Will Halo 3 Pull The XBox 360 Out Of The Red? Unlikely. (MSFT, SNE)

Includes: MSFT, SNE
by: Yankee Group

By Carl Howe

Ars Technica notes that Microsoft predicts Xbox 360 will become profitable by Fiscal 2007, which starts in July 2006. Personally, I find that hard to believe, except for one little detail I learned today: Halo 3 is scheduled to launch on the day that Playstation 3 is launched. Given that the many XBox 1 sales were made because of Halo 1, and that Halo 2 single-handedly made XBox 1 profitable for a quarter (and only that quarter), Microsoft might be betting the farm on having similarly great results with Halo 3.

Unfortunately, the data doesn't really support that theory. Sequels in the movie business tend to make about 1/2 of the revenue of the prior product, and the game business nowadays looks a lot like the movie business. So if Halo 2 made X dollars, the rational expectation is that Halo 3 will make X/2 dollars, not X or 2X just because it is new. Assuming that Microsoft is going to lose about $700 million on XBox 360s sold through June (6 million units times $126 loss per unit), Microsoft would have to sell about 19 million Halo 3s (at $40 profit per unit) to make up those losses. Given that Halo 2 sales were about 6 million units to date, that just doesn't seem possible.

XBox 360 was an interesting product launch, but at the end of the day, it ran very much along the lines Blackfriars predicted last summer. It sold fewer units that Microsoft originally projected (fewer than one million versus predictions of 1.6 to 2 million), and it was constrained by processor chip supplies. By July of next year, Microsoft will probably sell six million or so XBox 360 consoles. But by that point, Microsoft will be seeing real competition from Sony's Playstation 3 and probably from Nintendo's Revolution console, and that will be the end of the easy XBox 360 sale.

The result? The market for Halo 3 will be less than 10 million units by the end of 2006 -- and that's not enough to edge XBox 360 into the profitability. We expect Microsoft's XBox 360 business to lose money well into 2007 unless something drastically changes. The real question is how long Microsoft and its stockholders will subsidize this business in hopes of future profits.

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