MS taking heavy losses..

www.redherring.com/inside...62402.html

Microsoft takes heavy losses on the Xbox
Beating Sony and Nintendo in the gaming console market is apparently worth billions to the software giant.
By Dean Takahashi
June 24, 2002

Microsoft executives are predicting heavy losses related to the Xbox video game console, but the company is prepared to keep supporting its central offensive against Sony and Nintendo by launching a version with new features next year.


Microsoft expects to lose $750 million in the current fiscal year ending June 30 and another $1.1 billion in the next fiscal year, according to a source familiar with the matter. David Hufford, a Microsoft spokesman, declined comment on the financials.

Meanwhile, the Xbox team has been working for about nine months on a machine that combines the features of the Xbox with UltimateTV, a set-top box that features digital video recording. Mr. Hufford said, "Regarding a hybrid box, we are moving full steam ahead with Xbox in its current state while staying deadly focused on games. Of course we have engineers looking at dozens of possibilities for the future of the console."

While Microsoft does not break out the loss figures for the Xbox from the rest of its operating results, it has said it expects to sell 3.5 million to 4 million units by June 30, and 9 million to 11 million by June 30, 2003. It has also said about three games are selling for every box sold.

The losses suggest that it will be difficult for Microsoft to make a profit on the division for some time unless it starts selling a much larger number of games and begins reaping profits from the upcoming launch of Xbox Live, its online gaming service.

The losses aren\'t unexpected, but they do show that Microsoft expects to lose more money the more machines it sells. When Bill Gates approved the Xbox in the fall of 1999, he was told that the console could lose $900 million over eight years and that if Sony cut its prices aggressively, then Microsoft could lose $3.3 billion. After much hand-wringing, Mr. Gates approved the box because he felt Microsoft needed to face the threat of the PlayStation 2 and hook gamers on Microsoft products.

"There is a debate going on if it is better for Microsoft to lose more money and get an installed base, or underperform in unit sales and lose less money," said John Taylor, an analyst at Arcadia Investment in Portland, Oregon. "My sense in strategic sales is it is more important to get an installed base."

Microsoft can absorb the Xbox losses. The company has an estimated $42 billion in cash reserves and, for the year ending June 30, it is expected to report a net profit of about $10 billion and revenues of $28.25 billion.

The costs of goods for every Xbox amount to $325, according to the source. That means that Microsoft is currently losing at least $150 on every box, and probably more due to shipping, advertising, development overhead, and return costs. Microsoft sells the box wholesale to retailers for $175. Microsoft would have to sell a lot more than three games apiece to break even.

By contrast, Sony is believed to be losing only a small amount of money on the PlayStation 2, which costs an estimated $185 to manufacture. Sony recently began shipping a cost-reduced version of the PS2 with redesigned chips and fewer and smaller components in the box. Microsoft isn\'t expected to do the same until the fall.

Sony has been aggressive. It cut the price of the PlayStation 2 in May by a third to $199, and Microsoft matched it. In addition, Sony cut the price of its first-party software titles from $49 to $39. Microsoft had launched its box in Europe at a price of the equivalent of $419, but cut the price to $266 due to slow demand. (Nintendo\'s GameCube launched at $199 in the U.S. and has been cut to $149.)

The cost pressures on Microsoft are why it asked Flextronics to shutter a plant in Hungary and move assembly of the boxes to China, and they also explain why Microsoft is in arbitration with Nvidia over the price for the Xbox graphics chips. The XGPU, as it is called, is the most expensive component in the box.

One problem for Microsoft is that it projects that its costs for the Xbox will decline slowly. The cost of the box may come down over five years from $325 to $225, according to the source. By contrast, Sony and Nintendo are expected to bring their costs down more steeply over time, largely because their machines don\'t have an expensive hard drive.

Microsoft seems undeterred by the losses. Robbie Bach, the chief Xbox officer, said at the recent Electronic Entertainment Expo that Microsoft planned to spend $2 billion more on the Xbox over five years. To add features like digital video recording, the machine will need more costly components like TV tuners, extra memory chips, and a bigger hard disk. This combo box might launch next year for a price of $500. The product is controversial in part because it creates a conflict within the machine: will the game slow down so that the hard drive can record "BattleBots"? Balancing the needs of gamers and general users will not be easy.

With all that\'s happening, Mr. Bach is going on a sabbatical beginning July 3. He has been the key senior executive in charge of the Xbox since 1999.

Write to Dean Takahashi.

MS takes hits after hits.. I wonder how much longer they will hold out.

Do you think they will drop it like a hot potato?

Thats all true and all, but the fact is, M$ does have the money to lose, it\'s not like their short on it.

In any case, pretty much all consoles lose money, X-Box just seems to do it 10x worse.

on a machine that combines the features of the Xbox with UltimateTV

BWUHAHAHAHAHAHA!  *sniff*
/wipes tear from eye
i outright dare m$ to release this contraption

on a serious note, without dumptrucks of cash, xbox = 3do and m$ = tragic

Originally posted by fastson


Do you think they will drop it like a hot potato?

No

xbox is a way for MS to symbolize the state of PC gaming, and the dated architecture behind it, is alive and doing fine. So as long as MS can maintain that image for the dwindling PC gaming elite, they can hope to stem the flow of developers turning their attention to consoles first (more importantly, consoles that don\'t rely on some version of DirectX to program games). To drive home the point, the idea for xbox didn\'t blossom until after Sony flatly refused repeated requests by MS to allow them to help design a version of DirectX for PS2.

No, MS has too much else at stake to really care whether they ever make a dime on xbox, hardware or software.

This guy seems to have a few good points, but I\'m trouble by this:

"One problem for Microsoft is that it projects that its costs for the Xbox will decline slowly. The cost of the box may come down over five years from $325 to $225, according to the source. By contrast, Sony and Nintendo are expected to bring their costs down more steeply over time, largely because their machines don\'t have an expensive hard drive."

I don\'t think the writer has a clue when he wrote this. It\'s possible to get a bottom of the barrel PC for less than $225, and in all likelihood MS can get one for even less. EDIT: An 8GB HD isn\'t a lot of money. Plus that Xbox uses mostly "off-the-shelf" parts, MS costs could quiet easily fall faster than propriety parts.

EDIT: Well, I\'ve look into this and thought about a little bit. Now I think it\'s mostly BS.

"Meanwhile, the Xbox team has been working for about nine months on a machine that combines the features of the Xbox with UltimateTV, a set-top box that features digital video recording. Mr. Hufford said, \'Regarding a hybrid box, we are moving full steam ahead with Xbox in its current state while staying deadly focused on games. Of course we have engineers looking at dozens of possibilities for the future of the console.\' "

I think they were refering to Xbox2, since they stated that this is the "future of the console" and "we are moving full steam ahead with Xbox in its current state."

"The costs of goods for every Xbox amount to $325, according to the source. That means that Microsoft is currently losing at least $150 on every box, and probably more due to shipping, advertising, development overhead, and return costs. Microsoft sells the box wholesale to retailers for $175. Microsoft would have to sell a lot more than three games apiece to break even."

I\'d seriously doubt this. This price been around for while. I believe that this the original release price of the Xbox over a year before they launched. Anyhow, since launch DRAM prices have plummeted and nVidia\'s chips drop about $20 (believe it was 70 at launch and 50 now).

"Microsoft seems undeterred by the losses. Robbie Bach, the chief Xbox officer, said at the recent Electronic Entertainment Expo that Microsoft planned to spend $2 billion more on the Xbox over five years. To add features like digital video recording, the machine will need more costly components like TV tuners, extra memory chips, and a bigger hard disk. This combo box might launch next year for a price of $500. The product is controversial in part because it creates a conflict within the machine: will the game slow down so that the hard drive can record "BattleBots"? Balancing the needs of gamers and general users will not be easy"

Obviously, the reporter just made this up by combining the "$2 billion over five years" figure and this "hybrid box."

I\'ve never heard of this "hybrid box". If there was, I\'d probably have heard it elsewhere. All in all, I doubt the accuracy of this article and I wouldn\'t put much faith in what this guy said.

Ive heard talk about the hybridbox months ago.

Nevermind

Originally posted by mm


BWUHAHAHAHAHAHA!  *sniff*
/wipes tear from eye
i outright dare m$ to release this contraption

on a serious note, without dumptrucks of cash, xbox = 3do and m$ = tragic

Well, they do have the cash.  Your point is moot.

I\'m laughing in the inside

no, point is valid

without thier blood money, xbox would be dead already

my penis in yer ear, now thats a moot point

Everyone looses money with hardware, especially the first year and the first time producing any hardware.  MS is prepared for it.  This, if it is even accurate, is a good thing.

You spend money to make money.  And MS knows how to make money.

yeah, they puke up some sort of dysfunctional OS for the technologically ignorant to suk up cause the media scares them into it

that article is not only talking about lack of hardware sales

lack of hardware sales = lack of software sales

Hey, what happened to your look of posts mm?

You lost a little *bling bling* if you ask me No gold name, no picture avatar thing, nothing! Except girth, ahahaah.

i was messing with muh profile

i cant make the forum allow color in user titles

Win 2000 and Xp are great OSs.

And Xbox has the highest attach rate of any system since launch.  Certainly doing better than the GC.