MassiveAttack
Banned
New Xbox Aim For Microsoft: Profitability
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
May 24, 2005; Page C1
Microsoft Corp.'s Xbox 360 will be a boon for videogame players. Now it is up to Bryan Lee to make Microsoft investors happy with the new game player.
Mr. Lee is the head of finance at Microsoft's Home & Entertainment division, which includes the videogame business. Analysts say since 2000, the unit has recorded at least $4 billion in operating losses, thanks mostly to the first Xbox.
The Xbox 360, unveiled May 12 and scheduled to go on sale late this year, is Mr. Lee's chance to stanch the red ink. It won't be easy. The launch of the new player opened a long and expensive battle with Sony Corp., maker of the PlayStation console, which is the reigning champion. Sony last week announced a new console as well, the PlayStation 3, which will go on sale in the spring of next year.
Mr. Lee, 42 years old, says his goal for the videogame unit is simple. "Sony makes money. No reason we shouldn't make as much," he says.
His mission takes on special importance as growth slows at Microsoft's core Windows and Office franchises. Microsoft's stock price has been flat for four years and remains more than 50% below its bubble-era peak. Microsoft launched the Xbox in 2001 as one of its "long-term bets" to diversify beyond software for personal computers. Since then, it has shipped roughly 20 million Xbox units, less than one-quarter the number of PlayStation 2 consoles Sony has sold.
The game unit reported its first quarterly operating profit in Microsoft's fiscal second quarter ended Dec. 31, boosted by the runaway success of the game Halo 2. In the third quarter, the group fell back into the red, though its operating loss narrowed by 26% from a year earlier, to $154 million. For the fiscal year ending June 30, Goldman Sachs analyst Rick Sherlund projects the Xbox group will cut Microsoft's earnings by about seven cents a share, or 5%, to $1.29.
The Mississippi-bred son of a Baptist preacher, Mr. Lee spent 13 years as an accountant and deal maker at Sony's movie unit. He joined Microsoft in 2000 to help set strategy for the Xbox and moved to his current job in 2002 when Microsoft Chief Executive Steve Ballmer installed finance heads at the company's seven major units to inject more financial rigor into daily operations.
The videogame group faces a unique challenge because it makes a hardware device. That means it has more in common with hyperefficient personal-computer maker Dell Inc. than with the rest of Microsoft.
Mr. Lee and his team have learned how to scrutinize the cost of components inside the Xbox. For the original Xbox, Microsoft relied on suppliers like Intel Corp. for key components, a strategy that helped it get the Xbox to market quickly but left it hostage to other companies' pricing decisions. By contrast, Sony, along with a partner, designed and manufactured its own chips for the PlayStation 2, creating savings as the cost to make the chip declined.
Microsoft also misjudged the impact of equipping the Xbox with a disk drive, similar to those that store information in PCs. Microsoft executives thought the drive would distinguish the machine from Sony's. But disk-drive prices don't decline the way chip prices do. That made it harder for Microsoft to cut prices on the Xbox as it aged, as makers of game players typically do.
For the Xbox 360, Microsoft executives decided in 2003 to design the main chip in partnership with International Business Machines Corp. That put "more of the financial control in our own hands," says Robbie Bach, head of the Home & Entertainment group and Mr. Lee's boss.
Then, Mr. Lee set strict sales, revenue and profit goals for the life of the Xbox 360. A manager seeking to spend more on a feature such as a disk drive has to find allies in the group to cut spending elsewhere, or identify new revenue to offset to increase. "The process forced us to talk about trade-offs," Mr. Lee says.
Consider how the group selected the amount of memory inside the box. When Microsoft first showed game developers the specifications, the box contained 256 megabytes of memory. The game makers said that wouldn't be enough for the coolest special effects. Adding more memory would boost the cost of the box by as much as $30, analysts estimate -- no small thing given it was expected to sell initially for about $300.
But Xbox managers determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It also would extend the life of the console, generating more sales. Earlier this month, Microsoft said the Xbox 360 would contain 512 megabytes of memory, the same amount that will be in PlayStation 3.
Mr. Lee's targets also shaped game-development strategy. To ensure a variety of titles for the original Xbox, Microsoft expanded its own development studio. But few of its games sold well; most were considered me-too versions of perennial favorites, such as sports games. The big exception was Halo, conceived by a small developer Microsoft had purchased in 2000.
Mr. Lee last year led a controversial decision to cut back in-house game development. Now, Microsoft pitches Xbox 360 games from publishers such as Electronic Arts Inc. and Activision Inc. of the U.S. and Square Enix Co. of Japan, which recently agreed to put a popular game called Final Fantasy on the Xbox 360.
Mr. Ballmer says he is convinced the new machine will bring a "very significant change in profitability." Mr. Lee feels that pressure. He imagines a scene where he tells Mr. Ballmer that the Xbox 360 won't make money. "After that, they fire me," he says.
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
May 24, 2005; Page C1
Microsoft Corp.'s Xbox 360 will be a boon for videogame players. Now it is up to Bryan Lee to make Microsoft investors happy with the new game player.
Mr. Lee is the head of finance at Microsoft's Home & Entertainment division, which includes the videogame business. Analysts say since 2000, the unit has recorded at least $4 billion in operating losses, thanks mostly to the first Xbox.
The Xbox 360, unveiled May 12 and scheduled to go on sale late this year, is Mr. Lee's chance to stanch the red ink. It won't be easy. The launch of the new player opened a long and expensive battle with Sony Corp., maker of the PlayStation console, which is the reigning champion. Sony last week announced a new console as well, the PlayStation 3, which will go on sale in the spring of next year.
Mr. Lee, 42 years old, says his goal for the videogame unit is simple. "Sony makes money. No reason we shouldn't make as much," he says.
His mission takes on special importance as growth slows at Microsoft's core Windows and Office franchises. Microsoft's stock price has been flat for four years and remains more than 50% below its bubble-era peak. Microsoft launched the Xbox in 2001 as one of its "long-term bets" to diversify beyond software for personal computers. Since then, it has shipped roughly 20 million Xbox units, less than one-quarter the number of PlayStation 2 consoles Sony has sold.
The game unit reported its first quarterly operating profit in Microsoft's fiscal second quarter ended Dec. 31, boosted by the runaway success of the game Halo 2. In the third quarter, the group fell back into the red, though its operating loss narrowed by 26% from a year earlier, to $154 million. For the fiscal year ending June 30, Goldman Sachs analyst Rick Sherlund projects the Xbox group will cut Microsoft's earnings by about seven cents a share, or 5%, to $1.29.
The Mississippi-bred son of a Baptist preacher, Mr. Lee spent 13 years as an accountant and deal maker at Sony's movie unit. He joined Microsoft in 2000 to help set strategy for the Xbox and moved to his current job in 2002 when Microsoft Chief Executive Steve Ballmer installed finance heads at the company's seven major units to inject more financial rigor into daily operations.
The videogame group faces a unique challenge because it makes a hardware device. That means it has more in common with hyperefficient personal-computer maker Dell Inc. than with the rest of Microsoft.
Mr. Lee and his team have learned how to scrutinize the cost of components inside the Xbox. For the original Xbox, Microsoft relied on suppliers like Intel Corp. for key components, a strategy that helped it get the Xbox to market quickly but left it hostage to other companies' pricing decisions. By contrast, Sony, along with a partner, designed and manufactured its own chips for the PlayStation 2, creating savings as the cost to make the chip declined.
Microsoft also misjudged the impact of equipping the Xbox with a disk drive, similar to those that store information in PCs. Microsoft executives thought the drive would distinguish the machine from Sony's. But disk-drive prices don't decline the way chip prices do. That made it harder for Microsoft to cut prices on the Xbox as it aged, as makers of game players typically do.
For the Xbox 360, Microsoft executives decided in 2003 to design the main chip in partnership with International Business Machines Corp. That put "more of the financial control in our own hands," says Robbie Bach, head of the Home & Entertainment group and Mr. Lee's boss.
Then, Mr. Lee set strict sales, revenue and profit goals for the life of the Xbox 360. A manager seeking to spend more on a feature such as a disk drive has to find allies in the group to cut spending elsewhere, or identify new revenue to offset to increase. "The process forced us to talk about trade-offs," Mr. Lee says.
Consider how the group selected the amount of memory inside the box. When Microsoft first showed game developers the specifications, the box contained 256 megabytes of memory. The game makers said that wouldn't be enough for the coolest special effects. Adding more memory would boost the cost of the box by as much as $30, analysts estimate -- no small thing given it was expected to sell initially for about $300.
But Xbox managers determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It also would extend the life of the console, generating more sales. Earlier this month, Microsoft said the Xbox 360 would contain 512 megabytes of memory, the same amount that will be in PlayStation 3.
Mr. Lee's targets also shaped game-development strategy. To ensure a variety of titles for the original Xbox, Microsoft expanded its own development studio. But few of its games sold well; most were considered me-too versions of perennial favorites, such as sports games. The big exception was Halo, conceived by a small developer Microsoft had purchased in 2000.
Mr. Lee last year led a controversial decision to cut back in-house game development. Now, Microsoft pitches Xbox 360 games from publishers such as Electronic Arts Inc. and Activision Inc. of the U.S. and Square Enix Co. of Japan, which recently agreed to put a popular game called Final Fantasy on the Xbox 360.
Mr. Ballmer says he is convinced the new machine will bring a "very significant change in profitability." Mr. Lee feels that pressure. He imagines a scene where he tells Mr. Ballmer that the Xbox 360 won't make money. "After that, they fire me," he says.
And it also came with the ethernet port, which the original PS2 models didn't have (another $35)... After seeing Xbox and its extra features, I felt a little ripped off paying the $300 for PS2, even though I knew that PS2 was gonna be the system that has all the games I like.