Microsoft Loses $177m on Xbox in Three Months

Albanach writes "The BBC News are reporting in this story that Microsoft's Home Entertainment Division has filed a submission to the Securities and Exchange Commission reporting a loss of $177 million for the three months to 30 September 2002. The loss comes on revenues of $505m for the division that manufactures the Xbox games console. Microsoft are said to be prepared to spend $2 billion funding Xbox live over the next five years, suggesting it will be some time before the home entertainment division break into the black."

Only $177m? Who cares?

That's probably less than billg's annual pizza budget.

Re:Only $177m? Who cares?

I'm surprised that's even legal?!
Even if that's not a lot of money for MS, in Belgium it's forbidden to sell products for less money than you needed to produce it...
It's unfair competition.
If they put Playstation and Nintendo out of business because they don't have the money to use this trick, some American judge should finally see what MS is doing and give them a REAL punishment...

Re:Only $177m? Who cares?

AFAIK it's perfectly legal here.

They make a huge profit on the games, so maybe that's a loophole or something.

Re:Only $177m? Who cares?

No its not legal.

America has so called anti dumping laws.

However they get only applied if a non american company tries to sell for dumping prices inside of the US.

E.g. Korean car manufactors selling 30% cheaper than US car manufactors or VCR crafting companies regulary got a punishment import tax.

The US puts taxes at will on any kind of product if they think their own industrie soffers from forreign laws. E.g. genetic manipulated Soja needs to be noted as incridience in european food(by law). Europeans as majority do not buy genetic manipulated food. Feeding animals with genetic manipulated food is not allowed, as it gets to difficult to prove its absence in the final products (like ham). Result: US is threatening europe with a tax war since years just because Soja sales droped in Europe.

However: what is legal and what not, all over the world, is final descided by a US court.

Silly situation.

angel'o'sphere

Thank god it is legal to "price dump"

Otherwise Sony (being the only vertically integrated of the three companies) would be the only one able to sell their console at a low price.

Look, I hate MS as much as anyone, but romaticizing Sony or Nintendo as good guys is a pretty biased view.

If people really cared about the good guys winning the console war, people would've bought more Dreamcasts. Since they didn't win, you just have to go on which one has the games you want.

Besides, we're not talking about Wal-Mart selling drugs below cost to drive the local competition out of business; we're talking about a "give the razor, sell the blades" pricing model here.

There's a world of difference.

Scott

No, it's an investment... and lots of stores do it

It's not dumping. Period.

Microsoft, like every other game console producer, takes a hit on the console. It isn't to put the other guy out of business (though sometimes that's a benefit), but rather, to get you hooked on a specific console. After that, they recoup their loss on the games. After all, who buys a console and then never buys a game? The only significant difference here is that Microsoft is banking on turning the profit in an online system, rather than just games.

Last year, the Sheetz gas station near us was selling gas for $0.95/gallon, significantly less than what they paid for it. It wasn't to kill the competitor, but rather to get people in the habit of filling up there. The money they made from their food, drinks, and various items inside the store made up their loss and they slowly raised the cost of gas to normal rates. I fully recognize that, but you know what? I still shop there and I'm not the only one.

Re:Only $177m? Who cares?

No its not legal.

America has so called anti dumping laws.

...and Microsoft is not dumping.

I'm sorry, but this is a pet peeve of mine. Every idiot in the world speaks authoritatively about dumping when they have no idea whatsoever what it actually is.

Here's a hint: "Selling a product at a loss" is not dumping. Not even a little bit. If you produced a product and gave it away for free, that still wouldn't be dumping.

Dumping is very simple: It is selling a product in a foreign market for less than you normally sell it for in your domestic market. If you don't believe me ask the World Trade Organization [wto.org]. So unless you believe that MS is selling the Xbox cheaper overseas (hint: they're not), MS is not dumping.

You may now all return to your ignorant, dogmatic lives.

Re:Only $177m? Who cares?

No, Sony does not and never has sold at a loss. Please stop perpetuating this myth.

Info here [actsofgord.com].

To sum it up, most people (at this point) believe that Sony still makes at least $50 per console sold, Nintendo is just about breaking even, and Microsoft is still losing at least $70 per console sold. (this is taking into account drops in production prices, drops in sale prices, etc).

Re:Only $177m? Who cares?

Uhh, no, if you read it you'd notice that of $175 they were making per console, roughly $120 was from the console itself. $55 was from software and accessories.

Sony is not stupid. They do not sell at a loss. Sega sold at a loss and is now defunct as a hardware business. Nintendo sold the Gamecube at a slight loss but most accounts have them as about even now. Microsoft has billions it can throw down the drain, and so it sells at a loss.

Also, just a FYI, when Nintendo sells at a small loss it is almost meaningless to them, and I'll tell you why:

When a game is sold for $50, maybe $20 of it is profit. Of that, typically the console maker gets $5, and the game producer gets $15. However, Nintendo is in a special position in that it makes most of the really popular games for it's own console. Thus, if they sell at a $20 loss (which is about twice what most people estimated), but you buy the Gamecube and a single Nintendo produced game (which I guarantee you will), they've broken even, because they get all $20 of profit.

Microsoft, on the other hand, does not produce the games. Therefore, even if you are nice and say they're only losing $30 per console (which is way below most estimates), they need to sell 6 games just to break even. How many people do you know who have 6 XBox games? I don't know any. Every person I know with an XBox has less than 5 games, and typically has bought a single extra controller. Every person I know with a Gamecube has at least 5-6 games and most of them also buy 3 extra controllers due to the number of good 4 player games.

Something tells me MS is the only company really digging itself into a hole in the console business right now.

Re:Only $177m? Who cares?

Your view of economics is far to simplistic. Its called a loss leader. Its routine in America and most capitialist countries.

Breaking into a market is hard. You need to be able to offer competitive prices from day #1, or else you will never attain any market share.

Companies looking to get into established markets against huge players (like Ninenton, Sony, etc) will loose money until their market share is sufficent.

Laws like the ones you propsoe actually *hurt* competition, because disallowing undercutting forces products to have high prices, therefore killing a company before it even has a chance for acceptance - example: PlayStation, Ninenton sell units for $200 (because they already paid for development a long time ago, before MS was in the market). MS has to sell Xbox at $999 to cover R&D to satiate your law. Xbox dies, and instead of having three gaming consoles we now have two.

Re:Only $177m? Who cares?

As far as American law is concerned, there's an ongoing trade dispute over stumpage fees charged by the Canadian government to Canadian softwood producers. The US government has lost in the courts 18 times, but still fights it, arguing that the lower stumpage fees allow Canadian companies to sell lumber at below actual cost, and hurts American producers.


In British Columbia (A Canadian Province), the stumpage fees go to the government. The government then uses the money to ensure adequate regulation of the companies. Cutblocks get re-planted, streams are protected, roads are deactivated. The problem is that in the US, they have a auction systems for timber. Private landholders auction their lumber from their private land holdings. Not only do they have to do their own re-planting (adding expense) they also require a profit. (Adding more expense)

When you look at the lumber barons who are doing the lobbying in Washington, most are from the southeastern US. They sell inferior quality wood compared to BC softwood. THeir product is also higher cost, mainly because they refused to spend the money to upgrade their mills. So they produce a low grade, high cost product (very labor intensive) that simply cannot compete in the marketplace. The BC mills spent billions upgrading their mills to be highly efficient. Now they are being penalized for their foresight.

Inevitably, whenever a US industry gets into a non-competitive situation where they can't dominate, out come the lawyers and the lobbyists. (steel) The WTO will overturn this tariff. Until then, thousands of workers and business' in British Columbia will suffer.

Did I mention that the average new house in the US is costing $3K-$5K more? They don't tell you that in Businessweek do they?

Re:Only $177m? Who cares?

>If they put Playstation and Nintendo out of business because they don't have the money to use this trick

I am not Microsoft fan, but I have to say that this is actually the oposite of what happened. You see Microsoft made a much more expensive console then Sony or Nitendo (to produce that is). Then, Sony and Nintendo started dropping prices and Microsoft had to do it to keep up. They were planning on Moore's law dropping the cost to produce them before having to drop the price. The difference between Sony, Nintendo, and MS is that from the ground up MS has been planning on selling the Xbox as a service (ie Xbox live) to make their money. Besides, Sony has a huge market share. Mod: -1, not Anti-MS (this time)

Re:Only $177m? Who cares?

The off-the-shelf parts will be more expensive, all things considered. For example, the PS2 was designed from the ground-up to be easy to build on a production line. Each of the parts would have been engineered over time, with the PSOne experiences included. In the X-box, it has been designed around these parts, and will be harder (i.e. more expensive) to put together, test and rework failing units. Having boxes and boxes of parts isn't earning you any money, you'd be better with the money in the bank, earning interest.

Sony controls and designs (with sub-contracting) all of the parts within it's hardware. The X-box has to source parts that are made by lots of different companies, who each get a profit, not on only the manufacture of the part, but also the design. This adds to the overall cost of the part.

By designing all the components (well most), Sony have bitten the bullet on the one-off design costs, which comes along with a long-term volume saving.

There is quite an overhead with working with third-party parts as well. You have to consider the cost of quality control, sending broken parts back etc. All this costs money and time, and goes against the minimal-supply stock models that most manufacturing plants follow nowadays.

The other poster was correct about the part list, although it could have been phrased in a more civilised manner! ;-) The HD etc do cost money. In later editions of the PSX (the original ones), Sony dropped the parallel port and audio/video outs to save money. These are simple hookups to parts of the PCB that already exist, but by not having connectors on the back means that you have saved money on both the raw parts themselves, and the cost associated with testing and repairing them on the production line.

Re:Only $177m? Who cares?

XBox naked:
http://www.extremetech.com/image_popup/0,3 969,s=10 17&iid=7210,00.asp

GameCuBe naked:
http://www.segatech.com/gamecube/overview/ gamecube _motherboard.jpg

If only looking at the Basic motherBoard, you can see why people think the XBox costs more than a GameCuBe.

PS2 naked:
http://www.megagames.com/ps2/images/psx2-b oard.jpg

The thing to note aBout the PS2 is that recently Sony has managed to comBine the Emotion Engine and the Graphics Synthesizer into one chip:
http://zdnet.com.com/2100-1103-877756.html

Meaning, of course, that there's less silicon and simpler manufacturing. So in the end, while we don't know the component prices, we do think that the XBox costs more Because it has more components (including the hard drive!), a more complicated motherBoard, a more complicated CPU, and less system integration than either the PS2 or GameCuBe

Apologies for the strange text, my copy of Mozilla 1.3a happens to map 'B' to 'Manage Bookmarks', so I've got to use 'shift B' instead.

You can stop kicking the horse now... Please?

Common, if you're gonna hit microsoft on this practice, you're going to have to hit Nintendo, Sony and the late-great Sega on it as well. They all sell their consoles at a loss in order to hit the consumer's impulse buy range. The only real difference here is that Microsoft has deeper pockets with which to do this with. It gives them the ability to market superior hardware while hitting the same impulse buy zone. And yes, it also creates hideously large loss numbers.

As for putting Sony and Nintendo out of business, somebody really isn't in touch with the real world. First, the XBox is nearly dead last in console sales. That differential will decrease over time, but unless Sony and Nintendo do something incredibly stupid or MS incredibly brilliant, that's not likely to change in this round of the console wars. Second, Sony is a big boy. It has a diversified market beyond gaming. Their products have global reach and ideal penetration within their respected markets. Sony isn't going anywhere. Nintendo, on the other hand, has a far smaller foundation and hasn't exactly been making stellar decisions as of late. They haven't had a great console since the SNES, and the Gameboy is STILL their principle source of income. They're more likely to kill themselves off rather than be a victim of any MS "dumping" campaign.

But it's just another day in the anti-MS neighborhood, I guess...

Accounting Tactic

Of course... This could be an accounting tactic to allow them taxbreaks on their losses.

Re:Accounting Tactic

according to The Register's article here [theregister.co.uk] the losses are minimal, when compared with the operating income MS gets from Windows, Office and their Server products. The numbers are (quoting the register):

Windows: $2.48 billion on $2.89 billion revenue
Office: $1.88 billion on $2.38 billion revenue
Servers: $519 million on $1.52 billion revenue

compare that with a loss of $177 (and microsoft lost on many other things, like CE/Mobility) and you'll see that the picture is not as bad as it looks (heh, for them, anyway)...

Slashdot is aiming for the sensationalism value again, but that's nothing new now, is it? :)

Is this like a movie company's "loss"

or is there something actually legitimate about this? Granted there's stiff competition in the home console market, but MS was throwing consoles at people in hopes that they'd recoup their losses with the sale of games. to hear that they're losing money with game sales seems odd to me.

Like that hurts them..

They have said from the get go that they didn't care about losing money to dominate the market.. And they have taken some market share from Nintendo and a small amount from Sony.. But that number seems pretty small for a company with like 20 billion in cash..

"Lost"

We really need to redefine business loss. Microsoft didn't lose money. They knew ahead of time that they were going to be in the red on the Xbox. Not that I'm saying Microsoft is bad for following this practice, it's common practice in many markets.

I just don't think that purposefully loses should count like a standard lost. They know that this $177m they drop now, it's an expense. Not a loss. They will get it back, they are just taking credit out on their budget and getting the government to pay the interest.

Re:"Lost"

Not to mention redefine "Monopoly".

It's absurd that a company can consider a 200 million dollar loss "acceptable" and continue operating (under the same management) with plans for expansion.

This reeks of the ability to undercut the console market.

Re:Doesn't take a monopoly to invest lots of money

I object to the American populace losing ~$100M of tax money from Microsoft because Microsoft purposefully and deliberately priced the Xbox so low they knew they would have this loss.

Look at from a longer-term view. Microsoft does not intend to lose money forever. They want the books to be positive at the end of the day. The government allowing Microsoft to deduct losses now is an attempt to help Microsoft to become profitable in the future. Profitable in the future means revenues to the government. It doesn't do the government any good if they kill companies in the start-up phases before they get a chance to produce taxes.

$100M could do a lot towards fixing our schools so there aren't 55 kids in a kindergarden class. It's a start...

Two things to say about this:

1) It wouldn't do anything for the schools, since this is mostly federal taxes. Schools are locally financed (although, the feds have been sticking their nose more and more where they shouldn't lately)

2) I'd rather have Microsoft grow and create jobs for the parents of the children, rather than have the government take MORE of our money. The government has more than enough money to fix the schools. Insist on efficiency, not higher taxes.

Re:"Lost"

" ... redefine business loss. ... it's an expense. Not a loss. They will get it back ..."

No, they need to report this as a loss. Look, the Xbox division is a gamble by the larger company to enter into the home entertainment market. As with any gamble it contains a significant amount of risk. This loss quanitifies exactly how large a risk and let's the shareholders and prospective investors have some insight into how the gamble is going. Perhaps, this whole experiment will bomb ... who knows what can happen in five years ... So, you see, it is in the best interest of everyone for losses like this to continue to be reported for exactly what they are: immediate losses on a long term gamble with no guarantee on seeing the money again.

Ooze on over to infest the next marketplace

This is of course, how Microsoft takes over a marketplace. They are eternally funded, and can oulast anyone.

They'll chip away at Sony and Nintendo's profits until even these successful companies can't make a profit.

I wonder why they're trying to pull out of the DVR market. They say that there's no money in it. Maybe. I thinks that maybe it conflicts with their DRM agenda.

Isn't this the exact definition of

an abusive monopoly. No other company can just throw this kind of money away in this market. The only reason why people are not saying something is because Sony is actually beating Microsoft's stupidity.

Reminds me of a line form Citizen Kane

You're right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars *next* year. You know, Mr. Thatcher, at the rate of a million dollars a year, I'll have to close this place in... 60 years.
-- Charles Foster Kane

Re:500lbs Gorilla ...

Yea, I'm waiting for them to go into fast food. Give McDonald's a run for their money.

Just think, a free 2-day Serial Key to MS-Office with every BillyBurger sold!

How is this news?

Who here thinks games consoles are profitable?!? The money is made from the games.

I knew I should've got another!

I was trying for 200 mill, by pouring Pepsi in the boxes at Walmart. Now I'll never get my 'Corporate Killer Anarchist' badge.

Billy Henderson always wins, 'cause his dad's the scout leader.

Standard Oil

One of the tactics Standard Oil would employ was to sell oil and petroleum products well below cost, absorbing the loss for the sake of driving competitors to the point of ruin, and then buying their ruined competitors' assets.

Sony is a strong, powerful company. Nintendo is slightly less so. I think, however, that if you were to do a direct comparison, Microsoft has the ability to lose more money and stay solvent for longer than either Sony or Nintendo.

This tactic was found to be in violation of the Sherman act when applied to Standard oil. It's amazing to me that MS is able to get away with the same thing without its competitors screaming more loudly at the US government.

Ridiculous

It always bothers me when we (the linux community, technically the underdog) make some snide reference to the failures of our competitor, especially when in the big picture the direct issue is rather silly.

• Consider:
• We _know_ that they have lots of cash. Granted a loss is not cool, and they will try to remedy it, also consider
  
• How widely popular the xbox is. Even people that planned on hating it drool over it
  
• The upheaval in the console market
  

This is similar to how we report linux and windows vulnerabilities. When a windows vuln is mentioned, we bitch about the OS and its quality etc. etc.; when a linux vuln is mentioned, we downplay the potential risks, and then compliment the speed of patch/update/fix release.

Don't get me wrong--I love linux, use nothing else, and haven't for many years; this ridiculous attitude of most zealots is annoying, however.

XBOX #3 in this console iteration

i'm a (not so proud ;) ) xbox owner, and while i'm excited about various applications (sega's games, xbox live), the xbox is already #3 in this console war and will stay that way. the main reason is their DISAPPOINTING presence in japan (which is virtually non-existent). you simply can't win a console war without support from nihongo developers and users.

that said, i don't this MS really cares. for a first iteration console they've done well, and you can kind of think of xbox as a testbed for future MS consoles (especially xbox live). also, they only have some 50 billion left in the bank (oh, the convenience a desktop OS provides!).

my bet is that xbox2 will come out BEFORE ps3 simply because first-mover momentum in the industry has become more important. the ps2 is hard to develop for, but the installed base is NUTS so developers flock to the ps2. MS realizes this so i wouldn't be surprised xbox2 comes out by 2004ish.

Re:How to make the Xbox a success

Keep it open, stupid

This directly opposes Focus on getting better games. While one or two good games might come from Joe and Tom working in their bedrooms for 8 months straight, most of todays games are massive efforts and the cost for playing helps to ensure that only those who are truely serious will play. Don't get me wrong, I'd love to get my mitts on a dev kit cheaply, but games today are way more complex than the average person/small team can effectively deal with.

Manufacturing Xboxes that defeat region encoding and macrovision with small modifications would cause sales to skyrocket

Me thinks that your definition of "skyrocket" and M$'s definition of "skyrocket" might be orders of magnitude different. Who in the US (general game playing population) gives a flip about region encoding? Sure, beating Macrovision might be interesting and sell a few more boxes, but it's a GAME BOX, those features have no interest to GAMERS. This is especially accute concerning M$, since even as you mentioned they have made little inroads in Japan, and after all, isn't getting those hot Japanese titles months before they come here one of the primary reasons that the hardcore gamers care about region encoding.

Microsoft needs to switch to AMD or Transmeta chips, which pack more power for the buck, run cooler

Uh, which AMD chip runs cooler? Which Transmeta chip packs more power for the buck? Do you know the details for M$'s agreement with Intel to know if they could truely save money by switching. Could the other two companies afford to offer prices as low as Intel could?

Also, this will allow them to use cheaper graphics coprocessors by using a cheaper, more powerful main CPU

Isn't this bucking the trend? Aren't games systems moving towards ever more powerful graphics subsystems with modest increases in cpu performance. Sony gets away with using a ~300mhz (IIRC) cpu, I don't think that the console makers are too stressed out about raw CPU performance.

but if Microsoft takes these suggestions, their Xbox division will be well on its way to profitability

They need to produce better games than Sony and offer the user a better experience for the buck and most importantly, they need market share. The power of the last point is elegantly illustrated by Sony. PS1 was the market share (though long money losing) vehicle that allowed Sony to start cashing in once PS1 was established thus smoothing the road to much quicker profitability on PS2.

Xbox 2

The common theory is that by 2005, the Xbox division will be profitable. Why?

1) They are said to be abandoning dependency on third party chip makers (aka Intel and nVidia). This means they will probably buy a chip company.

2) They will want their console to be the latest and greatest, so they will probably release it late but with extremely powerful and expensive hardware. If they learned their lesson this time they will release it concurrently with their main competitor, but I don't think they have. The hardware will probably be a derivative of x86, but they could abandon that for a custom chipset (although that's doubtful - they might pull a PS2 and allow backwards compatibility with Xbox 1 games). They will probably sell at a loss in the beginning (as some console companies do).

3) Who knows how much PR money they will spill into the Xbox2's budget.

I'd say profits at 2005 would be during that small window of time, those few months, between when Xbox 1 + Xbox Live! + PR Money for Xbox1 + nVidia/Intel-tax become profitable, and when Xbox 2 will be unleashed (assuming the usual 5 year cycle).

Actuallly, $177M isn't that bad

Microsoft already said they were spending $500M in marketing ALONE for xbox in the first year. Losing $177M in 3 months isn't all that bad, because it means that out of all the exhorbinant money they spent, they still only lost $177M which isn't an insane number given the insanity of spending $500M in marketing (a sunk money used for demand generation).

I expect that they will scale back their marketing a LOT as soon as they proliferate a base number of boxes, which was their entire objective anyways.

Besides, Microsoft was already planning for first year loses [com.com] so it isn't like that this wasn't forseen.

Umm, math?

MS stated they were going to spend $500 million in advertising during the first year. The numbers you're looking at now are related to what, the current quarter? (Lost $177m in 3 months ended Sept 30th.)

When do you think they spent most of that $500 million? That's right, the launch events, the pre-release hype, and everything leading up to that first day. (Think of all of those campus tours and giveaways and what not.)

This is talking about the losses of the box for the most recent quarter. Marketing expenditures for the XBox have decreased dramatically since then.

In fact, losses accelerated when they clipped $100 off the price tag. They've managed to do some work to decrease the cost of the box since then but nowhere near a 33% cost reduction.

How Sad

How sad that on the day Microsoft launches [washingtonpost.com] Xbox Live, we have a story about how much money MS is losing on the Xbox.

The desire among the overzelous Linuxites for the Xbox to fail is palpatable at Slashdot. Just look all the posts advising people to buy a Xbox but not buy any games. Just so MS can lose money. Its pathetic and sad.

Go ahead and buy a Xbox, waste your time and install Linux on it. But I dare you not to play Halo on it (Game of the Year and a work of art).

I dare you not to plug in your Cat-5 and fire up Unreal Championship (released Today!). Oh! and when Halo2 is released later late 2003, please do'nt go and buy it. Leave it to the serious gamers.

The Xbox is a great piece of tech. Real gamers know it. Thats why in the states its outselling the GameCube (read linked article above).

Market Distortion

As the story at the Register [theregister.co.uk] points out, any other business with ventures losing money like Xbox and MSN would kill them off as clearly bad business decisions.

A company willing and able to sustain hundreds of millions of dollars poured down a holes that are peripherally related to their core business of PC software, for years at a time, is crazy.

A company willing and able to do that against large, established business like AOL/Time Warner and Sony is downright scary.

A normal business, run to increase profits, would look at the margins on Office and Windows and simply jack up their prices. It's an iron-clad guarantee to increase profits at MSFT. There is virtually zero price elasticity of demand [mintercreek.com] for Windows and Office and MSFT management owes it to their shareholders to optimize profits by taking advantage of their stranglehold on the market.

[Note: I don't own any MSFT.]

Less than I thought, but still bad...

... coming from the point-of-view that losing money is always bad. Of course, it's an expense, as another poster pointed out. Nothing unexpected.

It's bad from a PR perspective. It's bad considering that Nintendo and Sony are now actually turning a profit on the consoles, a slim one but a profit nonetheless. Sony has managed to fit the entire Emotion Engine + CPU + sundry other parts onto a single chip, which reduces cost significantly. I'm not sure how Nintendo has pulled it off.

Xbox Live is doing better than expected, but the total numbers are pretty intimidating for MS. Last I checked (2 weeks ago), the score is:

- approximately 8 million GameCubes
- approximately 10 million XBoxen
- approximately 52 million PlayStation 2s

By those numbers, it's safe to say Sony has wrapped up this round, if you're looking for a 'winner'. 5X the market share is too compelling for game designers. The games go where the customers are.

[tangent]

I like the Xbox, even if it is a little limited in scope. There's a completely different philosophy at work at Sony's computer entertainment division that I don't think MS really understands. The Xbox is basically a kickass 3D sandbox. The PS2 is a super-flexible games machine; by this I mean that the PS2 is oriented for all kinds of games, not just 3D. The PMUs for example, can generate procedural textures on the fly. Take the oft-lamented VRAM issue. VRAM holds lots of shiny textures. But what if you are generating textures from (basically) pure math? No texture overhead. (Bryce 3D, to name a weird example, gets away almost entirely without using graphical textures.)

And now we see Sony moving fast to innovate in areas that Microsoft basically can't... namely, they've gone and asked IBM for a radically different kind of chip. MS is in no position to do this, as part of their whole pitch is the fact that it's a PC in a box, with MS's x86 programming tools.

[/tangent]

Article is wrong

According to the 10-Q filing, the article is wrong. The $177M net loss is for all of home and entertainment, only a subset of which is Xbox. In fact, comparing it to last year, where the losses were at $68 M and there was NO xbox, you can conclude that total losses resulting from xbox activities would not be greater than $109 M, and in fact probably even less than that. There are many other things in the home and entertainment division such as Windows Media Center PC, UltimateTV, MSN TV, and so on, many of which were probably not profitable, and contributed to the overall losses.

Fair's Fair

I have no idea how much money has evaporated due to lost productivity by businesses using MS products that crash left and right.

Hell, the value of man-hours consumed by Solitaire alone must be close to the GNP of your average South American country...
GMFTatsujin

This is a common tactic

used by cash-rich companies against cash-poor competitors. There's really nothing unusual about it except that it's Microsoft. Take Blockbuster video and Hollywood video, for example. When they try to crack a new market (region), they basically do the economic equivalent of carpet-bombing. They open stores every TWO BLOCKS in some cases. The reason is: even if there's a mom-n-pop video store only a mile away, they want to make sure you walk/drive past three of their stores before you reach their competitor. If they divert enough customers, their competitor goes out of business. Then, they close down their excess stores, because they've been losing money like crazy by having way too many stores in a small area. But in the long-term, they make money, because without competition, you can charge whatever you want and make it all back.

Much as MS abuses the law in many many other areas, this is just a (shitty) business practice you see every day.

Perspective

Microsoft are said to be prepared to spend $2 billion funding Xbox live over the next five years, suggesting it will be some time before the home entertainment division break into the black."

I don't begrudge people their money and I'm not an anti-corporate type. MS may be evil, but not for simply making money. Still, it's good to put numbers like $2 billion in perspective. The state I live in has about 8 million people. We're facing a budget shortfall (two-year budget, compared to MS's five-year plan) of about $2-3 billion, and people are flipping out -- school funding may be cut, roads might not get fixed or else taxes are going seriously up. One can argue about the reasons -- like government spending way too much already -- and it's not really important to my point. I just wanted to give that figure a context: It's a statewide disaster. Or an investment in making a line of video game hardware successful. Take your pick.

Linux is the target ....

It's obvious that Microsoft is trying to adopt the business philosophies of Linux-based companies in order to better compete with Linux. The idea of losing millions with a slim chance of attaining profitability in the distant future is something that companies like VA Software, Lineo, etc have been very good at.

Big Deal

It's all an investment.

How much do you think Microsoft lost on Internet Explorer through its first three or four versions?

How much did that end up costing Netscape?

Of course, even taking the dynamics of the bubble into consideration, Sony has much deeper pockets than Netscape ever did...

Its working

In the UK the XBOX has now put itself as the number 2 console , ahead of Nintendo's gamecube.

Xbox wins race of the also-rans
http://www.guardian.co.uk/online/comment/story/0,1 2449,840789,00.html [guardian.co.uk]

Oh come on

EVERYBODY does this, especially Apple. How many times has the "They're supported by hardware sales" argument been invoked against x86 OS X here? How much do you think Apple is losing on the iApps or movie trailer hosting? How many other companies are shelling out for research that won't bear fruit for another few years? This is perfectly normal corporate gambling, except that MS is doing it in the market instead of the lab.

This is simply an artifact of accounting methods

MS is required to post a financial report by the SEC. The SEC defines how often this has to occur (2 times a year I think). If your business plan lasts longer than this period you are going to post short term losses and gains that have no meaning outside the larger context.

If I open a new comic book store, I have to pay 1st months and last months rent (2x rent), Buy shelves, inventory, register, computer, business license, phone installation, internet installation, website setup costs...

Now I start to sell comic books at the going rate. Can the comic book store up the street call foul because I'm operating in the red at this very moment? I won't have all that start up stuff paid off within the next 6 months (when a public company would have to file a financial report). I won't have it paid off in a 12 months. I'll be lucky to be operating in the black in 18-24 months. I'm not cheating, I just have a business plan that lasts longer than the SEC filing period.

=Shreak

I actually respect this...

I respect the fact that MS is showing a willingness to nurture their product for the long term rather than giving up at the get-go just because it failed to change the playing field over night.

My heart is breaking.

Despite the losses Microsoft will not have to rein in its marketing and promotional efforts any time soon. The company has a cash pile of more than $30 billion to fund expansion.

Even if it did not have this huge amount of cash on hand the $3.5 billion profits from its operating system and software divisions in the quarter more than offset any loss.

I imagine billg broke into a cold sweat when he heard the news of this financial catastrophe...

t_t_b

Stop kicking the horse... Please?

Common, if you're gonna hit microsoft on this practice, you're going to have to hit Nintendo, Sony and the late-great Sega on it as well. They all sell their consoles at a loss in order to hit the consumer's impulse buy range. The only real difference here is that Microsoft has deeper pockets with which to do this with. It gives them the ability to market superior hardware while hitting the same impulse buy zone. And yes, it also creates hideously large loss numbers.

As for putting Sony and Nintendo out of business, somebody really isn't in touch with the real world. First, the XBox is nearly dead last in console sales. That differential will decrease over time, but unless Sony and Nintendo do something incredibly stupid or MS incredibly brilliant, that's not likely to change in this round of the console wars. Second, Sony is a big boy. It has a diversified market beyond gaming. Their products have global reach and ideal penetration within their respected markets. Sony isn't going anywhere. Nintendo, on the other hand, has a far smaller foundation and hasn't exactly been making stellar decisions as of late. They haven't had a great console since the SNES, and the Gameboy is STILL their principle source of income. They're more likely to kill themselves off rather than be a victim of any MS "dumping" campaign that everybody else also seems to be engaged in.

But it's just another day in the anti-MS neighborhood, I guess...

Anyone familiar with Cell phone pricing?

Many of you seem so surprised by this per unit loss yet every cell phone company in North America "subsidizes" phone handsents - creating such a loss. Do you think the cell provider gets your phone for 9.99 ? Do you know why GSM phones in Europe at generally start over US$200 yet in North America they are $19.99 with a contract? This is a common practice in many service industries, broadband internet providers do the same. They subsidize the modems and other hardware - wireless providers do this to such an extent that many have limited growth based on capital available. Anyone who thinks this is abnormal or illegal is not aware of common business practices as the list of examples is immense.

National Pride

In all this discussion of console wars, many people seem to overlook an important point:

Microsoft is the only american player in the game.

Don't get me wrong, I'm just as concerned about M$ as the next guy, but it seems to boil down to buying my entertainment from either some big japanese company or some bigger american company. I'm no economist, but isn't it better for my nation if my money stays in my nation's economy?

Striving for relevance...

"Documents filed with the US financial watchdog show that Microsoft's Home and Entertainment division, which includes the Xbox, lost $177m (£112m) in the three months to 30 September.
"The documents also reveal that five of the seven divisions of the company are operating at a loss. "

Could you possible sensationalize this article anymore? "XBox falls from orbit, kills wife and kids!" The XBox did not lose $117 million. The Home and Entertainment Division did. Not only that, Five other divisions of Microsoft are also operating at a loss, not that those deserve mentioning.

Jeez, Taco, can't you screen these articles just a tad bit better?

Re:The reason...

The simple answer is: Linux has killed the X-box sales.

Yes. Of course. That's the reason. Everybody that bought an XBox hacked it to run Linux instead of buying games.

Maybe they lost money because:
1) Couldn't break into key Japanese market
2) Expensive, generic hardware that lends itself to piracy (far more likely than, say, Linux use)
3) Ugly machine, shitty controllers (this stuff counts in the console market)
4) They had to pay to get third party developers (ie/ Bungie)
5) They wanted to combine PCs and consoles (in a fashion) but failed miserably on both counts

Obviously, they went in knowing they would lose money. They are losing money in other sectors too (ie/ MSN).