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[therealbigrich]

I'm on the side of looking at the comments as speaking towards Xbox as a lifetime not being profitable. If we was just looking at Xbox one x being profitable or not I would say it is hard to not see it being profitable. What could there losses really be? I mean maybe hardware but MS said software has offset that so they should still at least be a little profitable if we were to just look at Xbox one imo

 

[LiquidSolid]

From what I can tell even at launch the console only cost around $100 to make so probably by then it was even cheaper to build.

No offence but that's completely ridiculous. The Gamecube was a powerful system for its time, there's absolutely no chance it was that cheap at launch.

We know for a fact the Gamecube was sold at a loss:
http://www.neogaf.com/forum/showthread.php?t=10069
https://web.archive.org/web/20040827092607/http://game-science.com/news/000671.html

 

[Upinsmoke]

This is what I can't get my head around, if the division has never been profitable after so long then it isn't exactly a massive issue to them. It's a drop in the ocean maybe for Microsoft as a whole. Then why not throw as much as they possibly can behind game development?

 

[Armaros]

This is what I can't get my head around, if the division has never been profitable after so long then it isn't exactly a massive issue to them. It's a drop in the ocean maybe for Microsoft as a whole. Then why not throw as much as they possibly can behind game development?

Because then the company will have to answer to shareholders why they are knowingly throwing away so much money on such limited returns.

 

[Colbert]

(a) Your summary claims the exact opposite of the claims of Thurrott. He says they are not profitable now.

(b) You also cannot separate hardware and software of a closed console, you can't cut the unprofitable hardware and keep your profitable software, the former is the only reason for the latter.

(a)
For my conclusion I used gross profit margins of the industry (derived by statistics) because with the current public reporting it is not possible to get those numbers separated for a product line like Xbox. In my opinion a better method than just guessing around like Thurrot did. He also did not explain how he came to his conclusion, tbh. I did based on industry averages (with some adjustments to the games business). I even put a 30% downlift on software and hardware compared to the current margins of the industry sector (HW: 40% and SW: 79%).

(b)
Are you serious? Internally you do exactly this, you separate your products (sw, hw, services) to find out who is contributing how much to your total gross profit margin. That is why "internal accounting" exists which is not the same as "financial accounting".

It is a common practice that you have a mix of gross profits in a product line (Xbox) that in total contribute a positive gross profit while some components can be even in the negative. But you have to know where they are!

 

[justsomeguy]

Microsoft as a whole needs some major restructuring. I don't know how that company is profitable period.

Edit: I am very aware of the divisions that are their moneymakers and the ones that are not. I should have said "I'm shocked they are profitable considering how bloated and inefficient they are as a company". Bad post, my bad.

Ms has had two rounds of restructuring in the last 14 months or so. It's really not that bloated overall.

 

[LiquidSolid]

This is what I can't get my head around, if the division has never been profitable after so long then it isn't exactly a massive issue to them. It's a drop in the ocean maybe for Microsoft as a whole. Then why not throw as much as they possibly can behind game development?

The more realistic question is why would Microsoft give a crap about an industry that isn't making them money?

 

[Chobel]

(a)
For my conclusion I used gross profit margins of the industry (derived by statistics) because with the current public reporting it is not possible to get those numbers separated for a product line like Xbox. In my opinion a better method than just guessing around like Thurrot did. He also did not explain how he came to his conclusion, tbh. I did based on industry averages (with some adjustments to the games business). I even put a 30% downlift on software and hardware compared to the current margins of the industry sector (HW: 40% and SW: 79%).

(b)
Are you serious? Internally you do exactly this, you separate your products (sw, hw, services) to find out who is contributing how much to your total gross profit margin. That is why "internal accounting" exists which is not the same as "financial accounting".

It is a common practice that you have a mix of gross profits in a product line (Xbox) that in total contribute a positive gross profit while some components can be even in the negative. But you have to know where they are!

Thurrot is not guessing, he has contacts in MS: an insider.

 

[Sad Affleck]

For the Xbox line as a whole this is very likely. Between the R&D costs, the RROD issue, two out of three released consoles failing to be the lead platform of their respective generation,yeah I think Thurrott is right. The upside is that Xbox is a recognizeable brand and probably the only Microsoft product in the last 15 years to have really resonated with the average consumer. So even if it hasn't made a lot of money yet it's a valuable brand for Microsoft and it's bringing in the MAUs. That's also important in a world where Microsoft's consumer-facing services aren't exactly dominating (email, maps, search, messenger and so on.)

That said, I have no idea what the Xbox platform will morph to in the future. It seems inevitable to me that eventually, maybe as soon as next gen, the Xbox will merge with Windows gaming to essentially form one platform. Sony is beating Microsoft handily in the console space but the world's biggest games are being played on a Microsoft platform (Windows.) If Microsoft wants to beat Sony in any region other than North America it needs to take advantage of the PC gaming landscape. The fact that PC gaming has gotten so big worldwide and Steam dominated digital game sales under Microsoft's nose clearly demonstrates the lack of vision and forward thinking of Microsoft's previous leadership. The jury's still out on the current one.

 

[Stop It]

Mojang cost Microsoft $2.5 billion dollars and generates about $150 million profit per year. Need to wait a decade (and hope Minecraft stays relevant) until it starts making them loads of money.

That's not how it works.

So long as the asset value (The value of the asset if it was sold on) of Mojang stays at $2.5 billion or increases, they're in the black.

It's why major purchases do not generally cause major losses in any GAAP or NON-GAAP accounting. Otherwise any acquiring company will have very scary annual figures. The only time a company reports losses about an acquisition is when they have to write down the value of the purchase. See HP/Autonomy for a good example.

Anyway. I can see the Xbox division being in the red this year because of the R&D costs of Xbox One X. However from when we did have figures, the Xbox division has made money on a YOY basis but overall has too much sunk cost to make up. However that money is long gone and if the division ends up being moderately profitable YOY then it'll be silly to give the market back to Sony and Nintendo. However considering the margins on the rest of the business, it's clearly their worst performer that they haven't killed off. Windows phone currently excluded as while still officially in development, it's dead really and that pretty much was doomed from the start.

 

[bitbydeath]

The more realistic question is why would Microsoft give a crap about an industry that isn't making them money?

Why Ballmer did?
Who knows.

Nadella on the otherhand inherited everything (including XB1) and has since made big changes upon coming into power, such as the implementation of the Windows Store/play everywhere and the massive budget cuts we now see today on the division.

 

[Nightengale]

Let's look into into it from a business perspective:

From a business perspective, the profit margin ratio of their more successful competitor is 6-8%.

Platform holders have a very, very, very high operating cost base. Even if their gross profit per license/console/software sold is high, the necessary cost to run them pretty much drives the overall margin down to single digits.

 

[anothertech]

we knew this right?

Apparently just reading a few pages of this thread, no, most of us don't.

In fact I'd go as far to say anyone spouting numbers for profits or against is just telling tales from their ass. Why? Because MS hasn't given us straight numbers for over half a decade.

MAUs and revenue increase tells us fckall about profitability. But that doesn't help the narrative when waging the console wars fellas.

 

[big_z]

Nadella on the otherhand inherited everything (including XB1) and has since made big changes upon coming into power, such as the implementation of the Windows Store/play everywhere and the massive budget cuts we now see today on the division.

Has Nadella been seen as a improvement since Ballmer left? I know he's cut a ton of jobs and did some restructuring but you also hear about how teams within Microsoft are set up to be competitive with each other and fail to communicate. Not sure if that's his doing or a hold over from the Ballmer years.

 

[leeh]

Has Nadella been seen as a improvement since Ballmer left? I know he's cut a ton of jobs and did some restructuring but you also hear about how teams within Microsoft are set up to be competitive with each other and fail to communicate. Not sure if that's his doing or a hold over from the Ballmer years.

He brought there stock price higher than the all-time high so that's a comfortable yes.

 

[hydrophilic attack]

Has Nadella been seen as a improvement since Ballmer left?

if you're a shareholder, yes

if you're a fan of gaming, the jury's still out

 

[Dr. Feel Good]

If it was profitable it would be publically known. There's a reason they have spent years putting mud in the water by categorizing it with the Phone division.

The original Xbox was a money sink due to the hard drive and what they threw around for exclusives. There's a reason it only had a shelf life of four years. It was a foot in the door but an absolute black hole of expense.

Xbox 360 would have been the peak of profitability but RROD fucked that up in the first few years. Not to mention again all the money they threw around for exclusives for Japan and DC from flag ship third parties in the west. Most profits during this generation were tied to software roaylities and they were making a killing as the main platform for most games. One would think the Kinect era would have turned them into black but given the sophistication of the hardware they likely lost money on each unit sold and it had very little traction with software attach ratios.

Xbox One is likely starting to generate a lot through the online marketplace with growing subscription base and more downloadable games (which have higher margins) but they are likely being offset in losses from hardware and the fact that they have fallen behind in platform of choice for third parties. I would be hard pressed to believe their North American division was not profitable, but globally they are being dragged down hard.

2010-2012 would have been the only period I can imagine the entire global Xbox division was profitable. Hardware costs had decreased dramatically, they were the global leader in third party sales, Kinect was relevant, and Xbox Live had gained a massive user base. But R&D on the One would have spiked here too so who knows.

 

[Nightengale]

Apparently just reading a few pages of this thread, no, most of us don't.

MS has used the word "profitable" with the Xbox division every now and then in the past few years. Realistically speaking, most of us don't second-guess execs on financial and earning calls when they say that word, so naturally most would assume "bad start, but they're fine now."

Thurrot is saying that current Xbox isn't profitable, and that Nadella is using PR-wordplay where 'growing profitably' actually meant "still in red, but we'll eventually be profitable on our current growth trajectory."

Console business is such a shit-show of low margins that it's not impossible that either PlayStation or Xbox could be in the red, even with revenues surpassing 9 billion a year.

Let's do some random maths. If we assume the operating profit margin is 6% and the business is worth 10 billion in revenue, that means that the company's profits are just 600 million dollars.

A lot of money. But all it takes is for a company to go crazy in terms of bundles
( AssCreed bundle in 2014 was estimate worth a billion in lost revenue, afaik ) and for some AAA games with big marketing to sell badly and all the profit estimate goes poof.

 

[mrklaw]

The more realistic question is why would Microsoft give a crap about an industry that isn't making them money?

With their current 'play anywhere' strategy, maybe they think Xbox is a halo brand (pun unintended) which will help them grow the win10 App Store? It does seem crazy in the face of steam, but that might be their goal. Give it a few years to see how the strategy is playing out and if they aren’t seeing significant traction they may shut that approach down.

 

[Bits N Pieces]

Satya misleading investors and shareholders in an earnings announcement? That's a bold strategy.

 

[madmackem]

I can see that overall it would take a lot in the plus column just to make back the costs of the rrod calamity.

 

[LiquidSolid]

Why Ballmer did?
Who knows.

Nadella on the otherhand inherited everything (including XB1) and has since made big changes upon coming into power, such as the implementation of the Windows Store/play everywhere and the massive budget cuts we now see today on the division.

Completely agreed on Nadella but as for Ballmer, I'm pretty sure he supported it because Xbox was one of his initiatives and he wanted it to be a success no matter what. Just look at his numerous attempts with the Windows Phone that never went anywhere.

With their current 'play anywhere' strategy, maybe they think Xbox is a halo brand (pun unintended) which will help them grow the win10 App Store? It does seem crazy in the face of steam, but that might be their goal. Give it a few years to see how the strategy is playing out and if they aren’t seeing significant traction they may shut that approach down.

I wouldn't say "maybe", that absolutely appears to be their current strategy and it's what Thurrott's referring to when he says Xbox is undergoing a digital transformation.

 

[Colbert]

Thurrot is not guessing, he has contacts in MS: an insider.

An insider have internals about their internal accounting, I doubt that. He is an "insider" getting infos on product releases, roadmaps, management changes and such. And thats it.

 

[Colbert]

From a business perspective, the profit margin ratio of their more successful competitor is 6-8%.

Platform holders have a very, very, very high operating cost base. Even if their gross profit per license/console/software sold is high, the necessary cost to run them pretty much drives the overall margin down to single digits.

You talk about gross margin or net income?

 

[Shpeshal Nick]

For the Xbox line as a whole this is very likely. Between the R&D costs, the RROD issue, two out of three released consoles failing to be the lead platform of their respective generation,yeah I think Thurrott is right. The upside is that Xbox is a recognizeable brand and probably the only Microsoft product in the last 15 years to have really resonated with the average consumer. So even if it hasn't made a lot of money yet it's a valuable brand for Microsoft and it's bringing in the MAUs. That's also important in a world where Microsoft's consumer-facing services aren't exactly dominating (email, maps, search, messenger and so on.)

That said, I have no idea what the Xbox platform will morph to in the future. It seems inevitable to me that eventually, maybe as soon as next gen, the Xbox will merge with Windows gaming to essentially form one platform. Sony is beating Microsoft handily in the console space but the world's biggest games are being played on a Microsoft platform (Windows.) If Microsoft wants to beat Sony in any region other than North America it needs to take advantage of the PC gaming landscape. The fact that PC gaming has gotten so big worldwide and Steam dominated digital game sales under Microsoft's nose clearly demonstrates the lack of vision and forward thinking of Microsoft's previous leadership. The jury's still out on the current one.

You don't have to be the market leader to make money.

 

[TheThreadsThatBindUs]

An insider have internals about their internal accounting, I doubt that. He is an "insider" getting infos on product releases, roadmaps, management changes and such. And thats it.

To be fair, you have no idea what he knows or how he knows it. It's extremely arrogant to presume that you do.

 

[leeh]

You don't have to be the market leader to make money.

Just look at Apple.

 

[Nightengale]

You talk about gross margin or net income?

Oops, net operating income.

 

[Sony_Prophet]

Doesn't surprise me one bit.

 

[anothertech]

...

My point exactly. So what we know for sure is that we actually know shit about Xbox profitability unless we hypothesize tales from our ass

An insider have internals about their internal accounting, I doubt that. He is an "insider" getting infos on product releases, roadmaps, management changes and such. And thats it.

And we also have no idea what his actual contacts at MS are feeding him, so your 'limitations' on this insiders knowledge are also tales from your ass lol. Honestly I don't mean it personally. It's just funny to see how people react differently to the same info

 

[panda-zebra]

An insider have internals about their internal accounting, I doubt that. He is an "insider" getting infos on product releases, roadmaps, management changes and such. And thats it.

Without knowing how or by whom the information is received it's not logical to dismiss it selectively, you either pay attention or you don't. Is it reasonable to accept the info/leaks Thurrott provides when they're interesting and positive but draw a line when it's less palatable or doesn't fit our narrative?

 

[Colbert]

To be fair, you have no idea what he knows or how he knows it. It's extremely arrogant to presume that you do.

Arrogant?

To share such internal information to an outside "insider" even he worked for MS in the past can cost you your job (regardless of position in the hierarchy) and in worst case you go to jail (the person shares the info not the one receives it unless the info is used for insider-trade).

I double down on Thurrot doesn't have any info on internal cost and profit structures! He has the same info we all have from balance sheets, P&Ls and investor call/meeting slides plus maybe some valuations from his contacts.

And even so such info isn't even shared internally other than need to know and I don't think people in the know would risk their career for such a thing!

 

[D.Lo]

You don't have to be the market leader to make money.

While true, I don't think anyone except Nintendo has made money (aka made a profit) while not being market leader in three decades.

3D0 went out of business, Sega never made money, Microsoft maybe made some money in the brief window they were #1 worldwide after The Wii died with Kinect, and Sony made money on PS1, PS2 and PS4 while losing around five billion dollars in the PS3/PSP era.

Maybe NEC made some money in 1987/88 with the PC Engine? (only just making it into the last 30 years)? They were actually also possibly market leader in Japan that year in hardware sales. Maybe SNK's niche console division was profitable for a couple of years?

But generally, unless your name is Nintendo, statistically you most likely need to be market leader to make money in consoles.

 

[Chobel]

An insider have internals about their internal accounting, I doubt that. He is an "insider" getting infos on product releases, roadmaps, management changes and such. And thats it.

He doesn't need to have direct access to internal accounting documents, It could just some of his sources (who have that kind of access) sharing whether MS' gaming division is profitable or not.

 

[anothertech]

Arrogant?

I double down on Thurrot doesn't have any info on internal cost and profit structures! He has the same info we all have from balance sheets, P&Ls and investor call/meeting slides plus maybe some valuations from his contacts.
!

So we're all insiders then cause we all have access to the same info? Common now, maybe arrogant is the right word after all

 

[nekkid]

The business of making games consoles, ladies and gentlemen.

 

[hydrophilic attack]

You don't have to be the market leader to make money.

Let's take a look at the console market leader's latest quarterly report

Sony’s gaming revenue jumped slightly to ¥348.1 billion (around $3.15 billion), but operating profit dropped big time to ¥17.7 billion ($160 million), compared to ¥26.3 billion ($238 million) for this period last year.

That's a 5% margin. (And that's based on operating profit, net income is likelyworse.e) For the market leader. Sure, they note that they haven't released any big games this quarter but still. If the market leader can only get a margin of 5-10 percent, I don't find it hard to believe, at all, that their struggling competitor is running a loss

 

[Beer Monkey]

Wasn't the Xbox division saddled under the same umbrella as all that Windows phone stuff?

That probably fucked em over for a few years.

Yes.

 

[Ovek]

Microsoft will shed Xbox eventually, it won't all go because of the extreme investment involved but I can see them ditching the very expensive hardware development and exclusive studios.

When the shareholders get super pissy Microsoft will retreat back to the only thing that makes them any money Enterprise software and licensing that's why Satya Nadella got the job because that's what he knows.

 

[Jaguar Victory]

I'm sure Microsoft is making money on XBOX and has been for years. The move to digital and therefore increasing store sales are a huge boost this gen. They still sell millions of games every month. Even if the console breaks even, software is driving profits.

 

[Kysen]

I don’t believe this, you don’t spent millions on a custom chip design for multiple consoles to lose more money.

 

[Sad Affleck]

You don't have to be the market leader to make money.

I agree. It does help though.

 

[Tecnniqe]

Microsoft will shed Xbox eventually, it won't all go because of the extreme investment involved but I can see them ditching the very expensive hardware development and exclusive studios.

When the shareholders get super pissy Microsoft will retreat back to the only thing that makes them any money Enterprise software and licensing that's why Satya Nadella got the job because that's what he knows.

So what you're saying is we finally get a new Rise of Nations?

 

[Panajev2001a]

This just in: internet armchair analyst claims that multibillion dollar goliath Microsoft, posting some of the largest profit amounts in the industry, "needs major restructuring", questioning how the company is even profitable

Spoiler

christ

Tell that to people worries about Sun Microsystems in the late 80’s - mid 90’s .

 

[anothertech]

I'm sure Microsoft is making money on XBOX and has been for years. The move to digital and therefore increasing store sales are a huge boost this gen. They still sell millions of games every month. Even if the console breaks even, software is driving profits.

You can have revenue coming in and still be operating at a loss. That seems to be the case here, at least from people actually in the know that aren't trying to push some console war narrative at least.

 

[Colbert]

He doesn't need to have direct access to internal accounting documents, It could just some of his sources (who have that kind of access) sharing whether MS' gaming division is profitable or not.

You may have seen my response below.

Let me ask a simple thing ? Lets assume your not into anything near accounting in your company you working with. Do you know if a product line (not a division) is profitable or not? Do you get info beyond that margins are above or below expectations from internal communications or you were able to increase margins by 0.1 points? I am really curious about that!

To share such internal information to an outside "insider" even he worked for MS in the past can cost you your job (regardless of position in the hierarchy) and in worst case you go to jail (the person shares the info not the one receives it unless the info is used for insider-trade).

I double down on Thurrot doesn't have any info on internal cost and profit structures! He has the same info we all have from balance sheets, P&Ls and investor call/meeting slides plus maybe some valuations from his contacts.

And even so such info isn't even shared internally other than need to know and I don't think people in the know would risk their career for such a thing!

 

[anothertech]

You may have seen my response below.

Let me ask a simple thing ? Lets assume your not into anything near accounting in your company you working with. Do you know if a product line (not a division) is profitable or not? Do you get info beyond that margins are above or below expectations from internal communications or you were able to increase margins by 0.1 points? I am really curious about that!

And it sounds like his sources might be directly related to accounting. Hard to fathom I know.

 

[Kthulhu]

I'll believe it when I see numbers. Till then this is just rumors and speculation in my book.

 

[Jangowuzhere]

This sounds like bullshit to me.

Even with the red ring problem for the 360, I have a hard time believing that console wasn't profitable.

 

[Colbert]

And it sounds like his sources might be directly related to accounting. Hard to fathom I know.

Thats very hard to believe for me because we talk about an US company which have very strict policies on this very matter. Just saying.