MS projects further $ losses on the box

[Neo]

http://www.redherring.com/insider/2...xbox062402.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.

[Bond]

Well, this really isn't old news. It's been known for at least a few months that Microsoft would lose this much money or more. But I do find it funny that TeamXbox nor any other Xbox website has posted this news.

[Angrist]

Wow, they're making an upgraded X-Box, that will work!

[Professor S]

MS's goal from the beginning of the XBox's conception was to eventually make it an all in one entertainment machine, including DVD, TiVo, etc. Like Bond said, this isn't anything new or earth shattering at all.

[TheGame]

http://www.gametavern.net/forums/sho...d&pagenumber=2

X-Box is meant to be financial failure

Xbox is purely a tool to put Microsoft on the Video game map... period.

but, like you said, that doesn't mean "Xbox is a failure"

What did it fail at doing? Making Money off of Xbox wasn't a goal for Microsft, so it didn't fail to reach it's goal. X-Box's goal is to sell well, not to make $$$ off of the sales, that's X-Box 2's job.

two quotes from the same old topic in one day, that's goooood

[Shadow_Link]

What makes people so sure that the Xbox 2 will make any significant profit, if at all?

Just food for thought, I'm not saying it wont.

[Bond]

Originally posted by Shadow_Link
What makes people so sure that the Xbox 2 will make any significant profit, if at all?

Just food for thought, I'm not saying it wont.

What makes anyone think anything will make a significant profit?

[gekko]

Originally posted by Shadow_Link
What makes people so sure that the Xbox 2 will make any significant profit, if at all?

Just food for thought, I'm not saying it wont.

That's my stance on the matter.

Xbox fans brag about 1 thing, the hardware. Before the consoles launched, all they ever talked about was how Xbox has the best graphics, and the best sound, and what not. And how did it get that way? MS took a huge loss with each console sold.

Next generation, when all the fanboys start debating meaningless system specs, do you really think Microsoft is gonna show a console that's not top of the line? Do you think they'll cut back on the graphics a little to save money?

MS has dug themselves into a hole they can't get out of. They take a hit on every console sold to complete, they want to rule the online world so they will take a hit with the Xbox Live starter pack and everything. Next generation, they'll need to do it all over again.

Xbox's fan base just seems to be based too much on hardware specs, and not on games. So come Xbox 2 time, I have a feeling we'll be seeing more "Xbox's 2 graphics r0z0rz" and less "Look at this game lineup." I mean, Xbox's launch we saw them bragging about Shrek, Kabuki Warriors, and Oddworld, but we're talking about good games

[Professor S]

Originally posted by gekko
Xbox's fan base just seems to be based too much on hardware specs, and not on games. So come Xbox 2 time, I have a feeling we'll be seeing more "Xbox's 2 graphics r0z0rz" and less "Look at this game lineup." I mean, Xbox's launch we saw them bragging about Shrek, Kabuki Warriors, and Oddworld, but we're talking about good games

Gee, thats a completely rediculous comment. I am an XBox fan, and I bought it FOR GAMES. Are the games that I bought it for out yet? Some are, as in Halo and Morrowind and Raw (ok, Raw was a dissappointment, but still decent if you spend the time to learn the engine). The others like The Thing, Duality, Brute Force, KOTOR, Enclave, Yager (I love the beverage), Splinter Cell, Ultimate Blade of Darkness, Mech Assault, Steel Battalion (expensive, but may very well be worth it), Unreal Tournament, Panzer Dragoon Oorta, Robotech, and the near mythical Project Ego (this game sealed my decision to go with the Box). Now you can add Blinx, a gameplay redefining title to that list. These are only the one I can name off the top of my head. These are the reason why I bought an XBox over a Gamecube or PS2.

While I was researching what system to buy, it seemed that while Nintendo fans were always talking about their upcoming franchise games like Mario and Zelda. Good games, yes, but not my style. I am still planning on getting a Gamecube, but the realization that WMX8 is not another No Mercy has made this purchase less than pressing. ED is trying to open up my wallet, though

And when comparing specs I felt that the PS2 was going to reach its threshold soon, technically.

Therefore I chose an XBox, not for the present, but for the future and its potential for greatness.

And I don't think anyone was bragging about Kabuki Warriors, even before it was released. That game is a running joke even in XBox circles.

In the end, buying a console and sticking with it is always a gamble. There will always be games that you wish you had on your system. At the end of this year, I think those who only have an XBox be a little less jealous, and those that don't have a box will be a little more.

[Shadow_Link]

Originally posted by Bond

What makes anyone think anything will make a significant profit?

Er... ok... I was commenting on quotes in TheGame's post.

Box's goal is to sell well, not to make $$$ off of the sales, that's X-Box 2's job.

Hence my post. It COULD go the way the DC, and it may do a lot better. I was just commenting on how a lot of people say how the Xbox 2 will bring in the big bucks...

[Professor S]

I didn't see anyone of this thread (well, not The Game at least) saying that the XBox 2 will make big money. They said it is intended to make big money, which it is.

[Shadow_Link]

Originally posted by The Strangler
I didn't see anyone of this thread (well, not The Game at least) saying that the XBox 2 will make big money. They said it is intended to make big money, which it is.

Read my post again, I was commenting on the quotes in TheGame's post...

[Jason1]

Just wondering, If microsoft loses at least 150 bucks on every X-Box sold, and PS2 looses a little, what about the Gamecube? Now that its at 149, is it losing money? Anybody know?

[Professor S]

Shadow, I read your post the first time. The Game never said that the XBox WOULD make monet, he sadi it was its job to make money, which it is.

Anything I'm missing in your post?

[GameKinG]

So...they are loosing money (which was stated by those market people that it wouldnt profit for 5 years or whatever). And they will cheapen the design, but instead of a position where they could make money. They add a tivo-like item which up the design process and the price of the console so they continue to loose money.