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
