Analyst: "Gaming has been a disastrous endeavor for Microsoft"
Tuesday, April 17th, 2007 at 6:20pm by Staff
“Particularly from an investment perspective,” says Wall Streeter Roger Ehrenberg. Note, this doesn’t mean the Xbox has been a disaster for gamers — far from it (cough, cough Halo) — but Ehrenberg makes a strong case that the Xbox has failed investors by hemorrhaging Microsoft’s Home & Electronics profits. He also believes that when a console fails in Japan, as the 360 appears to have done, it cannot succeed in the world market (Caveat: NEC’s PC Engine did very well in Japan, and Japan alone).
From the article: “Microsoft needs to take a long, hard look at its gaming strategy - and, in fact, its entire H&E strategy. At what point, regardless of its virtually endless financial resources, does it say ‘enough is enough.’”
Independent of which platform(s) you enjoy, there have only been two profitable hardware makers in the video game industry over the last 7 years: Sony and Nintendo. It makes you wonder if the only reason we have a three player landscape right now is by way of ambitious, unwavering, and deep Microsoft pockets. Is it possible that Microsoft could say “enough is enough” someday, effectively throwing in the console towel? I don’t see it happening, but I suppose if shareholders grow tired of accrued losses, anything’s possible.
[Thanks, Robert]
April 17th, 2007 at 8:01 pm
People don’t want to hear it, but from a financial perspective, there genuinely may be little case for a 3rd Xbox, (and shockingly, little case for a PS4 assuming Sony’s loss of exclusives and 3rd party support is sustained).
The first Xbox lost 4 billion dollars in 4 years, and the second has lost something in the region of a billion dollars on top. There are arguments that the system may move to profitability if they can maintain their higher hardware price point (which they can justify thanks to Sony’s own problems), but with the cheaper Wii proving so popular, and a year and a half on the market already, people are going to start complaining about their high system price (a price that might now be just breaking even).
Here’s the thing:
Form a larger perspective the Xbox project as a whole should be profitable right? the problem is that even if the Xbox 360 is the most profitable system ever, making 5 billion dollars in the next 5 year s(highly unlikely), the project as a whole will only have broken even after 10 years of activity. If they could sustain that level of profit for another 5 years, they’d only make 5 billion dollars after 15 years of activity. For their foray into gaming to be even remotely worthwhile they’d need to sustain that level of success for a fourth generation to generate 10 billion profit over the course of 20 years. All extremely improbable.
In essence: they failed with the first system. No other company could lose that much money on any project in the world and so it as not a problem, or even as the gaming press calls it “a good first attempt”.
April 17th, 2007 at 8:01 pm
“see it” not “so it”
April 17th, 2007 at 8:44 pm
I would say that the whole gaming industry strategy is broken right now (maybe except for Nintendo’s, but I don’t want to sound like a fanboy).
I only hope that MS keeps its video gaming branch afloat until Halo 3 comes out!
April 17th, 2007 at 10:08 pm
The videogame industry is still growing massively year after year, and the consoles are slowly taking up a bigger and bigger part.
I believe Microsofts plan, all the way has been to go into the console buisness and establish a brand with one console (xbox), take a direct battle with Sony over exclusives and market share in the with a second console (360), and take over the market with a third console.
Microsoft is willing to sustain extreme losses so that they in 15 years time have control over the console market (as well as the PC market - which they do by providing the leading OS).
Microsoft wants to be the major player in videogame buisness cause they know it’s going to generate alot of money in the future - and if you ask me, Microsoft is more than financially capable and determined to go the entire way. If they drop out now or in the next generation - they will have lost the money they invested.
Not going to happen.
April 17th, 2007 at 10:14 pm
MS does not develop the Xbox to create a *just* a gaming platform. They see the Xbox as the beachhead of a long struggle with Sony, Apple, and maybe even Nintendo (though they seem to be dancing to another song) for control of the integration of the video over the web, TV, home computing, etc.
The game MS is playing with the Xbox won’t solidify in just a few years. They will not jettison they’re hold - however unprofitable - over a measly few billion dollars. Ehrenberg’s perspective is not where Bill and Co. are coming from.
April 18th, 2007 at 12:17 am
Arguments over a 15 year life cycle are pointless. As it stands, no company or line of systems save the gameboy->GBA->DS has held dominance more than two generations. Staying relevent for 15 years is challenging let alone sustaining massive profitability that whole time. This also avoids the issue that there very well may not be a console industry per-se in 10 or so years. Can you get better than photo-realistic? Obviously the future of hardware development is going to require some leap of imagination (hence Wii) for which MS consistently demonstrates their incapacity.
Arguments over beachhead positioning seem to be meaningless too, or else 360 would be the do-it-all media computer and the PS3 would be the hardcore gaming device. If Microsoft was serious about 360 as their avenue to the livingroom, then they would have made it a media centre and not a media centre extender, they would cut back on the DRM and MS formats only restrictions, they would include Wifi, they would include card readers, they’d allow generic USB data storage, they’d allow and supply full operating systems, they’d work out something more standard for HD films, and hey, they’d have allowed a mouse on the first Xbox. For whatever reason they decided the Xbox consoles should not impinge on their forays in the media center business. Maybe it was because J Allard wanted it to look ‘legit’ as a ‘Hardcore’ machine. Frankly, if the PS3 were affordable and it were properly advertised, PS3 could displace PCs better than 360 could displace consoles. In fact, I’d wager Wii is in a better technical and market position to be the all in one device than 360 is.
April 18th, 2007 at 12:19 am
I couldnt disagree more with the orignial poster. Who sounds like a PS3 fanboy to me. That said I think MS should continue to innovate the market. Which hopefully with its xbox live marketplace, force Sony to match or surpass them. In which case we the consumer can only win. Competition has always drove the marketplace why should gaming be any different. Sure wish I could find a Wii.
April 18th, 2007 at 12:55 am
Regarding the comment about the media center function/home beachhead - MS knew that to get this console into millions of homes and build the Xbox brand, it has to be a game console 1st and foremost.
If the product were cluttered up with all the extra functions from the beginning, gamers would have viewed it as a PC and rejected it. The massive investment is not just purely for gaming, but to build brand name and credibility in the household. If 40 million people have an Xbox in their homes and like it, they’ll be much more receptive to future home products from MS.
Pre-iPod, Apple probably didn’t have this credibility either, but they were smart enough to create a product that could make money from the get-go. Sans iPod, they’d have little hope of pushing consumer electronics into the home (look up “Apple Pippen” in Google.) So in that respect, Apple is way ahead of MS, but bottom line is that to be a player in consumer electronics, you need to get brand acceptance in the homes of millions, and that’s what MS did.
Ehrenberg might try reading Takahashi’s “Xbox 360 Uncloaked” to understand this, but it’s probably too much to expect a research analyst to read a book on the subject.
April 18th, 2007 at 1:07 am
Halo is not an argument for the xbox being good for gamers- it’s an argument for the xbox being bad for PC gamers. They stole it from us, our precious…
April 18th, 2007 at 1:39 am
It wouldn’t be terribly unlike Microsoft to throw in the towel — they’ve done it a few times with other products. I don’t know that they’d do it to the XBox though… well, maybe, if they can’t think of “what’s next” — I think for Nintendo that question is easy: a better Wii.
April 18th, 2007 at 2:27 am
i think this arsehole should stick to talking about shares and stock rather than the games industry did you not hear bill gates hes in it to win it no matter how much it takes, your as bad as the rest of the analyst out there just be quite. and how much is sony slipping in your back pocket for this you cretin.
April 18th, 2007 at 3:50 am
“It makes you wonder if the only reason we have a three player landscape right now is by way of ambitious, unwavering, and deep Microsoft pockets.”
Makes you wonder? As if it’s even a question. No other company could sustain the losses year after year that MS has. If this 3rs player were not MS, they would NEVER have made a sequel to xbox. MS and only MS could or would use this type of scorched earth strategy to get in a market. It’s insanity in the purest sense. Fortunately Bill & Co are insanely rich mofos.
April 18th, 2007 at 4:28 am
“I couldnt disagree more with the orignial poster. Who sounds like a PS3 fanboy to me.”
Um, his main point was that the Xbox lost Microsoft $4 billion dollars in 4 years, and that the 360 has lost them $1 billion. Those are facts. As much as you don’t like to hear them, you can’t really disagree with facts.
Sure, Microsoft can stick it out all they want, and Xbox fans can keep telling themselves that their system rules because it innovated the online arena and attracts a lot of third parties. However, that doesn’t change the reality that Microsoft is not making money off their Xbox division, and we currently have no reason to believe that they will in the forseeable future.
Of course, they can afford it, and if they want to keep throwing money at the Xbox to keep it afloat, that’s their choice. But whatever they’re doing now, it ain’t working. The point of a business is to make money and with the Xbox, Microsoft has completely missed the point.
April 18th, 2007 at 4:30 am
of course it’s cause of the deep pockets, look at what happen to sega, but i thought they were making money already with the 360, also it can’t be that bad for ms there making a killing on the halo/GoW franchise…i for one don’t wanna see only one winner…
April 18th, 2007 at 5:01 pm
Microsoft have always said the XBox is a long term investment. Sure the division is taking huge losses currently but the brand is now a significant player in the gaming business. You have to pay to play and MS is in a great position to reap huge profits in the future.
April 18th, 2007 at 11:48 pm
One of the challenges is timing. The cost of entry to compete with the likes of Sony & Nintendo is not cheap for any company attempting to penetrate the console market as late as MS did back when they launched the Xbox in 2001. Having deep pockets affords them time to mature, for better or worse.
April 19th, 2007 at 12:54 am
First of all this article contains nothing of substance other than a quote. Nothing else to back it up. Additionally, most of the comments are utterly stupid. To think MS does not have a global strategy for its H & E division is thinking inside the box to use a hack cliche.
If you look at the progression of all of MS’s products over the past 5 years, MS is making considerable progress as a viable family media resource. They control 90% of the pc OS market in addition to vast use of all of its software that increasingly is becoming a seamless integration of all of its products. It has established Games for Windows, Windows Live, Xbox 360 console, Zune, and a considerable online marketplace. The integration of all of these services no matter how successful any one product is, centers as the primary focus of MS in the next 5 years.
To claim the xbox console is a failed investment is a financial analysis wrought with inconsistencies and a lack of research.
I am a fanboy of all technology and use MS, as well as Mac, sony, nintendo and many other products. This article contains no substance and I am ashamed at the way it uses a quote to position itself in nintendo’s favor. If you love a product, then advocate with facts.
April 19th, 2007 at 4:49 am
@mark
Did you even read the article this is linked to? I’m guessing you didn’t, or you wouldn’t be complaining about facts since the article has an abundance of them. Not only that, it as a chart. That’s right a chart. With real numbers and everything. Go on, take and look and then come back….
dum de dum….
Ok, back?
Great. Note how much money MS is losing every year, year after year.
Thats right, over a billion dollars. Ok, now now how much they had to spend in order to lose that much. It’s amazing really, all these facts. What they point to is a shit investment. No investor could EVER look at those numbers and call this a good investment. EVER.
Spout all the baseless speculation you want about seemless integration and family media resources, but none of it can mask the unprecedented losses that are piling up. Maybe this will turn around in the next decade or so. Maybe not. But that’s one hellava gamble. So tell me, would you bet 5 million dollars that it’s going to work? Because thats what shareholders are doing if they don’t sell their holdings. Very risky. Not a good investment. Not now at any rate. Them’s the facts jack.
April 19th, 2007 at 5:39 am
no wonder they discontinued the original xbox, it was costing them too much
=P
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April 19th, 2007 at 6:37 am
Ummmto hte first comment…Aftetr just one generation, and one year of hte second generation, Microsoft is now turning a profit on every 360 sold. It is also an INVESTMENT. A investments are usuallt LONG TERM.
Claiming it is a bad move financially to come out with a new one based on the original XBox is like saying putting your money in stocks is a bad move becuase for the short term, you are now out that money, since you can’t spend it.
Microsoft is now in the livingrooms of many, many homes. And hte next generation will be FAR more than a gaming console.
April 19th, 2007 at 6:43 am
No company should be able to go years on end selling a product that loses money. Why does Wahl Mart get in trouble for selling items below cost to hurt the competition but Microsoft can get away with it for years?
April 19th, 2007 at 7:38 am
MS and others should bring games back to where they belong PC’s
April 19th, 2007 at 8:43 am
Well, from a business administration perspective how much money a project lost in the past is irrelavant.( Concept of SUNK COSTS ) You cant do anything about that anyways. The only important thing is will it be profitable in the present/future? So MS certainly doesnt care for the 5 billion if they think it will yield profits in the future.
April 19th, 2007 at 9:41 am
i thort MS investment in xbox was about getting their foot into the living room door, not just for gaming , but for entertainment in general, as a means to an end. Having said that, i think Apple have trumped them with appleTV, macMini, ipod, iTunes.
April 19th, 2007 at 11:21 am
This guy is not an analyst, he’s an anal-cyst.
Surely he cannot be that dumb, this is clearly propaganda. Nice try dork-face
April 19th, 2007 at 2:28 pm
“The cost of entry to compete with the likes of Sony & Nintendo is not cheap for any company attempting to penetrate the console market as late as MS did back when they launched the Xbox in 2001.”
I think Nintendo, who entered the console industry after Atari absolutely destroyed it, would know more about cost of entry than Microsoft. They had to convince the entire world that videogames were worthwhile again, and somehow they did it without incurring $4 billion dollars in costs.
But yeah, clearly it’s impossible to turn a profit in the console industry in the first few years… *rolls eyes*
April 19th, 2007 at 7:11 pm
Microsoft wants to strangle the gaming community. It wants control of PC and console games. It will not stop until it destroys Nintendo and Sony. They have already destroyed Sega.
Not only this, but they are already starting to destroy Nintendo. They bought rareware. For what? A shitty version of Perfect Dark? Rare was destroyed because it was bought out by M$.
M$ knows they can take these losses, and they know that when the kill everyone else, they will do to consoles what they did for OSes.
There will be no new consoles, and no one will be able to challenge M$.
I knew M$ was going to do this as soon as they released the XBox. So, when you stupid xbox purchasing retards have no more choice, and you are stuck on a console that equates to Vista, I’m going to laugh and say I told you so.
M$ will continue to buy stuff out, take losses, and try and kill the competition.
April 21st, 2007 at 10:12 am
Xbox 360 is a product for hardcore gamers and I don’t get it how Microsoft dudes talk about reaching out to new market segments - they simply don’t do it.
They do what Microsoft does all the time - slowly make a product the best there is (either by acquisition or by continous development). You know probably the joke that Microsoft is not very “creative” yet highly “at making things better”.
Some people say Microsoft needs at least V3.0 to make something great (Windows, IE, etc…)
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I think Microsoft wants to unify PC and console gaming via “Live” and then include iPods/Zune and everyting.
Sony wants to stuff Blu-ray corporate strategies down your throat (=digital convergence), Microsoft does it with Windows/PC interoperatibility (=PC in every living room).
Xbox 360 sends inconcruend messages because it’s not the entertainment machine you would expect but it fits Microsoft’s “digital amplifier for the PC” mindset.
Personally, I’m a little worried about the losses because Microsoft wants to make money on all departments (that’s why there is Shane Kim, a financial guy, right NOW the boss). On the other hand they have invested so much, can they just quit now? Never gonna happen, remember Microsoft is a marathon runner while Sony and Apple and Co. are sprinters (in their mainstream products at least - on a company level it’s different at least at Sony).