Xbox turns a profit

[Queasy]

Link

Last year Microsoft Entertainment and Devices Division (EDD) President Robbie Bach said that the Xbox business would be profitable in 2008. Well, so far it looks like he's right. Microsoft today posted its second quarter and first-half earnings for the period ending on December 31, and for the first six months of the company's fiscal year the Xbox division has recorded operating income of $524 million compared to a loss of $423 million during the same period one year ago. For Q2 in particular, the Xbox division saw operating income of $357 million.

In terms of revenues, sales grew only three percent in Q2 to $3.06 billion, but for the first half sales climbed 25 percent to $4.989 billion. For the first half of the fiscal year, Microsoft shipped 6.1 million Xbox 360 consoles, up from 5.4 million one year earlier. Growth (and profit) was no doubt driven in large part by the incredible success of Halo 3.

EDD also houses the PC games and Zune businesses, but Microsoft attributed the gains primarily to the Xbox 360. "Xbox platform and PC game revenue increased $1.0 billion or 35% during the six months ended December 31, 2007, as a result of increased Xbox 360 console sales, video game sales led by Halo 3, Xbox Live revenues, and Xbox 360 accessory sales," the company said in its 10-Q filing.

Microsoft said that for the remainder of the 2008 fiscal year it fully expects EDD revenue to continue to increase "due to increased sales of Xbox 360 consoles and related games, accessories, and services."

Overall, Microsoft's second quarter results were hugely positive. The company's revenue, operating income and earnings per share came in at $16.37 billion, $6.48 billion and $0.50 ? representing increases of 30 percent, 87 percent and 92 percent, respectively.

 

[R Nilla]

Amazing.

Nice Ghostbusters quote, BTW. :thumbsup:

 

[jpeyton]

Call me crazy...but does anyone see a correlation:

$357 million income during Q2 (October-December)

Halo 3 launched September 25th-27th (worldwide)

From the last week of September plus October-December, Halo 3 sells 8.1 million copies, and undoubtedly spiked console sales as well.

I'm curious how much income the XBOX business will bring in on quarters that don't include a Halo game launch.

I recall that the original XBOX had a profitable quarter, too, when Halo 2 launched.

 

[darkswordsman17]

Wow, less than a year after they suffered a $1 billion setback, they turn a profit (yes I know it was just for the quarter and that Halo 3 was largely responsible, but all the same), thats pretty astounding. I think it can be pretty easily explained too. Take a look at the games released last year. Who would've thought that if you make great games that people would buy your gaming console?

Not only that, but I think its a testament to how far gaming has come. We're in a world where Nintendo was the underdog (plenty of people said even on the ropes), who despite that is doing better than ever, competing against Microsoft and Sony, each of which is actually doing quite well. So its taken a bit for Microsoft to get the hang of things, and Sony seems like they're trying to make it difficult for themselves. I wouldn't be surprised to see the PS3 turn a profit this year (based on falling costs, Blu-Ray likely winning, HD finally starting to hit its stride in the mainstream, and of course a bevy of what should be great games).

However, one must make the point that just because its doing better as a business, is gaming now truly the best its ever been? Initially, I think I might say no, as I honestly just don't get excited about games much anymore (games today are too much of the same, few true gems, and with the mass of games there just isn't enough time to play and experience them all, not to mention the costs which aren't bad until you start considering all the extra stuff they get you with). With further thought, though, I don't see how you could argue it isn't. I say that, because, you're not limited to current gaming. You can pretty easily play through most of the best of what has come before, be that 20, 15, 10, or 5 years ago. The best part of all though? I think it only looks to get better.

 

[erwos]

Actually, I think they'll turn a profit next quarter, too, but only $100m or so. Big as Halo 3 is, that only account for about, guess-timating, $300m in revenue.

 

[DivideBYZero]

Making a profit in a qtr != in profit.

 

[PingSpike]

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

 

[Queasy]

Originally posted by: jpeyton
Call me crazy...but does anyone see a correlation:

$357 million income during Q2 (October-December)

Halo 3 launched September 25th-27th (worldwide)

From the last week of September plus October-December, Halo 3 sells 8.1 million copies, and undoubtedly spiked console sales as well.

I'm curious how much income the XBOX business will bring in on quarters that don't include a Halo game launch.

I recall that the original XBOX had a profitable quarter, too, when Halo 2 launched.

The difference is that MS is able to control costs with manufacturing the 360 this time while they weren't able to with the original Xbox. That will be a significant factor this time around.

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

This is actually for two quarters - 1st and 2nd quarter of the 2008 fiscal year. Considering that MS has been running in the red with the Xbox division every quarter except for one, having two quarters of profit is significant. They're on their way to their first profitable year.

Edit: To note the point I made above about MS being able to control costs with the 360: Link

Operating income within the division increased during the quarter primarily due to increased revenue, decreased cost of revenue and decreased marketing and sales expenses.

Lower manufacturing costs for Xbox 360 hardware drove the cost of revenue down $523 million, or 22 percent during the quarter.

That's a trend that will continue and is what will allow MS to be profitable with the Xbox 360 this time around whereas they weren't with the Xbox.

 

[Xavier434]

Guys, once a console company is in the black like MS has done here then they continue to pull in profits nearly every quarter until the life cycle of that console is done. This industry has always been that way. These numbers mark a big thing for the 360.

 

[mugs]

Originally posted by: Xavier434
Guys, once a console company is in the black like MS has done here then they continue to pull in profits nearly every quarter until the life cycle of that console is done. This industry has always been that way. These numbers mark a big thing for the 360.

Just a clarification - selling the console for a loss and then eventually reducing the cost to manufacture it isn't how it has always been. It is how it has always been for Sony and Microsoft.

Microsoft actually started selling the 360 for a profit a long time ago - disregarding repair costs. Repair costs killed them. The $1.1 billion charge they took last year was for future repair costs. So if their estimate of their future repair costs was accurate, I think you're right that they'll continue to turn a profit.

 

[Xavier434]

Originally posted by: mugs

Originally posted by: Xavier434
Guys, once a console company is in the black like MS has done here then they continue to pull in profits nearly every quarter until the life cycle of that console is done. This industry has always been that way. These numbers mark a big thing for the 360.

Just a clarification - selling the console for a loss and then eventually reducing the cost to manufacture it isn't how it has always been. It is how it has always been for Sony and Microsoft.

Microsoft actually started selling the 360 for a profit a long time ago - disregarding repair costs. Repair costs killed them. The $1.1 billion charge they took last year was for future repair costs. So if their estimate of their future repair costs was accurate, I think you're right that they'll continue to turn a profit.

Yes, that's correct. Since consoles started selling for a loss it has taken longer for companies to be in the black. This is ok though considering how much more money is made in the industry in comparison to back when consoles initially sold for a profit. I believe the Wii is the first popular console to sell for profit right form the beginning since the SNES days? It might even be farther back than that. Not sure...

 

[arredondo]

Originally posted by: PingSpike

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

That is correct. Estimates say they lost $4.5 billion to $5 billion on the first XBox alone. The X360 was selling for a loss for awhile, and then they had to shell out $1.2+ billion in RRoD debacle where up to a third of the first 10 million X360s are estimated to be defective. From all that alone, the gaming division at Microsoft are eons away from making their first true positive penny in the black.

Let's not even go into the viral marketing budget for rumored website influence, or the huge financial cost of money they bleed to buy timed exclusives and extra content of 3rd party games as well as help keep the failed HD-DVD format alive. My guess is that a TRUE profit from their game division won't be realized until midway through the XBox 720's life span, which some rumors suggest may be coming at the end of next year.

 

[mugs]

Originally posted by: Xavier434

Originally posted by: mugs

Originally posted by: Xavier434
Guys, once a console company is in the black like MS has done here then they continue to pull in profits nearly every quarter until the life cycle of that console is done. This industry has always been that way. These numbers mark a big thing for the 360.

Just a clarification - selling the console for a loss and then eventually reducing the cost to manufacture it isn't how it has always been. It is how it has always been for Sony and Microsoft.

Microsoft actually started selling the 360 for a profit a long time ago - disregarding repair costs. Repair costs killed them. The $1.1 billion charge they took last year was for future repair costs. So if their estimate of their future repair costs was accurate, I think you're right that they'll continue to turn a profit.

Yes, that's correct. Since consoles started selling for a loss it has taken longer for companies to be in the black. This is ok though considering how much more money is made in the industry in comparison to back when consoles initially sold for a profit. I believe the Wii is the first popular console to sell for profit right form the beginning since the SNES days? It might even be farther back than that. Not sure...

More or less. N64 sold for a profit from the start, and it came in second - but that was by a huge margin. Gamecube sold for a profit, but came in third by a small margin behind 2nd and a huuuuuge margin behind 1st.

And hey, I don't mind if they sell their systems for a loss - more hardware for my buck.

 

[mugs]

Originally posted by: arredondo

Originally posted by: PingSpike

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

That is correct. Estimates say they lost $4.5 billion to $5 billion on the first XBox alone. The X360 was selling for a loss for awhile, and then they had to shell out $1.2+ billion in RRoD debacle where up to a third of the first 10 million X360s are estimated to be defective. From all that alone, the gaming division at Microsoft are eons away from making their first true positive penny in the black.

Let's not even go into the viral marketing budget for rumored website influence, or the huge financial cost of money they bleed to buy timed exclusives and extra content of 3rd party games as well as help keep the failed HD-DVD format alive. My guess is that a TRUE profit from their game division won't be realized until midway through the XBox 720's life span, which some rumors suggest may be coming at the end of next year.

"The huge financial cost of money they bleed to buy...."

Hah. Those expenses are part of the reason WHY they're making a profit now. Look at the game selection - that is why the 360 is outselling the PS3 despite apparently inferior hardware, huge reliability issues, no built-in HD optical drive, etc. They have the great exclusive games that sell systems. They have the extra content that will give people a reason to buy GTA IV for the 360. That's why they have the best attach rate. And Microsoft isn't the only one who provides financial incentives for exclusives.

They're not "bleeding money" with those tactics, they're making money.

 

[Xavier434]

Originally posted by: arredondo

Originally posted by: PingSpike

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

That is correct. Estimates say they lost $4.5 billion to $5 billion on the first XBox alone. The X360 was selling for a loss for awhile, and then they had to shell out $1.2+ billion in RRoD debacle where up to a third of the first 10 million X360s are estimated to be defective. From all that alone, the gaming division at Microsoft are eons away from making their first true positive penny in the black.

Let's not even go into the viral marketing budget for rumored website influence, or the huge financial cost of money they bleed to buy timed exclusives and extra content of 3rd party games as well as help keep the failed HD-DVD format alive. My guess is that a TRUE profit from their game division won't be realized until midway through the XBox 720's life span, which some rumors suggest may be coming at the end of next year.

Ya, I am going to have to support Mugs on this one. While some facts exist here, your use of those facts to justify MS's financial success (or lack of success as you seem to view it) is bogus.


***EDIT***

Also, MS is not trying to support HD-DVD even though they chose it over Blu-ray for whatever reason. They are supporting digital downloads.

 

[Queasy]

Originally posted by: Xavier434
Also, MS is not trying to support HD-DVD even though they chose it over Blu-ray for whatever reason. They are supporting digital downloads.

Part of the reason that Blu-Ray and HD DVD never got together to create one format is because they couldn't agree on the software and tools to use. Sony and Blu-Ray consortium supported BD-J (Java). The HD-DVD backers supported MS's toolsets and software and the VC-1 codec. That is why MS backed HD-DVD.

 

[purbeast0]

i wonder if the increase in the hardware sales had anything to do w/people buying "backup" 360's for when the first one RRoD's

 

[Xavier434]

Originally posted by: Queasy

Originally posted by: Xavier434
Also, MS is not trying to support HD-DVD even though they chose it over Blu-ray for whatever reason. They are supporting digital downloads.

Part of the reason that Blu-Ray and HD DVD never got together to create one format is because they couldn't agree on the software and tools to use. Sony and Blu-Ray consortium supported BD-J (Java). The HD-DVD backers supported MS's toolsets and software and the VC-1 codec. That is why MS backed HD-DVD.

That makes sense. I still believe they are more in favor of digital downloads over either of the formats though.

 

[imported_Imp]

Originally posted by: purbeast0
i wonder if the increase in the hardware sales had anything to do w/people buying "backup" 360's for when the first one RRoD's

Ah, I remember that rumour with the PS2 back in the day. Think it had a 90 day warranty up until the slim.

 

[darkswordsman17]

Originally posted by: mugs

Originally posted by: arredondo

Originally posted by: PingSpike

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

That is correct. Estimates say they lost $4.5 billion to $5 billion on the first XBox alone. The X360 was selling for a loss for awhile, and then they had to shell out $1.2+ billion in RRoD debacle where up to a third of the first 10 million X360s are estimated to be defective. From all that alone, the gaming division at Microsoft are eons away from making their first true positive penny in the black.

Let's not even go into the viral marketing budget for rumored website influence, or the huge financial cost of money they bleed to buy timed exclusives and extra content of 3rd party games as well as help keep the failed HD-DVD format alive. My guess is that a TRUE profit from their game division won't be realized until midway through the XBox 720's life span, which some rumors suggest may be coming at the end of next year.

"The huge financial cost of money they bleed to buy...."

Hah. Those expenses are part of the reason WHY they're making a profit now. Look at the game selection - that is why the 360 is outselling the PS3 despite apparently inferior hardware, huge reliability issues, no built-in HD optical drive, etc. They have the great exclusive games that sell systems. They have the extra content that will give people a reason to buy GTA IV for the 360. That's why they have the best attach rate. And Microsoft isn't the only one who provides financial incentives for exclusives.

They're not "bleeding money" with those tactics, they're making money.

Not only that, but those costs should be factored into their balance sheets, so their financial reports should be including them. Advertising/marketing might be a separate entity in the company, but due to the way Microsoft does advertising they're probably making money there as well and don't care too much about it.

As for HD-DVD, I don't think Microsoft really put that much money into supporting it. Like others have posted, their big contribution was in various software that they were using with it (which was not specific to HD-DVD and so its not like they're set back much by HD-DVD losing).

Similar to how its difficult (if not impossible) to factor in how much exclusives pay for themselves, other technology that the 360 is opening up for Microsoft will more than make the immediate costs worth it. Digital downloads (I'm waiting for the Zune marketplace and Live Marketplace to be integrated so that you can access the same content on both), IPTV, and even just the social integration of Live.

Then there's the Zune. Wasn't that right about the same time that Microsoft was dumping Zune 30s in back channels (Woot, "refurbs" on Buy.com and I think Amazon among others)? If so, I would think that could not have been a positive move financially (meaning they lost money from doing that).

 

[JackBurton]

Originally posted by: arredondo

Originally posted by: PingSpike

Originally posted by: DivideBYZero
Making a profit in a qtr != in profit.

I don't remember the financials...but don't they have two or so years of losses to offset, as well as almost the entire original xbox run?

That is correct. Estimates say they lost $4.5 billion to $5 billion on the first XBox alone. The X360 was selling for a loss for awhile, and then they had to shell out $1.2+ billion in RRoD debacle where up to a third of the first 10 million X360s are estimated to be defective. From all that alone, the gaming division at Microsoft are eons away from making their first true positive penny in the black.

Let's not even go into the viral marketing budget for rumored website influence, or the huge financial cost of money they bleed to buy timed exclusives and extra content of 3rd party games as well as help keep the failed HD-DVD format alive. My guess is that a TRUE profit from their game division won't be realized until midway through the XBox 720's life span, which some rumors suggest may be coming at the end of next year.

Uh oh, it looks like someone from the Sony camp decided to drop by.

 

[tatteredpotato]

Originally posted by: darkswordsman17
Wow, less than a year after they suffered a $1 billion setback, they turn a profit

The point was take the big hit that quarter so that they have repairs prepaid for future quarters and don't have that financial hurdle to overcome.

 

[Eeezee]

Note that console production has fallen off considerably, which is where all of their costs have come from anyway. Less production = less money spent (ie they've already produced a ton of them that are now being sold, production has slackened since Jan-May of any year is slow for console sales).

The Halo 3 launch also clearly had a lot to do with this, in addition to Gears of War and a few other hard hitting titles (Mass Effect, Assassin's Creed, etc.), so yeah, I'd hope the CHRISTMAS SEASON would produce some sort of profit.

Now let's see if MS can get back the considerable money they've lost over the last two years. If I spend $100 in a casino and hit $1 on a slot machine, that doesn't mean I've made $1 in profit.

 

[tatteredpotato]

Originally posted by: Eeezee
Note that console production has fallen off considerably, which is where all of their costs have come from anyway. Less production = less money spent (ie they've already produced a ton of them that are now being sold, production has slackened since Jan-May of any year is slow for console sales).

The Halo 3 launch also clearly had a lot to do with this, in addition to Gears of War and a few other hard hitting titles (Mass Effect, Assassin's Creed, etc.), so yeah, I'd hope the CHRISTMAS SEASON would produce some sort of profit.

Now let's see if MS can get back the considerable money they've lost over the last two years. If I spend $100 in a casino and hit $1 on a slot machine, that doesn't mean I've made $1 in profit.

They essentially had to "buy into" the console business and that required a multi billion dollar investment in the business. The Xbox 360 itself won't bring the business into the black overall, but Microsoft is looking at this from a very long term perspective.