When Will Microsoft Own Up to the XBox 360 Bomb?
The success (or lack thereof) of Microsoft's (MSFT) Xbox 360 has been a hotly debated topic across both the blogosphere and mainstream media, with an amalgam of sober and utterly confused views depending upon one's vantage point: analyst, investor or gamer.
After taking a step back and looking at some objective numbers - those taken from Microsoft's own financial statements and comparative console sales figures extracted from VGChartz.com and Wikipedia.org - I have concluded the following:
# Gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective;
# The seeds of this failure are evident from their sales performance in Japan, particularly when comparing their 18 week sales figures (which is about how long the Wii and PS3 have been out) relative to those of the most successful console releases; and
# This early failure in the key Japanese market has a compounding negative effect on worldwide console sales, as game developers are less willing to invest in high-risk projects for console platforms that are shaky out-of-the-gates, which makes it less attractive for gamers to buy these consoles, and so on.
Before digging into the data, I'd like to clarify a key point: my perspective is that of a financial analyst. Therefore, my primary interest is in the strategic and financial implications of business decisions, in this case the Xbox 360 and Microsoft's Home & Entertainment strategy, and NOT whether or not the Xbox 360 is a rocking product.
Hemorrhaging Home & Entertainment
Let's first consider Microsoft's Home & Entertainment Division ["H&E"], which includes Xbox 360, Xbox, Xbox Live, Consumer Software and Hardware Products and IPTV. I have used a set of numbers from historical annuals that seem to change by $100 million or so year-to-year; I'm not sure why this is, but the numbers are close. Regardless, it is not a pretty picture from a financial perspective.
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? 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. I think it is also interesting to note that Microsoft's actual disclosure shows only Revenues and Operating Losses; I backed into and show EXPENSES below for explanatory purposes.
Why might it be that Microsoft has strayed from the classic Revenues - Expenses = Profits (Losses) disclosure? Perhaps because they don't want investors to focus on the fact that over $21 billion - the market cap of a sizable independent company - has been invested in a business that has performed so poorly, with unclear prospects for improvement. Could this be the reason? Hmmm