177m lost by the Home and Entertainment division.

Nite_Hawk

 

[aaaaa00]

Regarding IE, I don't think M$ put THAT much money into development initially. I mean isn't it licensed from Mosaic similar to Defrag from Symantec?

XP Defrag is from Executive Software.

The IE engine was almost completely rewritten between IE2 and IE3 -- there is very very little, if any, code left from Mosiac and Spyglass.

 

[cybamerc]

The Home and Entertainment division is new. Before the Home and Entertainment division there the division for Consumer Software, Services and Devision which was responsible for "Xbox video game system, MSN Internet Access, MSN Network Services, PC and Online Games, Learning and Productivity Software, Mobility, and Embedded Systems." UltimateTV was also part of this division.

Starting from Q1 2003 MSN and CE/Mobility has been spun off into their own divisions.

These are the figures for the division for Consumer Software, Services, and Devices:

2000 2001 2002
Revenue: 1,654 1,961 3,531
Loss: (1,090) (1,666) (1,778)

(You'll have to excuse the lack of proper formatting)

The Home and Entertainment division lost $177 million USD, the bulk of which comes from losses on the Xbox business, from June 30-September 30. The losses will be much more significant in Q2.

 

[cybamerc]

Johnny Awesome:

> Wow! That's way lower than most people predicted, including myself.

No it's perfectly in line with what analyst and M$ itself have been estimating. Stop trying to sugar-coat it. While M$ can more than afford it the Xbox is bad business.

> Not bad.

Please.


zurich:

> I don't know about the rest of you, but MS losing money to push the
> Xbox in the end leaves me with a better feeling about my enjoyment of
> the system, rather than Nintendo making a profit and sitting in 3rd.

Yes... damn them for making the kind of profit that will keep them in business. Moron!


duffer:

> Remember, however, that the $177M / quarter loss includes all the
> money-losing media and entertainment things that MS does (including
> MSN, interactive TV, and Windows CE if I'm not mistaken).

No. The $177 million loss is only for the Home and Entertainment division which the Xbox is part of. MSN and mobile software have been spun off into their own money losing divisions.

> The same quarter last year the same division lost $60 M.

Technically the division didn't exist last year. Not to mention that they're comparing quarters, not the full year. The Xbox wasn't launched till Q2 2001.

 

[aaaaa00]

http://www.sony.net/SonyInfo/IR/financial/ar/2001/f_operating.html

Sales for the fiscal year ended March 31, 2001 increased by 6.2 billion yen, or 0.9%, to 660.9 billion yen compared with the previous year. Regarding profit performance, compared with an operating profit of 76.9 billion yen recorded in the previous year, an operating loss of 51.1 billion yen was recorded.

[...]

Operating losses were recorded during the year principally due to the aforementioned software sales decrease and start-up expenses for the PlayStation 2 format. Cost of sales in the Game business increased principally due to manufacturing-related expenses for PlayStation 2 hardware, including raw materials and depreciation, which are attributable to capital expenditures from previous years.

In fiscal 2001, Sony's gaming division lost 51.1 billion yen on 660.9 billion yen revenue.

51.1 billion yen works out to around 420 million dollars (in march 2001).

Launching a console is NOT CHEAP. Not to mention Sony had profits from PSOne to offset the losses PS2 was incurring to their game division.

You really have to look at the P/L in later years to see if the investment was worth it. For PS2 it was worth it (obviously). It's too early to tell for xbox.

 

[cybamerc]

That's great and all but you could at least have included the numbers for the second year after the PS2 launch. The gaming division made $623 million in fiscal 2002. M$ is budgetting at least two years of losses on its Xbox business.

Nintendo made about $900 million in fiscal 2002 (Cube and GBA launch year).