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Author Topic: [360] Microsoft is losing money  (Read 2645 times)
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Andrew Mallon
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« on: April 26, 2007, 08:57:41 PM »

Well, their games division anyway. Microsoft released their quarterly report today and there are some interesting nuggets in the report. First, the Electronics and Devices division (home of the Xbox division) lost $315 million, lower than the $402 million loss for the first quarter of 206. Interestingly enough, Microsoft stated that the decrease in losses was due to selling fewer consoles:

Quote
EDD operating loss decreased during the three months ended March 31, 2007 primarily due to decreased products costs from lower sales of Xbox 360 consoles...

So, Microsoft is still losing money on every 360 sold. For the quarter, Microsoft only shipped 500,000 consoles worldwide, and they've shipped approximately 11 million 360s total to date. Microsoft really overshpped in 2006.

Full Press release here:

Quote
Electronics and Devices loses $315M this quarter vs $402M last year. For the year, they've lost $693M vs $861M last year (3 quaters)



Entertainment and Devices Division ("EDD") products include the Microsoft Xbox video game console system, PC games, consumer software and hardware products, the Zune digital music and entertainment device, TV platform products for the interactive television industry, and Mobile and Embedded devices (principally Windows Mobile software platform and Windows Embedded device operating system). The success of video game consoles is determined by console innovation, the portfolio of video game content for the console, online offerings, and the market share of the console. We believe that the functionality of the Xbox 360 console, games portfolio, and online offerings are well-positioned relative to competitive consoles launched during 2006.

EDD revenue decreased during the three months ended March 31, 2007 primarily because of decreased Xbox 360 console sales. During the quarter, we shipped 0.5 million Xbox 360 consoles as compared to 1.7 million consoles in the third quarter of fiscal year 2006, which was the first full quarter of Xbox 360 console sales. Xbox and PC game revenue decreased $393 million or 44% during the three months ended March 31, 2007 due to the decrease in console sales. Revenue from Zune, consumer hardware and software, and TV platforms increased $103 million or 61% during the three months ended March 31, 2007, primarily reflecting the recent release of Zune and new consumer hardware products. Mobile and Embedded Devices revenue increased $38 million or 30% during the three months ended March 31, 2007 driven by sales growth in Windows Mobile software and Windows Embedded operating systems.

EDD revenue increased during the nine months ended March 31, 2007 primarily due to increased Xbox 360 console sales, sales of Zune, and increased Xbox accessories and video game sales. We shipped approximately 5.9 million Xbox 360 consoles during the first nine months of fiscal year 2007. Since the Xbox 360 console was launched in November 2005, we have shipped approximately 11 million units. Xbox and PC game revenue increased $914 million or 37% during the nine months ended March 31, 2007 as a result of the increased number of consoles sold and related accessories and video game sales. Revenue from Zune, consumer hardware and software, and TV platforms increased $426 million or 68% during the nine months ended March 31, 2007, primarily reflecting the release of Zune and new consumer hardware products. Mobile and Embedded Devices revenue increased $109 million or 31% during the nine months ended March 31, 2007, driven by sales growth in Windows Mobile software and Windows Embedded operating systems.

EDD operating loss decreased during the three months ended March 31, 2007 primarily due to decreased products costs from lower sales of Xbox 360 consoles and increased Mobile and Embedded Devices revenue, partially offset by expenses related to the launch of Zune and increased Xbox 360 console warranty expenses. EDD operating loss decreased during the nine months ended March 31, 2007 primarily due to increased Xbox 360 platform sales and improved Xbox 360 console margins, partially offset by expenses related to the launch of Zune and increased Xbox 360 console warranty expenses. Headcount-related costs increased 10% and 13% during the three and nine months ended March 31, 2007, reflecting an increase in salaries and benefits for existing headcount and a 13% increase in headcount, partially offset by decreased stock-based compensation expense.

For fiscal year 2007, we expect revenue to increase due to the increased availability of Xbox 360 during the entire fiscal year and sales of Zune after its November 2006 launch. Revenue from mobility and embedded devices is expected to increase due to unit volume increases of Windows Mobile software driven by increased market demand for phone-enabled devices and Windows Embedded operating systems.
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noun
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« Reply #1 on: April 26, 2007, 09:51:13 PM »

This business model still confuses the hell out of me.  How does Microsoft plan to make money with their 360? DO they intend to make money on the 360? Are they hoping every gamer will subscribe to Live and purchase at least $400 worth of goods on Live Marketplace?
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« Reply #2 on: April 26, 2007, 09:58:58 PM »

I would guess their thinking is "Give away the razors and clean up on the blades." I am sure they want to make money off the consoles eventually as well. I know they were willing to lose big on the X-Box, but I think they hope to eventually be profitable with the 360.
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« Reply #3 on: April 26, 2007, 10:08:46 PM »

It's the Citizen Kane approach.  "You're right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars *next* year. You know, Mr. Thatcher, at the rate of a million dollars a year, I'll have to close this place in... 60 years."
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« Reply #4 on: April 26, 2007, 10:10:14 PM »

Quote from: noun on April 26, 2007, 09:51:13 PM

This business model still confuses the hell out of me.  How does Microsoft plan to make money with their 360? DO they intend to make money on the 360? Are they hoping every gamer will subscribe to Live and purchase at least $400 worth of goods on Live Marketplace?

Have you seen how expensive some of the accessories are?
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« Reply #5 on: April 26, 2007, 10:16:26 PM »

Here's an interesting article from a Forbes staffer on the 360, which touches on concerns regarding Microsoft's Ahab-like strategy of outspending its competitors:
http://www.forbes.com/2007/04/18/xbox-microsoft-nintendo-pf-ii-in_re_0418soapbox_inl.html?partner=yahootix

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Microsoft's vision of the gaming console as the window into the living room is a big, big bet, and one that clearly hasn't paid off thus far. The emphasis on HDTV as being a key factor driving broad-based console sales kind of misses the point. Is the Wii successful because of its zippy graphics and technological superiority? No. It is successful because it is fun. And because it appeals to a broad audience. And because it is comparatively cheap. The Microsoft strategy sounds more like a niche strategy for hard-core gamers, in which case it's investment in a console strategy should be smaller and more targeted.

Microsoft needs to take a long, hard look at its gaming strategy--and, in fact, its entire H&E strategy. At what point, regardless of its virtually endless financial resources, does it say "enough is enough"? Would we have been better served by returning the extra cash to shareholders rather than investing it in a franchise that seems to have questionable prospects for turning around? These are the kinds of questions Microsoft management should be asking. And hopefully, for shareholders' sakes, they are.

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« Reply #6 on: April 26, 2007, 10:33:00 PM »

I kind of think this shows they're in it for the long haul.  The overspending was about trying to beat Sony to the marketplace, but not have a vastly inferior console by the time PS3 hit (which I think they've succeeded in doing, for the most part), then maintaining that foothold with enough good games.  It's about shifting the perception in the marketplace.  It's debatable if they're accomplishing that shift, but everything Sony is doing has helped them icon_wink.

Of course, when you add Japan to the mix, it's more of an uphill battle, but it's still doable.  Not likely, necessarily, but possible.
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« Reply #7 on: April 27, 2007, 12:28:44 AM »

This is typical MS strategy, which has always ended up working for them.

First you establish a market presence, then you build up your product with features people want, then you continue putting out a decent and sometimes innovative product and wait for your competitors to stop doing so... then you win.
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« Reply #8 on: April 27, 2007, 01:18:15 AM »

Quote from: unbreakable on April 27, 2007, 12:28:44 AM

This is typical MS strategy, which has always ended up working for them.

First you establish a market presence, then you build up your product with features people want, then you continue putting out a decent and sometimes innovative product and wait for your competitors to stop doing so... then you win.

Really, since when did Microsoft lose money on their software packages and Operating Systems?

Eventually investors will wonder why the company continues to dump money into a brand that hasn't shown growth to match the investment.

I don't think Microsoft will fail, or will back out, but they are certainly skirting the line with their stock holders. Frankly, I think the fact that Balmer is running the show is part of the reason why they may have problems. This isn't the same Microsoft that was unbeatable in the Nineties.
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« Reply #9 on: April 27, 2007, 01:56:23 AM »

is anyone else worried? i mean seriously ms apparently isnt doing well with the 360, sony isnt with the ps3... and nintendo is making money?  honestly, i dont want the 360 / ps3 systems to disappear, and i sure as hell dont want to be playing exclusively mario with a wand in the next 10 years - its fun as a 5 minute diversion, but as the only console in town due to economic viability... *shudder*
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« Reply #10 on: April 27, 2007, 02:07:03 AM »

There was a good article about how, MS actually makes money, and it's not actually on the strength of their product most of the time.

Instead, Microsoft has consistently failed to gain market dominance in a great deal of other areas they move into.  Sure they do get their products out and on shelves, but they don't lead the pack, or get into the top most of the time.   That's specifically in areas where there are many other established competitors though.  With the console wars, the main thing that happened was Sony simply screwed up with the PS3 and MS got a good lead in the market along with a good price difference.

How MS makes money is off the exclusivity of the Windows operating system.  Any manufacturer, software developer, etc... has to pay MS in some way to put out something on the windows OS.  Hardware makers have weird licensing and driving signing fees, along with OEM fees.  It's all fees, and more fees.  Sales of the actual OS matter only to make sure they keep the market primarily windows based so they can keep charging those fees.  All those fees add up.

I don't think we'll see these systems disappear.  Instead, what we'll see is that this generation of consoles will be out on the market for a whole lot longer than previous consoles had (save for PS2 maybe)  Sony was talking about a decade of support for the PS3.  And actually I suspect the PS2 would have been the primary console for Sony for a while longer had not MS rushed out the 360.  Both consoles aren't going away, especially since they're both run by companies that have good cash reserves from other businesses outside gaming.  MS has its OS, Sony has all its consumer products.  In one or two years these systems will still be out there, they'll have gotten cheaper both in price and in manufacturing costs prompting more people to buy.
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« Reply #11 on: April 27, 2007, 02:12:38 AM »

Quote from: Turtle on April 27, 2007, 02:07:03 AM

Any manufacturer, software developer, etc... has to pay MS in some way to put out something on the windows OS.  Hardware makers have weird licensing and driving signing fees, along with OEM fees.  It's all fees, and more fees.  Sales of the actual OS matter only to make sure they keep the market primarily windows based so they can keep charging those fees.  All those fees add up.

Incorrect.  Unlike on a console, Windows development does not require any sort of fees be paid to Microsoft to publish a game or any other sort of software on the platform.  That is one of the big reasons PC's have been the haven of indie developers.  I could create and distribute my own Windows program using open source tools and not have to pay fees to anybody. 
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« Reply #12 on: April 27, 2007, 03:26:46 AM »

Quote from: Tebunker on April 27, 2007, 01:18:15 AM

Really, since when did Microsoft lose money on their software packages and Operating Systems?

Eventually investors will wonder why the company continues to dump money into a brand that hasn't shown growth to match the investment.

I don't think Microsoft will fail, or will back out, but they are certainly skirting the line with their stock holders. Frankly, I think the fact that Balmer is running the show is part of the reason why they may have problems. This isn't the same Microsoft that was unbeatable in the Nineties.

I disagree with this.  Shareholders are pretty happy considering that Microsoft's profit as a whole is up 65%.  In afterhours trading the stock price is up over 4% which is a big jump for a stock like MSFT, sitting at the top of the holdings list for hundreds of tech-based mutual funds.  The EDD division is losing money but keep in mind that is not Xbox exclusive.  It includes the amazing stupendous Zune, all the TV stuff they do, and their entire mobile division including their mobile OS stuff.

Now I'm not saying that the Xbox division is "stealthily" profitable.  In fact I'm certain it's still bleeding money.  However we're talking about a company with 13.4 billion in revenue just last year alone.  It's an insane juggernaut, and my belief as I think I've mentioned before is that they consider the Xbox division to be completely subsidized marketing of the Microsoft brand to the younger generation.  While the money might be bleeding out on paper, I think they're looking at it from the perspective that they have a major Microsoft product as a pillar of home entertainment in millions of homes.  Kids playing Xbox today are going to grow up and buy MS Office, Windows, and develop products for Windows that loops revenue right back around.

You can certainly agree or disagree with that assessment, but I don't think shareholders have much to cry about at the moment.  Now if Microsoft as a whole were missing estimates or otherwise being a slouch in earnings, I do think this would be one of the prime areas they would look for fat trimming.  And in addition I think there is a lot of pressure on their Games staff to improve the numbers.  But all that said, I think the whole company is metaphorically doing Scrooge McDuck dives into their cash seas, so I think the Xbox is very very secure.
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« Reply #13 on: April 27, 2007, 05:47:16 AM »

Quote from: EngineNo9 on April 27, 2007, 02:12:38 AM

Quote from: Turtle on April 27, 2007, 02:07:03 AM

Any manufacturer, software developer, etc... has to pay MS in some way to put out something on the windows OS.  Hardware makers have weird licensing and driving signing fees, along with OEM fees.  It's all fees, and more fees.  Sales of the actual OS matter only to make sure they keep the market primarily windows based so they can keep charging those fees.  All those fees add up.

Incorrect.  Unlike on a console, Windows development does not require any sort of fees be paid to Microsoft to publish a game or any other sort of software on the platform.  That is one of the big reasons PC's have been the haven of indie developers.  I could create and distribute my own Windows program using open source tools and not have to pay fees to anybody. 

Oh there's none of those kind of fees.  But there are other non direct ways of hitting software developers.  I didn't say there was a publishing fee, but there's probably some hidden or roundabout fee for software developers.  Hardware developers is where they hit them the most.

Also, with the move to Xbox live for windows, I wonder how long "official" windows gaming on PCs will be without software development fees.
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« Reply #14 on: April 27, 2007, 06:55:24 AM »

Quote from: kathode on April 27, 2007, 03:26:46 AM

Quote from: Tebunker on April 27, 2007, 01:18:15 AM

Really, since when did Microsoft lose money on their software packages and Operating Systems?

Eventually investors will wonder why the company continues to dump money into a brand that hasn't shown growth to match the investment.

I don't think Microsoft will fail, or will back out, but they are certainly skirting the line with their stock holders. Frankly, I think the fact that Balmer is running the show is part of the reason why they may have problems. This isn't the same Microsoft that was unbeatable in the Nineties.

I disagree with this.  Shareholders are pretty happy considering that Microsoft's profit as a whole is up 65%.  In afterhours trading the stock price is up over 4% which is a big jump for a stock like MSFT, sitting at the top of the holdings list for hundreds of tech-based mutual funds.  The EDD division is losing money but keep in mind that is not Xbox exclusive.  It includes the amazing stupendous Zune, all the TV stuff they do, and their entire mobile division including their mobile OS stuff.

Now I'm not saying that the Xbox division is "stealthily" profitable.  In fact I'm certain it's still bleeding money.  However we're talking about a company with 13.4 billion in revenue just last year alone.  It's an insane juggernaut, and my belief as I think I've mentioned before is that they consider the Xbox division to be completely subsidized marketing of the Microsoft brand to the younger generation.  While the money might be bleeding out on paper, I think they're looking at it from the perspective that they have a major Microsoft product as a pillar of home entertainment in millions of homes.  Kids playing Xbox today are going to grow up and buy MS Office, Windows, and develop products for Windows that loops revenue right back around.

You can certainly agree or disagree with that assessment, but I don't think shareholders have much to cry about at the moment.  Now if Microsoft as a whole were missing estimates or otherwise being a slouch in earnings, I do think this would be one of the prime areas they would look for fat trimming.  And in addition I think there is a lot of pressure on their Games staff to improve the numbers.  But all that said, I think the whole company is metaphorically doing Scrooge McDuck dives into their cash seas, so I think the Xbox is very very secure.

Yeah, Kathode said it all, and said it right.  thumbsup
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« Reply #15 on: April 27, 2007, 07:05:45 AM »

And as above, this once again feeds back into MS leveraging its market dominance, namely windows OS, to nickel and dime the manufacturers and developers in the long run.
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« Reply #16 on: April 27, 2007, 12:50:46 PM »

See, I actually agree completely with Kathode. He is right on. However, where stock holders will have a beef is ROI. Many investors will start to wonder why Microsoft is bleeding money into the entertainment division when they can be paying that into dividends OR more profitable long term and short term investments. I was reading on Forbes.com I think, where they question how Microsoft is placing the 360 in the market and potentially the size of the market. They questioned the fact that they intially tied it so heavily to HDTV's and how that has pushed them into a niche to a degree. It was interesting.

Again, I don't think the Xbox brand will disappear anytime soon. I do think that investors may start asking questions. It's great that profit is up, but when you see that it could be even higher, which means more money in investors pockets, well they will start to ask questions. If nothing else, it would make me think that Steve Ballmer is in more trouble than anything else.
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« Reply #17 on: April 27, 2007, 01:00:10 PM »

I remember that when Xbox 360 was announced while Peter Moore and J Allard were pontificating on how it's all about the gamer and the shared experience, blah, blah, blah, there were some interviews with some MS heavyweights like Bill Gates and Steve Balmer where they pretty much mandated that 360 needed to be profitable.  If MS isn't consistently turning out profitable quarters in the division by the end of this generation then I think there will be some tough questions to answer on whether the company proceeds.  However, they seem to be closing the gap to profitability so I expect that won't be a concern. 
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« Reply #18 on: April 27, 2007, 01:05:03 PM »

I am willing to bet that alot of their losses are based on the horrific, UTTERLY horrific failure rate.
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« Reply #19 on: April 27, 2007, 07:18:28 PM »

Quote from: Turtle on April 27, 2007, 05:47:16 AM

But there are other non direct ways of hitting software developers.  I didn't say there was a publishing fee, but there's probably some hidden or roundabout fee for software developers.  Hardware developers is where they hit them the most.

Also, with the move to Xbox live for windows, I wonder how long "official" windows gaming on PCs will be without software development fees.

Well, as a long time Windows developer I can vouch that there is absolutely no direct fee for developing and shipping an application for Windows.  Now if you want your application certified then, yes, there certainly is one.  But that's entirely optional and had zero affect on our sales.  It really behooves them to have as many people as possible developing Windows applications.  And in my experience they really support the "3rd-party" developers very well.

If they start charging certification fees for Live it would most certainly be a significant drawback.  But as long as there are still free alternatives then it's not really that much of a problem.  I think it will be a long time, if ever, that we will see them hindering software developers from making applications that keep people dependent on the Windows OS and the subsequent licensing fees that are MS' bread and butter.

Now the 360 is obviously a different story as they charge $100 a year for independent developers to have access.  Then again it's really unprecedented that amateurs have access to a console at all.  And at least you get some very slick development tools with the fee.  So it's not entirely without merit.  I just wish we could get access to some MS approved games for free from the XNA network.  Probably not going to happen with the way they are setting up the pricing on Marketplace, though.  It is becoming the land of nickle and diming.
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« Reply #20 on: April 27, 2007, 08:11:49 PM »

The one point I find troubling as a Microsoft investor is that MAINTAINING market dominance in the video game market is such a difficult prospect. Sony, Sega and Nintendo have all shown that a few missteps can have  significant negative implications.

Having said that, I also feel that it is imperative for MS to diversify because sooner or later the Windows cash cow, like all other technology products, will be devastated by something new and probably open source. Video games are a huge market that plays into several of Microsoft's strengths, so I think it is a good fit for the company.

Remember, if it wasn't for the crazy initial success of the Wii (which not even Nintendo anticipated would be so dramatic) Microsoft would be well on their way to  being the #1 console for this generation. That is quite impressive for an American company moving into a highly competitive field dominated by the Japanese. Back when the original xbox launched most analysts and gamers were positive that the xbox would be a complete and utter disaster, and that MS would leave the field with its tail between its legs. One generation later they have the current sales lead, significantly increased Japanese developer support, name recognition in the living room, and a product that is actually "cool". That is a significant achievement in such a short period of time considering the two titans they must compete against.

And I still believe that the Wii is on borrowed time. I have no doubt that it will continue to sell well, but once heavy hitting HD franchise games like Halo, Final Fantasy, Metal Gear, and Grand Theft Auto start entering the field the tide will begin to shift with increasing momentum. The difference in capabilities between the Sony and MS consoles and the Wii will be increasingly magnifed- and there are still at least 4-5 more years for this gap to grow.

 
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« Reply #21 on: April 30, 2007, 03:51:34 PM »

I think Nintendo has proven that a company can thrive without requiring market dominance.


The XBox360 reminds me of that joke with two guys running from a bear.  One guy says "hey man, we can't outrun the bear", and the other guy says "I don't have to outrun the bear, I just have to outrun you".

Seems like MS doesn't have to dominate the market, they just have to outrun Sony.
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« Reply #22 on: April 30, 2007, 05:53:14 PM »

Quote from: Dante Rising on April 27, 2007, 08:11:49 PM


And I still believe that the Wii is on borrowed time. I have no doubt that it will continue to sell well, but once heavy hitting HD franchise games like Halo, Final Fantasy, Metal Gear, and Grand Theft Auto start entering the field the tide will begin to shift with increasing momentum. The difference in capabilities between the Sony and MS consoles and the Wii will be increasingly magnifed- and there are still at least 4-5 more years for this gap to grow.


I agree with everything you said except this.  All those franchises, with possibly the exception of GTA are for the hardcore gamer base- not Wii's target.  So those titles should not make a hill of beans difference in the equation with regard to Wii sales.

I think ultimately the problem is going to be the software catalog. Everything I've seen, heard, read, says that Wii is going to have a very dry year.  If there are no titles to support the platform, it'll die just like the GC did.

As for MS, I thought it had come out that 360 was very nearly at the break even point with regard to $$$ lost per hardware sale.  That was a bit back, so is it fair to assume that now the 360 is possibly making a bit of money per sale due to decreased production costs? 

Finally, the failure rates must be costing them tons of money.  If they can solidify the quality, perhaps that will also boost the bottom line.
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« Reply #23 on: April 30, 2007, 05:59:00 PM »

Quote from: unbreakable on April 30, 2007, 03:51:34 PM

I think Nintendo has proven that a company can thrive without requiring market dominance.

Don't quite agree with that. During the years Nintendo didn't have dominance with the N64 and Gamecube they did have a cash cow in the very portable market with the GB/GBA/NDS, and we don't know what shape they would be in if they didn't have that.
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« Reply #24 on: April 30, 2007, 06:05:02 PM »

Someone better at this stuff can post the numbers, but it basically boils down to the fact that Nintendo has never lost money on any console they made (except for the Virtual Boy, that is).

In fact, if I recall correctly, they actually made a good deal of profit from the N64 and Gamecube.
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« Reply #25 on: April 30, 2007, 06:08:10 PM »

Quote from: ATB on April 30, 2007, 05:53:14 PM

Everything I've seen, heard, read, says that Wii is going to have a very dry year.  If there are no titles to support the platform, it'll die just like the GC did.

Really? I mean, they are going to have a slow Second Quarter(now), but so are the 360 and PS3. The third and fouth quarter look to be great. On top of that Nintendo themselves are in development with around 45 different games. Also, all reports point to developers moving games and dedicating studios to the Wii. EA, Konami and Buena Vista both have dedicated Wii studios, Ubisoft has dedicated a lot of support as well. All of the other developers who were caught with their pants down are scrambling to get games on the system, and that would point to at least a year out. The thing is that 3rd parties are actually getting sales on the system. So, I think 4th quarter 2007 will be a good true indicator as where the library will be heading.

If anything, I've only read things that point to the Wii software library only getting stronger as time passes as developers try to get on board with the machine. Which looks to be the complete opposite of the Cube where things looked strong to start software wise but fell apart in the long run.
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« Reply #26 on: April 30, 2007, 07:15:43 PM »

MS is making money (and a lot of it), so shareholders will not be calling for 360 cuts or Balmers head. 1 in the hand is worth 2 in the bush, and when it comes down to it MS needs gaming like a duck needs water.

Gaming sat on DOS, and Windows was made gaming "friendly". Windows 95 and DirectX sounded shortsighted and dumb (remember OpenGL that was going to save us from MS DX?).

Look at where DirectX is now, and what it's done for gaming. Microsoft has given the world a common platform; regardless of the flaws it's something that has allowed growth and not had a traditionally high entrance fee (piracy of Windows is second to none).

Right now PC gaming has waned; MS needs to get that leprechaun back in their pocket. The 360 / PC games for Windows is the way to do it.

That's why they're still supporting old consoles; they can't afford to worry about short-term loss over long-term gains. Sony's PS1 was the "cheap easy" on the market could tell the masses to go buy replacements rather than fix the drive flaw. MS doesn't have that luxury. The market is bigger, more visible and a hell of a lot more competitive. They need gaming to stay on MS turf to keep the households, and keeping the households keeps the workplaces.

The workplaces is where the money is. Bar None.
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« Reply #27 on: April 30, 2007, 07:25:04 PM »

Quote from: ATB on April 30, 2007, 05:53:14 PM

As for MS, I thought it had come out that 360 was very nearly at the break even point with regard to $$$ lost per hardware sale.  That was a bit back, so is it fair to assume that now the 360 is possibly making a bit of money per sale due to decreased production costs? 

The idea that the 360 was at or below the break even point was an estimate made by a non-MS affiliated company.  However, the first quote from MS in Andrew's post explicitly  says that they are selling the console at a loss. 

Quote from: unbreakable on April 30, 2007, 03:51:34 PM

I think Nintendo has proven that a company can thrive without requiring market dominance.


The XBox360 reminds me of that joke with two guys running from a bear.  One guy says "hey man, we can't outrun the bear", and the other guy says "I don't have to outrun the bear, I just have to outrun you".

Seems like MS doesn't have to dominate the market, they just have to outrun Sony.

Two totally different strategies.

The MS and Sony strategy is predicated on platform dominance- they sell their consoles for a loss for quite some time and depend on licensing fees on *all* software sold to be the big money bringers.  Both have some strong first party offerings but also depend quite heavily on big third party sales.  And third parties are pretty much driven by market share- they go where the market is. 

Nintendo focuses on making money not only on the hardware itself but on extremely strong first party sales where they are making a lot more per-copy-sold than the licensing fees the hardware makers get from third parties.  They are also much more conservative financially with many of their big franchises not requiring the resources that their competitors use for their games (ie much lower budgets).  For example, Animal Crossing DS not only outsold FFXII but probably cost a tenth as much to make.  How much do you think Brain Age and Nintendogs cost to make yet they have each sold in excess of 12 million wordwide. 

So Nintendo doesn't mandate platform dominance.  They just need to sell enough hardware and software to remain profitable.  They could quite easily remain at second place and do quite well.

The risk that both MS and Sony are facing with the way the Wii is performing is that if the Wii ends up dominating the market in a manner similar to what Sony did the past two generations then there could very well be a large third party defection.  Losing third parties equals disaster to MS and Sony since it's the foundation of their business model. 

A year ago, the big question to many people was whether the Wii would end up at Number 2 or 3.  Microsoft or Sony being in the number one position was all but a given.  Maybe that will still be the case, but the unexpected strength of the Wii's first six months has been a bit of an eye opener. 
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« Reply #28 on: April 30, 2007, 08:12:29 PM »

I don't believe MS and Sony have the same strategy.  MS is making a longterm investment in order to build out a brand and a gaming service.  Sony is... well, I don't think they quite know what their aim is or goals are, but they have their new system out, and since people really liked the PS1 and PS2, maybe people will magically need to get the PS3 no matter how much it costs. 

It seems the main aim of the PS3 is to create a market for Blu-Ray, the Cell processor, Memory Sticks, and whatever other proprietary technology Sony feels like gracing us fortunate consumers with.

Yes, they are both taking a loss on each console sold, but I think the similarities in strategy end there.  MS doesn't need to outrun the bear, they just need to outrun Sony.  This is classic Microsoft strategy: establish a presence, continue to incrimentally improve their product, then just sit around and wait for your competitors to get greedy and content then self destruct.  It happened with WordPerfect and Lotus, it happened with with NetWare, it happened with Netscape, and it at this early point, it seems like the Sony PlayStation could be added to that list.
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« Reply #29 on: April 30, 2007, 09:21:57 PM »

Quote from: unbreakable on April 30, 2007, 08:12:29 PM

Yes, they are both taking a loss on each console sold, but I think the similarities in strategy end there.  MS doesn't need to outrun the bear, they just need to outrun Sony.  This is classic Microsoft strategy: establish a presence, continue to incrimentally improve their product, then just sit around and wait for your competitors to get greedy and content then self destruct. 

So what the end game for MS then? Where do they make money here?  What changes for MS if Sony is out of the game if it isn't about marketshare?  How do they make up that $5 billion deficit they're in?

You seem to be saying that MS's ultimate goal with the 360 isn't to make money on games but on other entertainment options.  Even if that's true the only way that they make money on that scenario is through the sale of content.  And what drives how much content they sell?  Marketshare.  Which is exactly what they are trying to steal from Sony. 

Except the way things are playing right now, MS isn't gaining all of the marketshare that Sony is losing.  The numbers prove that.  That market is also going to the Wii and maybe even being diverted into the handheld sphere (where MS doesn't currently have a dog in the fight). 

Look at it this way- the market percentage last generation was roughly:

Sony:       70%
MS:          15%
Nintendo: 15%

Lets say this generation ends with:

Nintendo:  60%
MS:          30%
Sony:       10%

Where they beat Sony as you say.  Do you really think the halls of Redmond are going to be full of high fives over such a scenario?  I sure don't'.

MS's goal to beat Sony was on the assumption that would automatically put them in the number slot.  Maybe they were expecting Sony to self destruct but they were taking it for granted that, following dismal showings from N64 and Gamecube, that Nintendo had already self-destructed in the home console market. 
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« Reply #30 on: April 30, 2007, 09:45:43 PM »

Quote from: unbreakable on April 30, 2007, 08:12:29 PM

This is classic Microsoft strategy: establish a presence, continue to incrimentally improve their product, then just sit around and wait for your competitors to get greedy and content then self destruct.  It happened with WordPerfect and Lotus, it happened with with NetWare, it happened with Netscape, and it at this early point, it seems like the Sony PlayStation could be added to that list.

I think that's a good comparison for relating the current state of competition between Microsoft and Sony. But in regards to the Nintendo Wii, Microsoft really hasn't encountered anything like it before.

To create an equivalent scenario, think of Apple releasing a new OS about a year after Windows 95 that sells in 1 fiscal quarter 1/2 of what Windows did in a year. Then throw in a new MAC hardware design that's as popular and sexy as the current iPod. Faced with those factors it's very possible we'd be using a different OS than the XP and Vista we all know.
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« Reply #31 on: April 30, 2007, 11:05:08 PM »

Quote from: Kevin Grey on April 30, 2007, 09:21:57 PM


MS's goal to beat Sony was on the assumption that would automatically put them in the number slot.  Maybe they were expecting Sony to self destruct but they were taking it for granted that, following dismal showings from N64 and Gamecube, that Nintendo had already self-destructed in the home console market. 

Nintendo pretty much took everyone by surprise (though their E3 showing really turned heads).  What I'm surprised is that MS hasn't reacted to Nintendo.  They are pretty much fighting the console war believing Sony is their only competator (that's my take on it).  If MS was taking Nintendo seriously, they would have dropped the price on their consoles instead of bringing out the Elite and pricing stuff as they do.  A $200 (US) core and $300 premium would have had 360's flying off the shelves.  Or, do a $400 elite and a $300 premium.

I do think both Sony and MS are hoping the Wii is a fad and will die off.  I'm not sure that is a good business strategy.
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« Reply #32 on: May 01, 2007, 12:19:24 AM »

Quote from: Space Herpes on April 30, 2007, 11:05:08 PM

If MS was taking Nintendo seriously, they would have dropped the price on their consoles instead of bringing out the Elite and pricing stuff as they do.  A $200 (US) core and $300 premium would have had 360's flying off the shelves.  Or, do a $400 elite and a $300 premium.

Well, as the MS report indicated, they are still selling each console at a loss so I'm not sure they were in a position to drop the price significantly.

The Elite feels like a rather late reaction to the PS3.  Likely started in earnest before PS3's release, back when people expected Sony to be a much stronger player than they turned out to be, it feels like MS's answer to the Sony feature set (ie more storage and HDMI). 
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« Reply #33 on: May 01, 2007, 12:36:31 AM »

Quote from: Kevin Grey on May 01, 2007, 12:19:24 AM

Quote from: Space Herpes on April 30, 2007, 11:05:08 PM

If MS was taking Nintendo seriously, they would have dropped the price on their consoles instead of bringing out the Elite and pricing stuff as they do.  A $200 (US) core and $300 premium would have had 360's flying off the shelves.  Or, do a $400 elite and a $300 premium.

Well, as the MS report indicated, they are still selling each console at a loss so I'm not sure they were in a position to drop the price significantly.

The Elite feels like a rather late reaction to the PS3.  Likely started in earnest before PS3's release, back when people expected Sony to be a much stronger player than they turned out to be, it feels like MS's answer to the Sony feature set (ie more storage and HDMI). 

I think the Elite is also designed to artificially spike sales and shipments. First, Microsoft gets some incremental sales by a small percentage of existing customers trading up.  More importantly though, it forces retailers to to place orders. A given retailer can't not stock the Elite, so it forces them to order x number of Elites even if they have a high inventory of premium and core units. It gives the appearance of sales momentum in what otherwise would be a soft summer for sales.
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« Reply #34 on: May 01, 2007, 12:41:46 AM »

Quote from: Kevin Grey on April 30, 2007, 09:21:57 PM

Nintendo:  60%
MS:          30%
Sony:       10%

I think you are falling into a trap of percentages.

MS doesn't need to have a specific percentage of the market, they simply need a specific number of 360 owners.  If the Wii continues to expand the market, that's great for them, but the size of the market is ultimately irrelevant.  MS surely has a certain installed base in mind, and that figure has nothing to do with the overall market share.  In fact, I'll probably guess MS made projections based upon people who owned 2nd-gen consoles.

My "outrunning Sony" statement is based upon one simple concept: the decision to buy a PS3 or a 360.  People who buy either would  probably be more likely to own a Wii than the other console.  But I seriously doubt many people will own both a PS3 and 360.

I also never bought into the concept that a person owning a PS2 will ever help sway them toward a PS3 sale.  In fact, I think if someone has purchased a PS2 since the PS3 was announced, it's actually LESS likely they will ever get a PS3.  It seems (to me) to show a failure on Sony's part to make a convincing case for buying their PS3.  It's a failure to close the deal on a prospective customer.
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« Reply #35 on: May 01, 2007, 01:31:13 AM »

Quote from: unbreakable on May 01, 2007, 12:41:46 AM

Quote from: Kevin Grey on April 30, 2007, 09:21:57 PM

Nintendo:  60%
MS:          30%
Sony:       10%

I think you are falling into a trap of percentages.

MS doesn't need to have a specific percentage of the market, they simply need a specific number of 360 owners.

I should have clarified- that was assuming minimal expansion of the market- basically just a reshuffling of the approximately 145 million people who bought consoles last generation.

But we can talk hard numbers too- even from that standpoint MS is only seeing a bit of a bump over what they saw last generation- for example, last month they sold about 25% more than the Xbox did at the same point in it's lifecycle.  I posted the numbers in the last NPD thread we had- the same approximate number of consoles were sold in March '07 as March '02 (ie same point in generation lifecycle).  Any market expansion by the Wii is mitigated by the supply constraints it's under right now. 

MS did about 20-25 million last generation.  If they sell 25% more this time out then they'll sell about 32 million this generation.  Do you think they'll be happy with those numbers (ie still less than the N64 sold)?  I don't. 


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« Reply #36 on: May 01, 2007, 01:33:35 AM »

Quote from: Andrew Mallon on May 01, 2007, 12:36:31 AM

Quote from: Kevin Grey on May 01, 2007, 12:19:24 AM

Quote from: Space Herpes on April 30, 2007, 11:05:08 PM

If MS was taking Nintendo seriously, they would have dropped the price on their consoles instead of bringing out the Elite and pricing stuff as they do.  A $200 (US) core and $300 premium would have had 360's flying off the shelves.  Or, do a $400 elite and a $300 premium.

Well, as the MS report indicated, they are still selling each console at a loss so I'm not sure they were in a position to drop the price significantly.

The Elite feels like a rather late reaction to the PS3.  Likely started in earnest before PS3's release, back when people expected Sony to be a much stronger player than they turned out to be, it feels like MS's answer to the Sony feature set (ie more storage and HDMI). 

I think the Elite is also designed to artificially spike sales and shipments. First, Microsoft gets some incremental sales by a small percentage of existing customers trading up.  More importantly though, it forces retailers to to place orders. A given retailer can't not stock the Elite, so it forces them to order x number of Elites even if they have a high inventory of premium and core units. It gives the appearance of sales momentum in what otherwise would be a soft summer for sales.

Good point and that definitely sounds like what they're trying for.  I can't help but wonder if it's worth the potential damage that it will do in potentially creating consumer perception that the console received a price increase.  DS Lite benefitted enormously from redesign but it also kept the same price point in the process.  But maybe it will be enough to spike sales through the summer. 
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« Reply #37 on: May 02, 2007, 02:51:16 AM »

Quote from: Kevin Grey on May 01, 2007, 01:31:13 AM

MS did about 20-25 million last generation.  If they sell 25% more this time out then they'll sell about 32 million this generation.  Do you think they'll be happy with those numbers (ie still less than the N64 sold)?  I don't. 

I really can't say, I don't know enough of the numbers involved.  For example, are more games selling this generation than last?  Are they making more profit on Live than last generation?  Perhaps, MS is content to simply break even this generation, so long as they can sell X amount of consoles.

I don't know if they are doing better now, but succeeding in the Japanese market is clearly on their radar.  If anything, I would say that is one area they might like to alter sooner rather than later.



[edit] Actually, after thinking a bit, I see what Microsoft is doing.  They aren't selling the XBox360 so much as they are selling Live.  And if you view it that way, it kind of seems like a pretty visionary strategy: Live will persist from one console to the next, unlike the fragmented market left when other manufacturers try moving to the next generation.

If you are happy with Live, moving from XBox to XB360 is a no-brainer.  Now compare that with a PS2 owner thinking about whether to get a PS3.  In that case, the only actual draw is backward compatibility, which may not even be a big issue with many people.  So in that case, the purchase of which console to get is still up for grabs.

Live then becomes Microsoft's answer on how to keep customers moving from one generation to the next.
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