Huge Microsoft Home and Entertainment Losses

[Dave Long]

Microsoft’s Home and Entertainment division, which houses the Xbox business, had revenue of $499.0 million in the quarter and $2.88 billion for the full year. Those numbers compare to $483.0 million in the last fiscal year’s fourth quarter and $2.75 billion in FY 2003.
An operating loss of $1.1 billion was realized in the sector in the fourth quarter, versus an operating loss of $1.6 billion one year earlier. For the full year, the Home and Entertainment division had an operating loss of $4.7 billion, up from the $3.7 billion loss in the company’s 2003 fiscal year.

This is from a conference call today I believe.

--Dave

[Luke M]

Well, that sucks. At least the Xbox still has plenty of games coming out that look to be awesome.

[Wholly Schmidt]

Sheryl Crow is doomed!

[MauxFaux]

HUGE!

[Dave Long]

4.7 billion dollars in a year is pretty huge.

--Dave

[Rimbo]

That's a lot of not enough.

[Wholly Schmidt]

Microsoft’s Home and Entertainment division, which houses the Xbox business, had revenue of $499.0 million in the quarter and $2.88 billion for the full year. Those numbers compare to $483.0 million in the last fiscal year’s fourth quarter and $2.75 billion in FY 2003.
An operating loss of $1.1 billion was realized in the sector in the fourth quarter, versus an operating loss of $1.6 billion one year earlier. For the full year, the Home and Entertainment division had an operating loss of $4.7 billion, up from the $3.7 billion loss in the company’s 2003 fiscal year.

This is from a conference call today I believe.

--Dave
Alright, seriously though, can someone put that into understandable terms for me? As I read it, I see:
4th Quarter Revenue - Slightly up from last year
Year Revenue - Slightly up from last year....

Nevermind. As I started reading it through a third time to ask my question, I figured out where I was skipping a word reading it and it makes sense now. So, the operating loss for this year jumped a billion from last year? That kind of number isn't really even tangible to the imagination, like most numbers having to do with Microsoft. Is there some kind of perspective someone could put that in for me? A comparison to other departments or companies or something? Is that a huge loss comparatively speaking, or just a "rough year"? I mean, a billion certainly sounds like a ridiculously high number, but it's so ridiculous that I have to wonder if I'm just not appreciating where it stands in relation to other numbers.

[Dave Weinstein]

For perspective, Microsoft generates a billion dollars a MONTH in excess cash, and just ordered a $32 billion special dividend to shareholders (leaving them with about $20 billion in current cash reserves).

[Nick Walter]

Isn't this how Microsoft operates normally? Two huge cash cow divisions (windows and office) subsidizing all other divisions which consistently lose money.

[Anaxagoras]

This isn't necessarily bad news. An increase of operating costs usually represents new and/or expanded projects that will yield profits down the line. Thus, although it looks like Microsoft suddenly screwed the pooch, it's entirely possible that they're just investing in future products.

Or they could just be flushing money down gold plated toilets.

[Malderi]

Which could be a hobby of Bill Gates with no noticable financial impact.

[Dante Rising]

I'd love to know how much of that is specifically related to the Xbox, as opposed to everything else in the division.

[Chris Nahr]

There isn't much else in that division. PC games aren't that big, they no longer make PC game peripherals, and I've yet to see a Microsoft TV set.

Anyway, Joe Wilcox on the ever-helpful Microsoft Monitor (http://www.microsoftmonitor.com/archives/003398.html) has the breakdown for all MS groups. Here's revenue and net profits (+) or losses (-) for the last quarter, then for the last year:
Client (i.e. non-server Windows): 2.75 billion (+2.06 billion), 11.54 billion (+8.015 billion)
Server and Tools (i.e. Windows Server and Visual Studio): 2.3 billion (+567 million), 8.48 billion (+96 million)
Information Worker (i.e. Office): 2.789 billion (+1.96 billion), 10.8 billion (+7.15 billion)
Business Solutions (the fledgling division that tries to compete with SAP and IBM): 196 million (-42 million), 667 million (-225 million)
MSN (posting its first annual profit ever): 588 million (+35 million), 2.2 billion (+121 million)
Mobile and Embedded Devices (i.e. Windows CE): 70 million (-42 million), 247 million (-224 million)
Home and Entertainment (i.e. Xbox): 499 million (-339 million), 2.876 billion (-1.215 billion)
Note that Media Center and Tablet PC are in the Client division, not in Home/Entertainment and Mobile/Embedded, respectively.

As you can see, MS does have to other loss-making divisions but they are relatively small. None of the divisions of a similar size posts any losses, let alone such huge ones. However, the gigantic profits from Windows & Office do allow the Xbox to coast along at this rate for a good while longer.

CNet (http://news.com.com/Microsoft+earnings+paint+mixed+picture/2100-7343_3-5280372.html?tag=nefd.top) has another feature on this topic, with more details on the Xbox. Microsoft is selling more boxes and games than ever but also losing more money on them than ever, thanks to recent price cuts. Have a good laugh with this spin:


The earnings report also highlights Microsoft's continuing subsidizing of Xbox hardware, a situation [Robbie] Bach [senior vice president in Microsoft's Xbox division] said nobody's in a hurry to change. "We've been in an investment mode, where we sell consoles at a loss," he said. "We can be profitable soon if we want to, but we'd have to slow the rate of customer acquisition down a bit, and that is not the way we want to go now."

The Xbox figures are also stated somewhat briefer on Frictionless Insight (http://www.frictionlessinsight.com/archives/2004/07/18-week/index.html#000722). On the same site, we have the results for EA's first quarter:
Net income at 24.2 million, up from 18.4 million
49% of revenues from America, 44% from Europe
38% of revenues from PS2 games, 15% PC, 13% Xbox
Small fry compared to Microsoft... but then, I'd take 24 millions of profits over 339 millions of losses any day!

[DaveC]

DOOOOOOOMED!

[Wheelkick]

For perspective, Microsoft generates a billion dollars a MONTH in excess cash, and just ordered a $32 billion special dividend to shareholders (leaving them with about $20 billion in current cash reserves).

This is why what seems to be a big loss in their entertaimnent division won't stop them from continuing with their efforts in console entertainment. When you got that much cash to spend, there are no big losses.

[Sean Tudor]

It's a loss on paper but Microsoft have made huge gains with console market share. Remember they started from 0 consoles sold.

[chumpface]

MS Home entertainment ain't going away. If you look at MS, they have one consistent biz model. They enter a playing field when the game is already started, and they keep playing against the home team until they win, even if the game goes on for ten years and costs them billions of dollars.

MSN just posted a profit this year for (I believe) the first time. After 10 years.

See also: Windows and Internet Explorer.

[Jasper Phillips]

What's so strange about this? It's been exact plan with the Xbox all along: invest heavily at a loss while trying to dominate the market. It could certainly be going better for them, and it's not even clear if they'll ever succeed. But they knew it was a riisk going into the venture -- the potential payoffs and benefit of diversification are worth it to them. It's squarely in line with Bill Gates' vision of eventually rolling all electronic home entertainment into one package, so that he can leverage his windows empire into something even larger.

[Wholly Schmidt]

Thanks for the perspective Nahr.

[Warlord of Mars]

DOOOOOOOMED!

Human sacrifice, dogs and cats living together - mass hysteria!

[Chris Nahr]

It's a loss on paper but Microsoft have made huge gains with console market share. Remember they started from 0 consoles sold.

A loss is a loss is a loss. It's a real loss, not just on paper. They lost more money as their market share increased! That's a fundamental difference to their software success stories, and they somehow have to turn this around.

That's why the "losses in the short run, dominance in the long run" analogy to the other divisions seems broken to me. The other divisions didn't increase their losses as they grew.


MSN just posted a profit this year for (I believe) the first time. After 10 years.

Yes, as I already wrote. :) However, the MSN that is now making a small profit is a faint shadow of what MSN was originally intended to be -- a better AOL, an anti-Internet. Now MSN is not even present anywhere except in the USA, and it has no distinctive quality that would give me confidence in further growth and profit.


See also: Windows and Internet Explorer.

Microsoft is making zero money off IE. Instead, they're spending money trying to plug security holes and fighting bad publicity. This Pyrrhic victory was a mistake for Microsoft.

[Derek Meister]

I'd be interested to know how well sales of Windows XP Media Center Edition (http://www.microsoft.com/windowsxp/mediacenter/default.mspx) are doing, if only as a footnote in the future history of Microsoft's eventual goal of merging it with the in-roads into the family room made through sales of the X-Box and it's future successors.

I would almost not even look at the X-Box itself as being anything other than a long-term marketting tool for the eventual family room convergence device that Microsoft has hinted they expect to be where the big money is in the future.

[Guido Jones]

Yes, as I already wrote. :) However, the MSN that is now making a small profit is a faint shadow of what MSN was originally intended to be -- a better AOL, an anti-Internet. Now MSN is not even present anywhere except in the USA, and it has no distinctive quality that would give me confidence in further growth and profit.

You are very very wrong on this. A lot of MSN's revenue is generated overseas.

[noun]

I wonder how employees in the other Microsoft divisions feel about their profits being used to offset the XBOX's losses...

[RickH]

MS Home entertainment ain't going away. If you look at MS, they have one consistent biz model. They enter a playing field when the game is already started, and they keep playing against the home team until they win, even if the game goes on for ten years and costs them billions of dollars.

Yeah, just ask the Tivo folks how UltimateTV kicked their asses. Or ask Logitech and Belkin etc. how they have been driven out of the PC peripheral business. Or ask the people that bought Microsoft Bob or WebTV how much support they got from the corporation after it was decided that these products were DOA.

MS is good at one thing: cutting business deals that let them dominate categories. That's what got Office and Windows where they are. Since they can't make you buy an Xbox as a condition of getting a new TV, it's not going to work this time.

[Chris Nahr]

You are very very wrong on this. A lot of MSN's revenue is generated overseas.

Just checking... indeed, they have re-opened their German website, as a news & entertainment portal like the mother site.

I was actually an MSN customer here while they offered a dial-up service but they soon shut it down. Didn't know that they came back with localized portal sites.

[Guido Jones]

Heh, there's much more then just localized portal sites.

[Chris Nahr]

Heh, there's much more then just localized portal sites.

Like what?

[Guido Jones]

MSN Premium is the biggest part of it, but there's also Hotmail and MSN Mobile.

[Rob_Merritt]

Microsoft should of stuck with promoting the pc platform as a gaming platform.

[shift6]

And how much revenue did Hotmail generate for MS last year? :wink:

[Jason McCullough]

I can't find a number anywhere, but you know they have ads on there, right?

[Guido Jones]

Hotmail generates money from ads, as well as Extra Storage (well it's known as Hotmail Plus now) subscriptions. Exact numbers I can't give, obviously.

[shift6]

Yeah I know it has some money coming in. I was asking if it is generating positive cashflow, which is related to the original question of MSN's profitability, not just receipts coming in.

[Chris Nahr]

Setting the mystery of MSN's profits aside for a moment, Dave Long will be thrilled to hear that Nintendo reports profits (http://www.frictionlessinsight.com/archives/2004/07/25-week/index.html#000792) of US$156 million for the last quarter.

That's a whopping 140% increase, due to higher sales and a better dollar exchange rate. Cube sales skyrocketed from 80,000 units in the same quarter of last year to 750,000 this quarter.

Gentle readers, take note: Unlike Microsoft, Nintendo actually makes more money as its sales increase. Clever!

Meanwhile, Sony's game division (http://www.frictionlessinsight.com/archives/2004/07/25-week/index.html#000784) is losing money as people finally get tired of buying their ancient piece of crap consoles, even with the recent price cuts.

[Derek Meister]

While they are losing money, they are also gaining a foothold for a potential future all-in-one entertainment set-top box years down the road.

If they could converge something like a cheap version of this Alienware (http://alienware.com/product_pages/media_center_pc.aspx) Windows XP Media Center based unit to provide for the future equivalents of TiVo / WebTV / XBox / MP3 player / photogallery, then the loses Microsoft is encountering with the XBox will be nothing more than really cheap investments in marketting.

Will Microsoft be able to pull that off? I haven't a clue. The XBox is doing well, at least in terms of numbers, against a cheaper product from one of the most respected names in gaming, so they're halfway there. However, their DVR offerings haven't exactly took the world by storm, and WebTV eventually scuttled itself.

[Guido Jones]

WebTV still lives on BTW, just known as MSNTV now.

[Chris Nahr]

Microsoft Monitor has just posted a more detailed report on MSN (http://www.microsoftmonitor.com/archives/003463.html). Looks like most of their revenue still derives from advertising, and will continue to do so.

[Derek Meister]

In the august issue of Wired magazine, they had a long article examining how Madison Avenue is responding to their valuable young male demographic spent 12% less time with network television last year and spend more time playing video games and being online.

The gist was that most companies are beginning to shift ad budgets over to the Internet again, in some cases spending upwards of an average 25% more in 2003 than they did in 2002, which was the lowest point for such advertising since the dot.com bust.

Of course, we'll never see the crazy days where anyone with a web page, no matter how small, could make a small bit of spare cash with banner ads, but it does shed some light on exactly why Gmail's sudden popularity has caused other free webmail providers to do everything they can to keep up, with webmail being a prime target for serious internet advertising money.

[Kevin Grey]

Meanwhile, Sony's game division is losing money as people finally get tired of buying their ancient piece of crap consoles, even with the recent price cuts.

Not too tired- Sony sold more than twice as many PS2s as MS did Xbox's in June.