Xbox Operation to Turn Profitable by September 2007

[Subtlesnake]

Why are you lumping the Xbox and Xbox 360 costs together? Microsoft had to start again this generation, and because they wanted to be competitive with the PS3 they opted to incur some upfront losses. That's completely normal for a console, and I can see the PS3 taking at least two years to break even.

And yes, Live is a revenue spinner but I read in 'The Xbox 360 Uncloaked' that Microsoft estimated it had only saved them $1 per console. Really, Microsoft have been very conservative this generation and I don't see how they could have made large savings while competing graphically with the PS3.

 

[function]

Since the PS3 will have yet to launch in Europe by christmas, you could give MS some extra fudging time to still make it true .

Yeah, "we will ship 10 million 360s by the time of the PS3 [finishing] launch[ing globally]."

They may even beat that expectation!

 

[Shifty Geezer]

Nintendo, Sega, Sony, and Atari did not take 10 years or 2 console generations to become profitable.

XB was a hole for sure, but you can't judge XB360's performance by tagging it onto XB's. XB360 has been out 1 year, and is showing far smaller losses than XB managed. 2 years to be turning a profit isn't too terrible, especially if the profit it turns in the longrun is very large.

 

[function]

Nintendo, Sega, Sony, and Atari did not take 10 years or 2 console generations to become profitable.

Well, Atari went bust and Sega had two consoles running that bled money. Plus, the price of entry was lower in those days and has been getting progressively higher. Even nintendo had the Virtual Boy (which I don't think was a profitable venture, can anyone confirm/refute?). Anyone can have a console that constantly incurrs losses, it's just that MS had the Xbox and lost big time on their start up round.

If the 360 and PS3 can be profitable within 3 years of launching I think they're doing okay, regardless of what their predecessors achieved.

 

[fulcizombie]

Nintendo, Sega, Sony, and Atari did not take 10 years or 2 console generations to become profitable.
The Xbox was an admitted mistake in economics, but with the 360, MS had the chance to fix the problems. They had the chance to design a system and price it appropriately so it wouldn't bleed money, and they have Xbox Live which is pretty much pure profit, and yet they won't even recover the costs of just the 360 hardware on its own until 2008? That better include all the R&D and marketing dollars as well; the original Xbox was also predicted to be profitable within 3 years of launch.

Why do you care so much??In,fact why do people care so much about when MS is going to make money from its console buisness??I understand that some people are on their kness praying for the day that MS will leave the console buisness but it ain't hapenning soon,so better get over it.It hurts ,i know.....

We had a thread about Sony's pathetic Q1 results and the huge losses at the same quarter that the gaming division(consisting of the very profitable ps2) had and that thread was locked within a few hours and yet threads like this are going on forever.

MS had another piece of harware coming out (zune) that must have contributed to the ,very decreased anyway,losses.Let's see if the ps3 will bring a profit for Sony one year after its release before jumping into further conclusions.

 

[Fox5]

Why do you care so much??In,fact why do people care so much about when MS is going to make money from its console buisness??I understand that some people are on their kness praying for the day that MS will leave the console buisness but it ain't hapenning soon,so better get over it.It hurts ,i know.....

We had a thread about Sony's pathetic Q1 results and the huge losses at the same quarter that the gaming division(consisting of the very profitable ps2) had and that thread was locked within a few hours and yet threads like this are going on forever.

MS had another piece of harware coming out (zune) that must have contributed to the ,very decreased anyway,losses.Let's see if the ps3 will bring a profit for Sony one year after its release before jumping into further conclusions.

I actually like the Xbox (and Microsoft) and plan to get a 360 over a Ps3, it just doesn't seem possible that Microsoft could have put so much more planning and forethought into the 360 and still take years just to recover the costs of it alone (and possibly just the hardware costs, not even including all the other money invested into it). Sony is a bit more understandable that they can take huge initial losses, they're guaranteed huge sales. I don't believe PS1 suffered such loses though, and I'd imagine PS3's high launch price and micro transactions will minimize its losses.

Oh, is Zune from the same division of Microsoft as the 360?

PS. Did you ever think that rather that counting the days until Microsoft withdraws from that market that rather I'm concerned about how it can continue to run an unprofitable venture and still produce a product I like?

 

[Shifty Geezer]

Why do you care so much??In,fact why do people care so much about when MS is going to make money from its console buisness??I understand that some people are on their kness praying for the day that MS will leave the console buisness but it ain't hapenning soon,so better get over it.It hurts ,i know.....

What are you babbling on about? People are raising points and discussing they're validity and offering counter-arguments. It's called debate. It means discussing ideas without getting het up over being 'right' or 'wrong'. You should try it some time.

 

[iNoV]

Nintendo, Sega, Sony, and Atari did not take 10 years or 2 console generations to become profitable.
The Xbox was an admitted mistake in economics, but with the 360, MS had the chance to fix the problems. They had the chance to design a system and price it appropriately so it wouldn't bleed money, and they have Xbox Live which is pretty much pure profit, and yet they won't even recover the costs of just the 360 hardware on its own until 2008? That better include all the R&D and marketing dollars as well; the original Xbox was also predicted to be profitable within 3 years of launch.

Is Live now profitable?? Because it also contributed to xbox's losses

 

[fulcizombie]

What are you babbling on about? People are raising points and discussing they're validity and offering counter-arguments. It's called debate. It means discussing ideas without getting het up over being 'right' or 'wrong'. You should try it some time.

The discussion is old,very old,ancient.Threads about sony get locked up while threads about MS and its losses/profitability/whatever have been going on and on and on...

It's also really obvious where some people are coming from in these "debates".Why would a consumer care about what MS losses or profits from the gaming division??I mean o.k ,i can understand having a debate but this seems endless with endless topics ,like some people are obssessed about it.Wasn't there another thread about "how much is enough" and haven't there been a ton of threads about this and all are based on wishfull thinking of some people about MS.

 

[Shifty Geezer]

The discussion is old,very old,ancient.Threads about sony get locked up while threads about MS and its losses/profitability/whatever have been going on and on and on...

This particular discussion is extending previous efforts by adding later figures and comments. How well are MS currently doing? As for threads about Sony getting locked up, that's because they @%#"&!$ threads where chumps are making @%#"&!$ comments.

and all are based on wishfull thinking of some people about MS.

That's just crazy talk. For some people it's fun just to exercise the little grey cells in debate, considering arguments and POV. I've noticed nothing in this thread that's 'wishful thinking hoping MS will lose money' or somesuch. All we've got is some people thinking MS will sell more consoles, and some thinking they won't. As a console discussion forum that's relevant and...

Why would a consumer care about what MS losses or profits from the gaming division?

...because it gives an idea of what machines will be around int the future and what forces will be influencing the market. If MS lose another 4 billion or more, will we be looking at the possibility of an XB3000? If they sell 20 million a year for another 4 years, how will that affect the market share of the rivals, and thus the availability of software on different platforms? It's all relevant. Won't mean much, discussing it, but it's for the joy of the discussion that most people are here.

This thread so far has been different takes on how well MS are selling XB360s and how much money they are or not making. Fox5 made his point and 3 people contested it with counter arguments...and then you cried foul and claim the universe is biased in Sony's favour. You're the only one out of context here. Leave the anti-platform comments out of it. Answer each point you disagree with by debating it, rather than saying it's unfair that a person you disagree with is allowed to voice their opinions.

 

[Rangers]

Nintendo, Sega, Sony, and Atari did not take 10 years or 2 console generations to become profitable.
The Xbox was an admitted mistake in economics, but with the 360, MS had the chance to fix the problems. They had the chance to design a system and price it appropriately so it wouldn't bleed money, and they have Xbox Live which is pretty much pure profit, and yet they won't even recover the costs of just the 360 hardware on its own until 2008? That better include all the R&D and marketing dollars as well; the original Xbox was also predicted to be profitable within 3 years of launch.

Umm, are you aware Sony lost 369 million this same quarter that ms lost 96? Although as always, it's difficult to seperate exact gaming figures. (Sony's number is fairly pure though).

It definitly looks to me like the 360 is already losing much less than Xbox. I mean at this pace, they will lose only <400m for the whole year. With Xbox1 they lost about a billion per year.

What people are ignoring is that the Sony/ms model has ALWAYS involved losses the first 1-2 years. So why would you expect 360 to already be profitable? It is less than one year in.

BTW, I def do not believe Xbox live is pure profit. I believe it was a pretty big expense establishing the server rooms at one point, that's past but I often shudder to think the bw they run through (many freedemos are 1GB, and downloaded by how many??). I have no idea but I bet it's closer to a break even proposition, with potential for mild future profitability.

The 2008 number could be because face it, the 360 may be close to break even now, but there is a spring 2007 price drop looming that will likely set it back again. If it's a hefty $100 drop, it will sting a bit at first. But also pay dividends with added install base.

I guess they key point of this post is, 360 is losing much less than Xbox was at the same point. That's a fact. So how can the new business model be failing?
________
NotThatShy

 

[Acert93]

I guess they key point of this post is, 360 is losing much less than Xbox was at the same point. That's a fact. So how can the new business model be failing?

And MS has done a LOT to ensure that throughout the generation their cost continue to drop while making moves to maximize the install base (thus more software sales). Some well known points that I and others have brought up before:

- eDRAM. MS could have gone with a 256bit bus, but the problem is pads shrink slower, cutting into die reduction costs. MS could have gone with split pools (2x 128bit busses) like Sony, but then you have the cost of an extra memory controller and logic to exchange data, and the additional complexity for developers. Also DRAM does not drop in price as quickly as chips. The eDRAM move is one way to shift expense, and in the long run should be a very minimal expense (NEC has 55nm slated for 2007). Basically MS bought a lot of bandwidth that, unlike better/faster DRAM, will reduce in price faster than a comparable DRAM solution. In contrast with the Xbox1, it had an UMA like the 360, of course they had 2x the memory as the competitors and less bandwidth which was a hinderance. This time they went 1:1 in memory size configuration and removed one of the bigger bottlenecks of the Xbox1 and DRAM in general (bandwidth).

- Xenon and Xenos. MS really made a mistake with the deals last time around. This time around they licensed the IPs (up front design fees + software royalties) and are contracting with semiconductor manufacturers (Charter and TSMC) directly. They also had the chips designed with future cost reduction in mind. e.g. Xenon will be on the 65nm process ~15 months after launch. MS will probably get 2x or more CPUs per wafer. Down the road they are setting themselves up for a "slim" version. MS has a real plan for yearly cost reductions, something they didn't have last time, and they also have avoided the costly chip-deals they had with NV and Intel.

- Software. When the Xbox1 launched there were a LOT of questions about MS as a gaming company. Could they be trusted? The Xbox1 was the "Halo Machine". I don't think that could be said today about the 360. MS has aquired a number of developers (I doubt we will see any $300M aquisitions like we did with Rare, so there is nearly 10% of their losses right there) and partnered with others (Bioware, Mistwalkers, Epic, etc) to develop new IPs for the MGS brand and have developed competitive franchises in major genres (e.g. Forza Motorsport is a viable alternative that some people actually prefer). MS has become a viable alternative for mainstream gaming and developer support is very strong. Just look at the titles being released on the PS3 this fall -- many are cross platform. Obviously part of this is due to MS's early launch strategy, but it is also because the MS platform is viable and provides developers the ability to maximize profits, as well as offering a bridge for PC developers into the more lucrative console market. The Xbox 360, 12 months since launch, has an attach rate of 5 software titles per console. Strong software titles mean more royalties for MS and more Publisher support. It is a VITAL aspect of long-term profits. In 2008 when Gears of War 2 is coming out along with Bango and whatever else and there is a back library of games like Halo 3, Mass Effect, Forza Motorsport 2, Bioshock, Spliner Cell 5, Assassin's Creed, GTA4, etc MS will be making significant money from software, both 1st party and through 3rd party royalties. Software drives a platform and MS's offering with the X360 is much better than what the Xbox1 showed early on.

- Live. First savings is Live is already established (I heard that nearly 1B of last gens expenses were Live rollout). Another is that Live has gotten through the rough spots (see: EA not supporting online play with Madden). More importantly Live is the "standard" and a major selling point this time around, but more subtly Live is doing what it should be: A) It drives exposure through trailers and demos, especially important for smaller studios with nice apps that often fall through the cracks and for highlighting the BIG shows and releases, B) it has created a real alternative route for publishers to make money after the initial sale through expansions and microtransactions, and C) the arcade where new, smaller games can do well that would NOT sell well/get shelf space through traditional avenues and also gives publishers the ability to resell old classics. Live is all about giving gamers features they want -- while at the same time opening up alternative revenue streams not available in the past. Win-Win (if not abused). Live is absolutely essential to the Xbox brand as a differentiation point and one of the few "we currently lead in this market" bulletpoints, and is being leveraged in other spaces now as well and is the cornerstone to "Live Anywhere". From the MS perspective Live is huge, and it has opened up new ways to communicate with their customers, provide extra services, and further maximize profits--especially for publishers. Even if MS loses on Live, it is central to gaining overall profits.

- HDD optional / 360 Core. This is a big one; last time MS was chasing Sony. Lead time, developer support, and retail price. MS has flipped that paradigm. And while the Xbox1 had a standard HDD, MS has gone 2 SKU. This means their $399 console (with HDD) can reduce a major component cost and hit the $199 faster. This opens the door for more consumers (with viable upgrade path), and more customers means more software sales. And it also means removing a major "manditory/standard" cost in the Xbox1. Now MS is losing less on HDD models than non-HDD models. I think this is the very point where Sony tossed in the towel on cost. I don't think bare SKU v. bare SKU Sony would have been able to play the MS drop game (who wants to lose Billions other than Billy?) So they knew they would have to win on features, so went HDD standard. Considering the PS2 with less hardware outside MS at the same price last gen, maybe not so bad of a move. But for MS it was vital to control this cost because it killed them last time. They charge a premium to cover the cost of the HDD while keeping a cheaper SKU which will allow them tor each more markets--win-win situation in MS perspective, especially since almost anyone/everyone online will opt to get the HDD (I still think Live should require the HDD).

So the bulletpoints for those who hate my longer posts (i.e. how MS has improved their position in the market & removed many of the cash drains from last gen):

* Met competitors, instead of exceeding them, in memory footprint
* eDRAM as a bandwidth solution versus DRAM which would have been more expensive/slower reducing
* Better CPU/GPU plan for licensing and cost reduction
* Standard HDD removed; ability to reach more markets based on price
* Major entrance/setup fees like developer aquisition (e.g. Rare) and services (e.g. Live) out of the way
* Early launch has resulted in stronger position in regards to install base and publisher support
* The Xbox brand and software is much stronger and recognized this time around and seen as a quality platform and seems to be generating brisk software sales
* Established Live as a servive platform that promotes return business and sales
* Xbox 360 won't die after 4 years but should be a stable (but diminishing) source of income after Xbox 3 launches

Xbox and Xbox 360 comparisons are pretty superficial in regards to "profitability" discussions. Yes, the X360 is losing money now. That was always to be expected. But just a LITTLE digging clearly shows that it would be near impossible for the X360 to have the losses Xbox1 had. X360 is superiourly designed hardware in regards to cost reduction, they don't have to chase Sony downward this time around, they are established to have a much broader software portfolio, don't appear to be making huge investments like Rare and Live, and so forth. They have corrected almost every issue the Xbox1 had in regards to profits and have made significant headway on both Exclusive Titles and on 3rd party support. They still may lose money, but 4B in losses? I think they may about break even over 6 years... mind you the Xbox 360 should be longer lasting and not cut off like the Xbox1 because the 360 should be cheaper to make and be bringing in profits at the end of the life cycle ala Playstations. They may very well even fall short of the 45-55M range some projected (and even recently some were looking at 360 market share leadership into 2010), but I think MS from a software perspective is much improved over last gen + has a better plan for cost control and market placement. If they don't exceed 25M in 4 years I would be shocked.

MS is not losing $4B this gen. At the end of 2011 my bet is they will be in the black for the Xbox 360 generation... but not by much. MS will be writing the Xbox1 off as a learning experience and entry fee.

 

[-tkf-]

Umm, are you aware Sony lost 369 million this same quarter that ms lost 96? Although as always, it's difficult to seperate exact gaming figures. (Sony's number is fairly pure though).

Considering that the PS3 isn´t out yet and those 396 (if they are pure) would include PS3 "trouble" it´s expected i guess. However, the 360 is almost a year old, has no competition and should be selling well (alot better that it does though) and it still bleeds them. Of course when it comes to Microsoft bleed is more like dripping and how much money they burn doesn´t matter, imagine that.

http://news.bbc.co.uk/2/hi/business/6089752.stm

3.8 Billion dollars in just one quarter, thanks to their monopoly the outcome of this "battle" is written on the wall Microsoft can not be beaten. Why anyone would support their efforts is beyond me.

 

[Acert93]

TOKYO, April 27 (Reuters) - Sony Corp said on Thursday that it expected its game division to post a loss of about 100 billion yen in the current business year, hit by start-up costs for its PlayStation 3 game machine. That's about one billion dollars Sony is looking to lose to launch the PS3.

Just a reminder that Sony, like MS, expected to lose significant money on their console at first. $900M is a lot of money, and I believe Sony's fiscal year ends at the end of March 2007 (XBD?). And that is with a $499/$599 price tag. Losing money on the first couple years, to provide better hardware to lengthen the gen/profit window, is not uncommon. MS and Sony are really taking it to the edge, but it is not unknown as 2007 will see significant cost reductions from both and possibly some retail price reductions.

 

[RobertR1]

Acert,

The production issues and such will likely push the PS3's BOM higher than expected. Without a lot of consoles on the shelves, the software sales and accessories attachment rate will also be low.

One mistake I think Sony did was bundle everything in. Accessories have huge mark ups and are profitable (desirable ones atleast) and you can recoup a lot of the console losses off that. The MS approach of you pick and choose what you want is good for the consumer and obviously good for them.

Sony's fiscal year number should be quite interesting.

 

[onanie]

Acert,

The production issues and such will likely push the PS3's BOM higher than expected. Without a lot of consoles on the shelves, the software sales and accessories attachment rate will also be low.

One mistake I think Sony did was bundle everything in. Accessories have huge mark ups and are profitable (desirable ones atleast) and you can recoup a lot of the console losses off that. The MS approach of you pick and choose what you want is good for the consumer and obviously good for them.

Sony's fiscal year number should be quite interesting.

What exactly is "accessory" in the PS3 packages? If you prefer, you could always get the "core" version.

 

[Acert93]

What exactly is "accessory" in the PS3 packages? If you prefer, you could always get the "core" version.

Sony has made money off of memory cards in the past and the HDD eats into that (ask MS). Other examples being WiFi, Wireless Controller, Media readers, and so forth. Basically everything on Sony's retail PR sheet about the extra value in the PS3. Not that Sony is wrong on some of these (I like some of them and nice to have them "in the case"), but they can cut into peripheral / accessory revenue.

 

[onanie]

Sony has made money off of memory cards in the past and the HDD eats into that (ask MS). Other examples being WiFi, Wireless Controller, Media readers, and so forth. Basically everything on Sony's retail PR sheet about the extra value in the PS3. Not that Sony is wrong on some of these (I like some of them and nice to have them "in the case"), but they can cut into peripheral / accessory revenue.

HDD presence is mandatory for PS3, and so is Blu-ray. As I suggested to RobertR1, he could buy the cheaper core sku if he so wishes (though he has already made up his mind), which does not include Wifi or Media Readers. As such, where is Sony's mistake, going back to the original argument?

 

[Skrying]

HDD presence is mandatory for PS3, and so is Blu-ray. As I suggested to RobertR1, he could buy the cheaper core sku if he so wishes (though he has already made up his mind), which does not include Wifi or Media Readers. As such, where is Sony's mistake, going back to the original argument?

You're looking at it from the wrong view. From a business point of view Sony isnt potetinally maxing out the profit they could be making.

 

[Acert93]

HDD presence is mandatory for PS3, and so is Blu-ray. As I suggested to RobertR1, he could buy the cheaper core sku if he so wishes (though he has already made up his mind), which does not include Wifi or Media Readers. As such, where is Sony's mistake, going back to the original argument?

The manditory HDD is a mistake in his opinion. Standard HDD means NO memory card sales = lost revenue. Revenue the PS2/PS1 had to offset some console hardware costs.

To illustrate (fictional pricing):

PS2 Hardware Cost: $329.
PS2 Retail Price: $299.
Console Loss: $30

Memory Card Cost: $40.
Memory Card Retail Price: $10.
Accessory Profit: $30

i.e. you offset some hardware expenses with peripherals and accessories which traditionally have had larger margins. Now look a the PS3 in a similar situation:

PS3 Hardware Cost: $329.
PS3 Retail Price: $299.
Console Loss: $30

Memory Card Cost: $0.
Memory Card Retail Price: $0.
Accessory Profit: $0.

That is $30 you traditionally gained through memory cards (which my guess had an attach rate HIGHER than 1 per console) that will not be recouped on the PS3 because its functionality is now made redundant by the standard HDD.

Whether a mistake or not, it does displace some past revenue Sony has to recoup. Part of this is they are targetting the PS3 as a feature-rich platform (you pay more for more) and they are also hoping things like microtransactions offset such decisions. Time will only tell if they made the right moves.