It is always interesting to see the cowardly xflop fanbitches
conveniently ignore actual news events about the xflop 3-shitty, over
trying to spread lies and total fabrications about the PS3, like
Micro$haft reporting a $1,300,000,000 loss on the xflop 3-shitty for
fiscal year 2006 or that Micro$haft has no clear reason for the xflop
3-shitty other than fear of the PS3. The character of the xflop
3-shitty fanbitches match their overlords at Micro$haft: fearful,
confused, cowardly, covetous, jealous, spiteful and just downright
low-down cruds.
http://www.next-gen.biz/index.php?option=com_content&task=view&id=3988&Itemid=2
ANALYSIS: How Much is Too Much?
11 October 2006
Microsoft says it will stick with its Xbox business come hell or high
water. But with years of heavy losses behind it the time has arrived to
turn a profit. Has it all been worth the effort and how can the company
turn its hard won market share gains into actual profits?
Earlier this week, an interview with Microsoft COO Kevin Turner
affirmed that Microsoft is willing to stay the course with its
videogame business, despite the fact that it hasn't been profitable
on an annual basis since the original Xbox launched in 2001.
For some, the reaction to the interview was surely, "'Duh.' Of
course Microsoft plans to stick with the Xbox business." That
reaction stems from the fact that it's easy to see Microsoft's
successes as the lone next generation console on the market. The games
library is good, upcoming titles are looking great, Xbox Live is a
robust service with many appealing features and Microsoft is insistent
that it will move 10 million hardware units by the end of the year.
But all of these successes and admirable plans have come at great
expense-greater than Microsoft had expected initially. For fiscal
year 2005, Microsoft's home and entertainment division posted a $485
million net loss.
After its third fiscal quarter ended March 31, 2006, when Microsoft
posted a $388 million operating loss for its home and entertainment
division, Microsoft CEO Steve Ballmer issued an internal e-mail that
stated, "...The cost of producing Xbox 360 consoles was higher than
expected..."
In fiscal 2006, ended June 30, 2006, the division lost $1.26 billion,
mainly due to Xbox 360 launch expenses.
Of course, these losses represent investment-heavy investment that
Microsoft hopes to turn into profit by fiscal 2008, the target date
that Robbie Bach said the home and entertainment division would become
profitable.
The question is, how much loss is too much? Microsoft's resources for
supporting the Xbox 360 business seem unlimited, as other profitable
divisions rake in the dough. But what would it take for Microsoft to
throw in the towel?
Xbox as a defensive maneuver
We posed that question to company-specific research firm Directions on
Microsoft analyst Matt Rosoff. His answer in short:
"I don't know."
Still, he explained his uncertainty. "Remember that Microsoft partly
entered the game console business for defensive reasons," Rosoff
said. "The company was concerned that a PlayStation successor would
become the default gateway to networked entertainment in the home-Ken
Kutaragi promised as much-and cut into consumer PC sales."
He continued, "It's very hard to calculate the worth of a defensive
business. I personally think Sony will have a really hard time with the
PS3-fewer games at launch, $200 price premium, and yet they're losing
more money per console than Microsoft is on the 360. More long-term,
imagine no PlayStation 4 and how Microsoft might profit from such an
environment."
So according to Rosoff, one of the main rewards that the Xbox business
can provide Microsoft is the ability to block Sony's encroachment on
the living room and PC sales, the software for which is Microsoft's
bread and butter. The value of these areas seems immeasurable to
Microsoft, so it's no wonder the company wants to stick with the Xbox
business despite its steep near-term costs.
'08 the magic number?
But why is Microsoft saying that fiscal 2008 will be the coveted time
by which the home and entertainment division will be profitable? After
all, according to Directions on Microsoft, the company previously said
that the division would be profitable by the beginning of fiscal 2007,
which began in July. The company missed that goal by a long shot (see
the aforementioned $1.26 billion loss).
Again, heavy investment in the Xbox 360 in the face of the PS3 combined
with faith in the first-mover advantage drove spending to high levels.
"First, they accelerated production of Xbox 360 consoles when they
found out that the PS3 would be late, in order to reach their goal of
being the first console in this generation to reach 10 million
sales," explained Rosoff. "So, because production was frontloaded,
costs hadn't come down as quickly as expected in fiscal '07. Second,
the home and entertainment group was starting up at least one
business-Zune-that Microsoft hadn't anticipated when they made the
fiscal '07 prediction."
The 10 million unit race
The large majority of spend has everything to do with Microsoft's
oft-mentioned race to 10 million Xbox 360s sold by year-end. Building
loads of Xbox 360s at an estimated $125 loss each puts a bit of a dent
in a company's financials. Lazard Capital Markets analysts Colin
Sebastian reminds us that once a really significant installed base is
established for the Xbox 360, it's all about software sales.
"I am not sure if the hardware will ever turn a profit for Microsoft
or Sony," he said. "However, what the manufacturers can count on is an
increasing contribution of royalties from third-party software sales,
which is where the real profit potential lies. ...With a high software
tie ratio they can earn a significant return over the course of the
five- to six-year cycle."
Rosoff concurred: "Peter Moore and others at Microsoft believe that
getting to 10 million first will ensure dominance through this
generation of consoles. When you hit that number, you get more
exclusives from third-party developers, more support for your from
retailers, and so on, and that leads to more game sales. And, again,
there's the defensive aspect to keep in mind."
Xbox in context
Speaking of defense, Microsoft's going to have to crank up its
defense to ensure that profitability target. The market's about to
get pretty crowded with the additions of the Wii and PS3, and come
mid-November, we'll all get a perspective shift, and will be able to
view the Xbox business in the context of an all-out next generation
console war. We think Microsoft's heavy investments will pay off, and
we couldn't be more excited about this upcoming three-way race.
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