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Friday, April 20, 2007

360 "Disastrous Failure"? ... Meh.

Next-Gen is reporting on the tale of multiple analysts, one who wants Microsoft to admit the Xbox has been a botched investment:

“Making money, e.g., the creation of long-term shareholder value, has got to be the ultimate driver of Microsoft's gaming (and H&E) strategy, right?” Ehrenberg writes. “Well, after five years and over $21 billion invested all they've got to show for it is $5.4 billion of cumulative operating losses, and Xbox 360 doesn't appear to be the silver bullet to turn things around.”
-- ANALYSIS: The “Disastrous” Xbox 360?

Microsoft retorts with the pretty expected "no, no, we sells a lot" response. I'm more inclined to buy into this thinking:

“Microsoft clearly planned to spend several billions of dollars to establish a sustainable position in home entertainment,” Pachter wrote in an e-mail. “It's premature to conclude that it has or has not worked. I would say that if they end up with 30 percent share or more of the US and European console market (virtually a certainty), they will have succeeded wildly. It's very tough to determine what their share of revenues from downloadable content will be, as the market is in its infancy.  The same is true of in-game advertising.”

The Xbox is a long term concept. Microsoft never intended to make money from the original generation - fiscally it was a tax break. The 360 is, if I recall correctly, actually beating the margins they had originally set out to be truly profitable with the division by the third division.

I've critiqued Microsoft in the past for being overly optimistic in terms of sales (a fad that blogs get into often as well) - but clearly Microsoft is happy with the results. They're in the game to stay at this point. About the only way for it to be considered a failure is if 360 sales tapered down to the point where developers lacked interest, which isn't going to happen.

Eventually, of course, the Xbox initiative will need to show the money. I'm not sure how possible that will be without repeating the basic strategy of burning cash to create value add, but the market is changing quickly and rapidly. Personally, as I've mentioned recently, I'm more concerned with what the force of the Xbox market will do to the PC market in general.


jvm said...

I think that Microsoft will actually feel more price pressure from Nintendo than Sony will. The Wii is on fire with consumers that have $250 sitting around, and that means that they're a lot less likely to buy an Xbox 360. Those people considering a PS3, however, are more likely to pick up two consoles anyway, so the Wii doesn't eat into PS3 sales the same way.

I do wonder how long they can hold off the investor complaints. As I said recently on CG, the idea 10 years ago was not to have a console, and now they're doing it and losing money *still*. If the Wii wounds them and they're forced into a price cut without commensurate cost reductions (the die shrink still hasn't happened!), that's just more red ink on top of what they already have. How long will investors buy the "yes, but we're going to make money eventually!" line?

Josh said...

They're definately at a stage where they need to start showing something - either a trend towards profitability or the inclusion of marketshare based on the digital living room (Zune fits into this as well, of course). The next generation should be their finish line.

And where is that die reduction?