Analyst: Microsoft’s Gaming Effort “Disastrous” – O RLY?

73 Comments

As a gamer, Roger Ehrenberg is a fan of the Xbox 360; unfortunately for Peter Moore, however, his day job is President of a Wall Street analysis firm. And the investor’s perspective is decidedly at odds with the gamer’s. To wit, as he writes on his blog:

“Gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective…” [Emph. mine]

His argument for a statement of such face-punching boldness is threefold: basically, 1) after blowing $21 billion over five years on their Home & Entertainment division, all Microsoft really has for its efforts is $5.4 billion in total operating losses, 2) the Xbox line has simply failed to take off in Japan, heart of the console industry, and 3) despite their stated intentions, the 360 has failed to diversify its audience much beyond hardcore gamers who own HDTVs.

It’s a solid analysis– read it all here. But is it correct? Short term, maybe. To take Microsoft’s side (and if I won’t, who will?), I can suggest three big picture rejoinders:

1 – Microsoft has finally bested Sony in the console wars.

After the first Xbox failed to capture the market away from the PS2, the 360 dominates over PS3, and looks poised to continue doing so.

2 – The Wii and the 360 aren’t directly competing.

While it’s true the Wii has succeeded magnificently, it did so by being an extremely cheap, non-HDTV console that has far less of the 360’s non-game features.

3 – The 360’s a full entertainment platform.

Where the Wii has revolutionary game functionality and Web browsing, the 360’s success as a next gen console will boost its appeal for downloading high-definition TV and films, and being a music/podcast hub for the Zune—content that the Wii can’t (so far) provide. (And hey: first console-based keyboard out the [next gen] gate.)

So—disastrous in terms of money spent versus profits (not) earned? Sure. A failure 3-5 years from now, when HDTVs are much cheaper and broadband is better and faster? I suspect not.

Hat tip: Infendo.

73 Comments

Gerrit-kjeld Dusseljee

The Atari XE gamesystem allready had a keyboard, so you could use it as a computer…
Even the Famicom (japanese Nes), had one for their downloadservices i think (and to use it as a computer).

jjimhuf

dont actually believe what you read. do you think MS would continue to poor money into a massive loss? No.

If MS were reporting 24billion dollar profits do you think people would stand for it and buy their system? No.

MS are making money off the 360 Brand

anon

“first console based keyboard out of the gate”.

No. Dreamcast had one. Others may have existed even before that.

iCowboy

Alright, I own all three and I like them all – for different reasons. Wii is just plain bonkers brilliant fun, 360 has the best action games at the moment and a certain glossy sparkle, PS3 – everything about it from the hardware to the games is sleek and professional.

The biggest problem with the 360 is that it was rushed to market to try and jump the PS3.

It’s really not ready to sit under a TV in a normal home. They screwed up not fitting HDMI or offering HDMI compatibility which is needed for most modern European sets.

It’s just too loud to have on all of the time. Sitting there at the Dashboard it is bellowing, put a disk in the tray and its plain unpleasant to be around.

There’s no guarantee users have a hard disk, so caching and the like are limited to the amount of free RAM.

Not having an integral next-generation drive is also a drawback which will limit the machine’s lifetime – games are coming on multiple DVDs already, a couple of years down the road they’ll be commonplace.

And it’s a little too early to say that HD-DVD is a Betamax for the 21st Century, but it’s not looking good.

Sony did a better job with the PS3, they made it much quieter and dispensed with the power brick, offered good connectivity, put a hard disk in as standard and threw in BluRay. And they don’t charge you for the privilege of using their online environment – Live! should be free.

Microsoft will most probably resort to the old tactic of releasing a new generation of console in the near future. The 360 will be obsoleted and dropped as quickly as MS dropped the original XBox. They’ll use their Office money to try and grab a larger share of the market next time round – and as anyone who uses Microsoft knows, by the third attempt at something they’re getting quite good at it.

But I suspect that neither Sony nor Microsoft will become rich (okay richer) from the current generation of consoles. Games are getting too expensive both to buy and to develop and the market for the first person shoot ’em up, war simulator, racing game, fight fest that dominate these consoles (especially 360) is probably close to its maximum limit. Innovation and novel markets are the future, and here they’ll be playing catch-up to Nintendo.

Daniel

They lost money developing it.
They lose money each time they sell one.
They lose money on most of the games they sell for it.
The games that are profitable are made by other people.

This product will never, ever cover its costs (Robbie Bach, in charge of Xbox, recently pushed back predicted breakeven point until late 2010, but to be honest, he can probably pick any date in the future he wants to, and it’ll still just be a number be plucked out of thin air, because the overall day-by-day picture for Xbox continues to be one of steady and predictable loss: the company doesn’t even have the finances heading in the right direction for ‘breakeven’ to something that is going to be achievable).

There is no way this product would survive a shareholder revolt, and Microsoft is long overdue a sharholder revolt.

thomas

Can sb point to sales figures for all the major consoles ? So what is the top-selling console today ?

Alejandro

I agree 100% with Steve, they are losing an insane amount of money, in everything entertainment related Xbox, Zune, you name it, there is no way to call this a success, even if you somehow can get a profit in the next 5 year (assuming thy can hold the next xbox that much , unsure at best) it is not worth investing in this effort.
A Lot of People have PS2, And are still buying them ( remember the first Xbox ? )

as for the points James makes…

a) It’s true now, but I’m not so sure in 2 years, especially in Europe.
And actually more important , Nintendo will surpass them both in units sold in less than a year.
( I’m taking worldwide totals not just the US)

b) Not so sure, when a “non gamer” is set to buy a game console he may prefer a Wii and surely he (or she) will not buy 2 consoles.

c) So is Apple TV and a bunch of other devices, and they cost less and have more media center features (wifi built in, some have tuners and bigger hard drives )

Shaun

This is the downfall of public companies in general. It’s all about the $$ … who cares that the 360 is the best console on the market, and most users love it. It’s sad really that the most important thing – user satisfaction doesn’t match the market value.

Steve

Yes, RLY(sic)

“1 – Microsoft has finally bested Sony in the console wars.”

Wagner, you’ve sited an article from Jan 2007, a time when the PS3 had been available for just 3 more and 3 months before the European launch. If you align monthly performances for both consoles since their launch, you will see the PS3 is actually winning.

“2 – The Wii and the 360 aren’t directly competing.”

If it’s a games console it is competing with the others. It’s the same market in case you didn’t notice.

“3 – The 360’s a full entertainment platform.”

Are we talking about a machine that neither supports Wi-Fi or Bluray / HD-DVD out of the box and until recently did not support HDMI? Oh but wait, the HDMI is the old 1.2 standard…

The gap between the Xbox 360 and PS3 will be insignicant this time next year.

Alan

Evan, the 360 will do IPTV near the end of this year. Who needs antequated TV tuners when the future of content is clearly going to be downloading?

Steve

IF, as a shareholder in MSFT, you think that the 360 play was a good one for MSFT, you need to go back to FInance 101. If they didn’t have a balance sheet full of cash they would never get away with such folly. Put it this way, would you rather have a dividend of 26 Billion (investment plus losses) or all the future returns on the Xbobx business Even if you had earned 10% on that money it would be well north of 30billion. You could more than buy Ninetendo with that kind of money, and pretty near buy Sony.

Microsoft’s whole strategy relies on consoles in the Living Room which is not where all this is going, that is pretty much clear. Media Center PC anyone?

They are following the same ridiculous business model on Zune, which is an even crappier product with even less upside. I don’t understand how their shareholders put up with this crap.

Kreig Zimmerman

Point by point answers:

1) Although true, this ignores the runaway success of the Wii. Which of course you choose to ignore via point 2.

2) So? The gaming market is unitary–most consumers do not buy multiple consoles, they settle on one. Any platform which grows/dominates the market is, by virtue of that success, dominant. Unarguably Wii has the mindshare and the sales figures and empirical as well as statistical evidence proves it. This is an artificial distinction which the industry itself does not make. Nintendo did an end-run on the HD battle and has thus far acquitted itself admirably.

3) All talk of a “unified entertainment platform” is speculative, at best. If the Apple TV starts allowing game downloads, does it enter the gaming market? My point being that although the industry continues to push for this “concept”, it is a concept driven by the desire to impress investors with POTENTIAL revenue channels. Outwith online gaming, which average consumer is going to let their gaming system replace a normal PC? Not many.

When you look at the bare facts, Nintendo is winning this war, and they have done so by growing the gaming market through TRUE innovation in gaming, not an empty “better specs” approach. Consumers respond to visceral improvements, not statistical improvements.

In sum, your arguments are strawmen. The truth is, as the FAs original article makes clear: on a hard-headed, investor-side basis, MS’ H&E division has lost beaucoup bucks without any obvious upside and turn to profitability. Hence one of the myriad reasons investors still sniff at MS’ stock, as the static band it has traded in for the last five years, makes clear.

thierry

to those who says MS will not succeed in japan, that is true but bear this in your heads. japn is not the first video game market ever since the late 90’s, if you dont know that then you dont know games. the biggest market is north america and even japanese developers know it that is why you dont see many games exclusive to japan only, they want our cash since their currency is weak and theur market collapse 10 years ago, now japan makes games to please westerners because they recognize that facts..who ever has north america and europe wins..yo wants proof?? sony sold more ps2 in north america than japan and europe put together you go do your math and see that this gentleman is not making sense and the x360 is made to last at least 7 to 10 years like the ps2 did, because video game makers cant keep up to making a console every 5 years it is too expensive(well MS can do it on bill’s gate cash alone), before posting fanboyist comments get your facts together, the video game market has change and it isnt what some here knew back then and i suspect most here are new video game players who started with the ps1 therefore dont knwo much about video gaming and which market generate the most cash(last year in noth america 11 billions were made)japan didnt even touch that amount. get out of the gutter, japan is not the be all end all of gaming no more, ask square enix, konami, capcom, fromsoftware etc where they make their cash and they will tell you north america. i own all the 3 consoles so i know what im talking about, the ps3 is overpriced with no games and weak sales therefore developers dont wanna risk yet(like with the 1st xbox), the wii is a gimmick with only one game worth it, i havent touch mine since i beat zelda, the x360 has too many first person shooters and need more diversity and less red ring of death….

giles

“The PS2 came out in 2000, and it’s still selling extremely well– better than the PS3, even.”

Thats because the PS2 was a phenomenal success in all territories from day one, it still sells now because it has the most games – which at the end of the day is what sells a console.

In other words, XBOX doesn’t stand a chance of having the PS2s success so talking about it in the long term is pointless, IMHO.

Scott McMeekin

This reader wonders if the writer will still be defending MS when his 360 stops working in a few months with the now documented and well-lamented 3-red-lights fatal error issue… Sorry – cheap shot. =)

In the same way that playing a game with an infinite money trainer running blows away the level-playing field with your virtual opponent, MS endeavors to destroy (or at least hobble) the competition by throwing their ill-gotten gains from years and years of unrepentant anti-competitive behavior at a market. They don’t need to make a profit, as long as the competition is damaged.

It’s the american way I suppose. Pork for Pork’s sake. MS props up a huge and largely pointless technology sector by virtue of their continued strategy of throwing gigantic gobs of money at everything instead of simply designing things properly in the first place. Would we have a booming (and self-sustaining) antivirus industry if MS had bothered to make some relatively simple design decisions in historical versions of windows? Would the EU be having to wait years for the API documentation for windows, if MS had bothered to follow the normal development practices that most other software houses are obliged to follow? The examples are endless, ad nauseum, without even stooping to mention Netscape et al.

Perhaps this is what happens when the computer industry is led by someone who is a better contract lawyer than he is a software developer/designer. Perhaps when Gates and Ballmer finally leave, maybe MS might actually consider writing a single product that doesn’t equate to a long-term publically-funded alpha test.

Chris EA

Don’t forget that the XBox is purely a stepping stone on the roadmap for XNA. Microsoft don’t want to be the sole manufacturer of a console running their software.

What they want is numerous manufacturers to produce consoles all running XNA games. It’s how they started out, multiple hardware manufacturers all running DOS and later Windows.

Their vision is for consumers to have a choice of consoles, be they made by Philips, Samsung, Sharp, Toshiba, HTC or any other manufacturer. All plugged into their TVs and all capable of running the same game.

They want consoles to be like DVD players in this respect. You buy an XNA game and play it on any XNA Game Console.

To this end, the XBox line is a just a forerunner, an expensive wedge to get into the console market. The release of Game Studio Express reinforces this strategy. It’s popularity with school and college based coders with will result in a whole new generation of coders, all fluent in C# and XNA withgin 5-10 years in addition to those developers already capable in the languages.

Microsoft are thinking far bigger and longer term than a simple console war with Sony here.

Mr Delaney

I have to disagree with some of the other contributors over the importance of Japan in the gaming market. Whilst the Japanese market is the current leader in terms on consol development, notably Sony and Nintendo, the software development market is currently dominated by Europe and North America. Also, in terms of units sold of both consoles and games Japan only makes up a small proportion of the global market. Therefore I don’t think the Xbox 360’s lack of sales in Japan will be a deciding factor in it success of failure. Brand loyalty to Sony and Nintendo as well as the first true killer app to appear on the next generation machines will be prove to be much more vital.

Natversion1

Sony should lose a lot of real gamers because it’s just slightly updated sequel after sequel, GTA, Metal Gear Solid have kept Sony going for too long. Xbox is the console of choice for this generation.

Also the Xbox 360 isn’t the first console to come out the gate with a keyboard because the Gamecube had a controller with a keyboard in it.

Steve

The PS2 is selling better than the PS3.

In fact… isn’t it also selling better than the Xbox 360 too?

greg d

The first console based keyboard actually came out for the Sega Dreamcast. As that had web browsing enabled. The Dreamcast also came with a mouse. I dont know why people overlooked this fantastic console! Too ahead of it’s time methinks.

M.Porth

“first console-based keyboard out the gate.”?

I hope you don’t mean first ever. I had a Sega Keyboard for my Sega Dreamcast and browsed the web using DreamKey. It even supports Flash. This was about 7 years ago!

Codepope

Wagner; Microsoft have shown they don’t apply the same model as Sony when releasing a new unit.

Sony cost reduced the PS2, then redesigned it into a slim unit and continue cost reducing that and selling it alongside the PS3. Sony did the same with the PS1 -> PS2 transition.

Microsoft’s model so far has been “We have a new console, take the old one out the back and bury it”, which means they don’t get the long profit from a cost reduced commoditized platform acting as a low cost entry point.

The lack of this high profit transitional phase points to Microsoft never breaking even with the XBox line if they keep it up.

As for other points raised, the problem with the 360 is that it isn’t designed for the living room. It’s a noisy beast with a power supply brick that’s bigger than a Wii (and I think noisier)… That takes some doing.

And as a platform for playing back HD media, well, to date the PS3 is the hands down winner. Bluray does get past the need to wait for broadband to be “fast enough” with a machine which is capable of not just playing media that’s been put online, but also anything you can put on a USB drive, compact flash card, SD card and so on, as long as it’s in a playable format (H264/AAC).

Oh, and as for the keyboard thing, I think Sony won out there by making it compatible with any USB keyboard. The PS3 even has a nice wireless keyboard/trackpad combo from Logitech in the shops now.

Wagner James Au

Your theory would stand correct if MS could get
7-10 years of life out of Xbox 360.

The PS2 came out in 2000, and it’s still selling extremely well– better than the PS3, even.

Simon Leyland

I think MS has done well to enter the market but they are in some trouble. In comparison to PS3 360 seems under powered, how long will it be until MS has to spend again to keep on a graphical par with PS3?

Having said if I were MS i’d be far more worried by the open social platform Sony are building with PS3. With PS3 i can watch my own movies/photos without having to worry about servers or streaming, i can surf the web, soon i’ll be able to create my own social community in LittleBigPlanet.

Now if Sony could monetise the open web structure they really would be in the lead. Anyone for a Google/Sony partnership?

http://rosler28.wordpress.com/2007/01/08/google-and-sony-match-made-in-heaven/

Jeffrey McManus

Jim, the Wii is absolutely competitive against the PS3 and the XBox. Different price points are not the same as different market segments.

CptBoomstick

I agree. With the tremendous movie studio and developer support for the 360, even the Sony exclusives are coming to the 360. Something tells me if a console is such a failure then developers/studios would stop supporting it. With such a great Live service along with XNA and Arcade, which allows smaller developers to publish their games on a large platform, I don’t see the Xbox going anywhere.

Although I give a lot of respect to Nintendo being able to find an untapped demographic and being able to create hype over what is really a Gamecube with a motion sensitive controller. I mean Wii’s are still selling out like crazy! Don’t get me wrong, I own and like the Wii but once you buy one and Zelda you look at the shelves you realize there are absolutely no games for it OR online multiplayer.

During Zelda or Trauma Center (a DS Port) I am constantly wanting to text/voice message my friends, download game demo’s, movies, game content, game trailers, etc., in the background and/or listen to my custom soundtracks as I play! For me, the 360 is the console of choice. I see the Wii and PS3 having huge problems down the road not the 360.

I mean even Wii owners have to agree, being able to download game demoes and movies so you don’t have to go or spend money at the local movie store is awesome! With the capacity for up to 2.0GB SD memory for the Wii I am surprised they don’t also support custom soundtracks.

Evan

I would disagree that the 360 is a “complete entertainment platform” – for example, no TV tuning (OTA, let alone cable/satellite), and even with the forthcoming 120GB “Elite” edition Xbox360, scarcely enough room to store all the media (music, pictures, videos) that the modern household is generating.

The Xbox360 is being cast as the client piece in a 3-tier MS home strategy which includes Windows Home Server in the basement, and a Vista Media Center in the equipment rack. Pretty luxurious …

MySchizoBuddy

Sure in 3-5 years there won’t be any new Competitor in the Home Entertainment market. The market will remain stagnant, which will make it easy for MS to finally get somewhere with the Home entertainment Business.

Now that Apple has entered into this market. It means absolutely nothing. Apple, shucks they are just losers. what do they know. SlingMedia are just babies. and Tivo never worked anyway. MS will take over this market segment for sure.

Future of MS in this market segment is absolutely bright.

Time to wake up.

you are ridiculous

xbox will fail… and fail again, American Company will never capture the Japanese gaming audience, it’s right next to being one of Japan’s greatest cultural offerings, and is something They have a personal and somewhat different taste for…. it just won’t happen, and therefor… expect japanese publishers to stick with nintendo/sony mostly… good luck monopolysoft, oh and do you think if i made ink + machines that print comic books I’d stand a chance at besting MARVEL – DC – Image as a comic company? yea… no… sorry.

mike b.

Wagner,

So—disastrous in terms of money spent versus profits (not) earned? Sure. A failure 3-5 years from now, when HDTVs are much cheaper and broadband is better and faster? I suspect not.

You’re forgetting that in 3-5 years, MS will need to release a new Xbox console! The cycle will have to repeat and the money loss will continue all over again. Your theory would stand correct if MS could get 7-10 years of life out of Xbox 360. Game tech and game consoles are just aging fast for the blades and razor model to work its magic. Just when MS starts breaking even and starts getting some revenue from having a large install base, it will be time to replace old Xbox360.

/mike

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