Microsoft Having Profit Problems with Xbox 360? You Don’t Say?
The “red ring of death” for Xbox 360, huh? I guess it is time for those empiricist gaming writers to stand up and take a bow. First, further confirmation that Nintendo is blowing the doors off with the Wii and putting a hurting on Sony and PS3. And then today, Microsoft comes out and announces a $1.15 billion charge for extended warranty costs associated with Xbox 360 product repairs. I know the Xbox 360 fanboys love their consoles, but let’s be clear: this is lousy news for MSFT stock. $1.15 billion is no trifling matter for any company of any size, but this is simply a pattern with Microsoft these days and particularly in the Home & Entertainment Division.
“We don’t think we’ve been getting the job done,” said Robbie Bach,
president of Microsoft’s entertainment and devices division, which also
makes the Zune digital music player. “In the past few months, we have
been having to make Xbox 360 console repairs at a rate too high for our
liking.”********************
Matt Rosoff, an analyst at the independent research group Directions
on Microsoft, estimates that Microsoft’s entertainment and devices
division has lost more than $6 billion since 2002.Microsoft has written down larger amounts in the past — more than
$10 billion in the late 1990s related to investments in
telecommunications companies, and more than $5 billion related to
antitrust issues — but a $1 billion write-down for one division in one
quarter is significant.“It suggests the problem is pretty widespread,” Rosoff said.
********************
In June, bloggers speculated that the Xbox 360 return problem was
getting so severe that the company was running out of “coffins,” or
special return-shipping boxes Microsoft provides to gamers with dead
consoles. “We’ll make sure we have plenty of boxes to go back and
forth,” Bach said in an interview.Microsoft’s entertainment and devices division reported an operating
loss of $315 million on $929 million in sales for the three-month
period that ended in March.
Mr. Rossoff’s numbers reflect my earlier post on Microsoft on their broken H&E strategy. You think Halo 3 is going to bail out Microsoft at push them to profitability on the Xbox 360 any time soon? Survey says - no way. The combination of the runaway Wii, the boom in family-oriented gaming, internal production problems and a price point that is still too high, Microsoft looks to continue to struggle in H&E for quite some time. For exactly how long nobody knows. And for stockholders, this is not what you want to hear.
Other relevant posts for those interested:
MSFT, Xbox 360 and Japan: Failure-in-a-Box
Microsoft, Channel Stuffing and Desperation
Gaming and Razors: A Hoplessly Broken Metaphor
An Investors-Eye View of Gaming: Today’s Perfect Storm
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COMMENT:
AUTHOR: David
EMAIL: dhpollack@gmail.com
URL:
DATE: 07/06/2007 10:38:55 AM
“First, further confirmation that Nintendo is blowing the doors off with the Wii and putting a hurting on Sony and PS3. And then today, Microsoft comes out…”
If you’re going to take a shot at the PS3, you might as well cite the price cut rumors (http://www.engadget.com/2007/07/05/ps3-price-slashed-to-499-at-least-at-circuit-city/). Otherwise this story has absolutely nothing to do with Sony and the PS3. I will say that I personally want a PS3, but more for blu-ray than games. I guess I’d just like to hear your opinion on this rumored price cut rather than taking a pot shot at the struggling PS3 in an unrelated (I know that can be argued) story.
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COMMENT:
AUTHOR: Jack
EMAIL: jbcougar@gmail.com
DATE: 07/06/2007 11:15:21 AM
Again, a Sony price cut is good news for those consumers who want a PS3 but can’t afford it (and let’s be clear, $500 is still expensive and is still slightly more than the Xbox 360 Elite). However, it is not good for the stock price, which is what Roger usually writes about here at IA. The price cut, should it happen, may see a short term increase in units sold, but not by many. The stagnant, but consistent, sales numbers of 30-40k in the States tells me that the majority of people who want a PS3 have bought one, and a price cut will only get the stragglers of this demographic on board.
And with a cut, Sony will be losing even MORE money with each PS3 sold, and there’s still no game library in place that will allow the company to begin turning things around. Big name exclusives are now set for 2008, and the ones dropping soon will cater only to those gamers who have already bought the system. The customer base will not grow for Sony in 2007 with the library that’s slated for this calendar (or even fiscal) year. That’s BAD NEWS if you’re a gamer, but even worse if you’re a stock holder.
Now, back to MS. Roger, did you see the news that they will not meet the 12 million units shipped goal they had promised for this quarter? And let’s remember that the 12 million number was already a reduction from what they had previously promised (14 million, IIRC).
Link: http://www.gamesindustry.biz/content_page.php?aid=26435
MS is “optimistic” for a great Xmas season, but again, Halo 3 can only do so much when the people who want it so badly ALREADY own the system.
MS needs to refocus and become a much tighter ship. They need to focus on their core demographic and forget this me-too Wii-like talk they’ve been brandying about lately. Focus on the 20-25 million strong base and make money there.
As for Sony, well, they need that and a hell of a lot more. Sony Home is the answer? Please.
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COMMENT:
AUTHOR: Roger
EMAIL: roger@monitor110.com
URL: http://www.informationarbitrage.com
DATE: 07/06/2007 04:09:55 PM
Jack, I did see the story to which you refer and, as usual, you and I are pretty in sync on this stuff.
David, did you see this http://uk.reuters.com/article/technology-media-telco-SP/idUKT4990520070706. Doesn’t look like the price cut is happening. Concerning “pot shots,” PS3 isn’t doing well. I’ve written about this many times before, provided much empirical data, etc. So I’m sorry if you don’t like the tone, but PS3s situation is what it is. I certainly didn’t put them there.
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COMMENT:
AUTHOR: Jess Curtis
EMAIL: jwillardcurtis@gmail.com
URL: http://technoutopia.blogspot.com
DATE: 07/07/2007 10:04:33 AM
Yeah this is bad news for MS stock — but great news for 360 owners and fanboys! woot — 3 yrs of warranty.
I guess I have a question for the numbers ppl here: what is the total lifecycle costs of the 360 projected to be? total lifecycle revenues? total profit? i ask because if total costs are projected to be 20 bln and and revenue 15 bln, then this is quite a hit to profitability (a 20% reduction in lifetime profit right?) I’m just wondering, from a total system lifecycle perspective, what this news means … since both MSFT and Sony seem to have a lifecycle model in mind where the goal is profitability over a system’s lifecycle, with most of the profit coming in the latter part.
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COMMENT:
AUTHOR: Michael
EMAIL: marvelheroes982@gmail.com
URL: http://www.freegamesystems.info/freexbox360elite.html
DATE: 03/13/2008 06:23:58 PM
The PS3 is no longer struggling. I think the PS3 will overtake the Xbox within the next few years.
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3 years ago
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