Microsoft's Earnings Report Slacker: XBox 360 Consoles

| About: Microsoft Corporation (MSFT)

By Carl Howe

I was going through Microsoft's (NASDAQ:MSFT) numbers after the close Thursday, and saw the blog entry at Business 2.0 Beta noting that Microsoft sold 500,000 XBox 360s in their fiscal Q3/calendar Q1 of 2007, compared with projections they would sell at least a million or more. Ouch.

Worse, the Entertainment and Devices Division [EDD] lost $330 million on revenue of $947 million. Double Ouch.

Unlike most of the other numbers Microsoft is putting up (which by any measure are quite impressive -- it's planning to grow $5.5 billion next year in revenue), losing more money than you received in revenue is not a good situation to be in.

Now remember that Microsoft lowered expectations for its console targets from 13-15 million to 12 million up through June 30 last quarter. Now it appears it won't even make that lowered target, short of stuffing its channel again, which will just make the calendar Q3 numbers worse. To put that in perspective, Sony's (NYSE:SNE) Playstation 2 -- a platform that is now seven years old, doesn't do high definition, and can't play any of the latest games -- shipments are still beating XBox 360 shipments month after month.


XBox 360 is a console that should be hitting its stride now nearly 18 months after introduction -- instead, its sales are declining and not hitting their goals. Eighteen months into Apple's (NASDAQ:AAPL) iPod rollout -- a product which sold at the time for more than the XBox 360 -- it had sold nearly 30 million units. Microsoft is struggling to achieve less than half that.

The fact that Microsoft is subsidizing this business may not be an issue for Microsoft directly, since they have plenty of cash. But having too much money to work with may be hurting EDD rather than helping; it allows the division to ignore problems rather than solve them. For example, why haven't they fixed the obscene power brick on the XBox 360? Even the new Elite version has the same old ugly power brick. And EDD is the home of other profit-challenged and market-challenged products such as the Zune and the Windows Mobile operating system. Ironically, the one Mac product that is part of EDD -- Macintosh Office -- actually makes money, but not enough to offset the other money-losers.

Just as kids often become more interested in developing themselves when they have to go out and earn a living, so it is with products and businesses. As long as Microsoft can avoid having to make the hard decisions necessary to make profits from each of its lines of business, it won't succeed against other more hungry and survival-focused competitors, be it in gaming against Nintendo and Sony, in music players against Apple, or in search against Google. Samuel Johnson observed, "Nothing so concentrates the mind like the prospect of a hanging." Spinning off money-losing businesses would show that Microsoft does have business discipline -- and might help those products and businesses succeed faster in the long run.

Full disclosure: The author has a long position in Apple, but no positions in the other companies mentioned in this article.