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 |  Subject: Why It's Perfectly Fine If Microsoft Has Lost Money On Xbox One  Wed Aug 13, 2014 8:22 am | |
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http://www.forbes.com/sites/insertcoin/2014/08/11/why-its-perfectly-fine-if-microsoft-has-lost-400m-on-xbox-one/
Why It's Perfectly Fine If Microsoft Has Lost Money On Xbox One :
According to a recent SEC report, Microsoft's MSFT +0.74% Xbox division revenue is now up to $1.7B annually, because of the Xbox One, but its costs are up to $2.1B, also because of the Xbox One. That’s yielded a collection of startled headlines about how Microsoft has dropped the ball with their new console by losing $400M already.
Update: The $400M figure itself was not the point of this article, but many are pointing out the math leading to all these headlines is misguided. These numbers reflect gross margin, not profit and loss, and are increases, not totals. While we can use that data to approximate $7.1B in revenues compared to $5B in costs, without further information from Microsoft, it’s hard to pinpoint an exact profit or loss on the Xbox One. Though if they have lost money on the system so far, it’s for the reasons I go into below, and would not be cause for alarm.
Microsoft’s collection of anti-fans loves to use any opportunity to try and take the company down a peg. The detractors of Nintendo or Sony do the same when the headlines suit them. But the reality is far less sinister than the big numbers and alarmist forecasts suggest. The truth? It’s perfectly normal for Microsoft to lose even a hefty sum when launching a new platform like the Xbox One.
Hint: it costs a lot of money to develop, market and release a new console. As such, it’s fairly standard to expect to lose money on a system at first, given that Microsoft is playing the long game here. Think of the money spent in the Xbox One like they’re running a small business. It’s going to be exceedingly rare for a new entrepreneur to spend boatloads of money setting up his business, and then immediately be able to turn a profit. Even if he brings in significant revenue from great sales, chances are he still owes a lot of money on the initial start-up costs of his business.
It’s the same with Xbox One. It’s exceedingly rare that a new video game console would immediately start printing money from its hardware alone this soon after launch. Sony may be having better luck with the PS4, but they’re the exception, not the rule in this case, and a typical console launch looks more like what Microsoft is experiencing now (not to mention there are still larger problems with Sony itself that drag down the accomplishments of their video game division).
Now, over time, Microsoft will earn back the money its invested to launch the Xbox One. They’ll do so through hardware eventually. The console will get cheaper to make, and they’ll be able to make more money on each unit as a result. Microsoft will earn money from software sales over time, and naturally, from the millions of practically permanent Xbox Live Gold subscriptions that are a huge golden goose for them.
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The Xbox One is just finding its footing as a platform, and still has some of its biggest draws to come (Halo 5, for one). They’ll have EA Access running soon as an interesting experiment, and now separated from the Kinect, that should drive sales further. Not to say that the Xbox One will automatically be some grand success in the future, but it at least needs to be said that this kind of loss this early is not some automatic indicator of doom, nor is it a terribly huge deal for Microsoft themselves, a company with 70+ billion in revenue.
But this also shouldn’t be taken as a greenlight for any fanbase to automatically dismiss losses as no big deal. Nintendo’s predicament especially does seem to be worrisome. They’re consistently losing money, despite the Wii U and 3DS being out for quite a while now, and despite the recent launch of Mario Kart 8, which very well may be their biggest console title in this new generation. And all of this is on top of the fact that Nintendo is a video game-only company, and they live or die on the success of their platforms. All those factors combine to paint a picture that’s a little bit more unsettling. Again, not apocalyptic, but important to note given that the Wii U has a full year’s head start on its competition, and Nintendo has had the time to release a series of supposed “system sellers” at this point.
It’s likely going to be a few years yet before the console race can really be viewed through a clear lens. It’s hard to argue that Sony has had anything other than a smashing start, but Microsoft and Nintendo are more complex cases. Don’t believe hysterical headlines until you know the facts, however, as this is a marathon, not a sprint.
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