Last month, Piru_Lee posted an interesting bulletin about MicroSoft losing billions on the Xbox... which sadly, some people didn't believe. Rather than post at the bottom of a dying thread that no one is likely to read, I've posted the actual numbers here, and some speculation as to the eventual launch of the PS3.
So, without going into the usual forum-type "they r teh suck" or "ps2 ownz!!1!!!!" uselessness, here are the actual numbers for revenue over the last 3 years (2005 still to be seen), as taken from Microsoft's financial report, available on their site:
The Home and Entertainment division (mostly Xbox, but includes PC games and interactive TV as well) posted the following revenue (total incoming cash):
2002 - $2,453,000,000
2003 - $2,748,000,000
2004 - $2,876,000,000
... and the following is the "operating loss" (how much more money was spent than what was made) generated by the Home and Entertainment division:
2002 - $1,135,000,000 (loss)
2003 - $1,191,000,000 (loss)
2004 - $1,215,000,000 (loss)
This means they spent more than they made... much more... all three years.
Basically, we're talking about a whole division here, but the descriptions associated with the numbers list the primary reason for losses being the Xbox... some other parts of the division are probably turning profits, so in all likelihood, Xbox is probably loosing more money for MicroSoft than is immediately apparent. The sum total in losses for the division is at $3,541,000,000 over three years... and you can easily expect this year to push it to $4 billion (or more, if the trend holds true).
Now, MicroSoft wasn't stupid, they did realize this whole platform gaming thing was a long-term strategy... but the numbers seem to indicate that they got in far over their heads. The business model, as posed by our beloved Sony so many years ago, was to sell the console at a loss and recoup on licensing fees for the games. This has worked well for Sony because PS2 sells a LOT of games. But the Xbox sells Halo... and nowhere near the numbers of other games. In effect, this business model has worked for Sony (lose money initially, make up the loss and get a ton of profit later) in spades... but clearly, it has done nothing but hurt Microsoft... who is $4 billion in the hole on this platform gaming excursion.
Now, next question... does this money hurt M$?
It does a bit, believe it or not. Ever wonder what a company like MicroSoft makes in reality? Here's some profits (not total sales... just profits):
2002 - $8,272,000,000
2003 - $9,545,000,000
2004 - $9,034,000,000
Okay... so losing a billion a year in that perspective isn't a HUGE travesty... but we're talking 12% of their profit, per year, thrown to a venture which is anything but a guaranteed success. Now, they know how to invest, and they know that it is long term... but even MicroSoft's MSN, which was second in losses, turned a profit in 2004.
The big hit for MicroSoft won't actually be in seeing these numbers as "big losses in the big picture", per se, but if you compare it to the profits they're making in other areas... and the profits that Sony and Nintendo are making in console gaming (precisely where they're losing money hand over fist)... well, that's a different beast.
You can bet the people in charge know where MicroSoft's profit is coming from too... it's from Windows and Office (which made $15 billion profit in 2004... so look again at their end profit to see how much they're losing on "other" ventures)... and you can bet too that they know the biggest money pit in the company, four years running, is a gaming console with only one big selling game franchise.
And do you think the people in charge don't watch the competition? I'll bet they do... and I'll bet they also notice Sony's PS2 profit for 2004 was almost 2 billion more than theirs (making $650 million in profit, rather than $1.2 billion in losses)... and that Sony's profit on PS2 the year before was around $1 billion compared to their own $1.1 billion in losses for 2003 (another $2 billion disparity). Hell, even Nintendo is turning a profit (net income... 2005: $816 million, 2004: $316 million, 2003: $640 million... all positive, no losses).
Even if you step away from profits/losses to look at total sales figures (in order to try to get a picture of where consumer money is going), in the 3 years above, MicroSoft did a total of about $8 billion in Xbox sales (actually ALL PC gaming and home entertainment sales are included here) to get their $4 billion in losses over 3 years. But Sony does that much in sales on any one of those years (last year was LOWEST of 2002-2004 at $7.5 billion in sales... 2002 and 2003 were in the $9 billion sales range).
So... in essence, what you have is one platform that dominates the landscape and turns a heavy profit (Sony)... another platform that holds it's own with a niche, albeit quality, market (Nintendo)... and one that only exists because the parent company is willing to throw a lot of money after a hope that they will eventually turn profitable despite the ongoing trend of increasing losses (MicroSoft).
And here's a kicker: Sony still has more experience in console gaming (they invented the business model they all work on here)... they have better relationships with developers (anyone want to bet how much it hurt MS to see Electronic Arts showcasing it's next gen games over at Sony at E3?... and that was just the beginning)... and they have a lot more experience in hardware, plus the ability to cross-pollinate one technology to another (they don't just make game consoles, you know). Besides, they've already had their version of the massive money pit... it was called Betamax... and they learned from the mistake.
Ready for another kicker? Who do you think owns the rights for movies to base games on? Sony bought MGM in 2004, and they already had their own studio and Columbia Tristar... they now own the largest library of color movies in the world. We're talking big franchises here too... like Rocky, James Bond, etc. Want more? Who owns the music developers license for their games? Oh... that would be Sony too. They've got the second largest music label in the world to boot (Sony Music merged with BMG in 2004) with a huge library of existing music. In short, they've got the capital AND the resources to cause a lot of trouble for the future of the Xbox, in more ways than one.
...
So... what's the speculation?
Here's the fact: you've got MicroSoft releasing a slightly-to-noticeably lower-tech machine... and up to a year earlier than the PS3 (maybe less, but probably a year earlier).
What does this mean? Well, given that the revenue model is to make money on game sales, it will KILL them unless they have the game sales to back it up over a long period of time. So what is a competitor like Sony to do?
First... you don't launch right away... even if you could. You wait.
Then you giggle at the MS fanboys saying "oh, but we have the 360 right NOW" Why is this funny? Because, so what? Nice console... but where's all the games to recoup the losses on hardware sales?
Then... you wait some more...
And you chuckle at the billions MicroSoft is losing on hardware sales in the first 2 quarters of 2006... not only because it is staggering... but because you're just about in a position to make it even worse.
Nope... wait some more...
You wait up until the time some real games are about to hit the shelves (like a Halo 3, for example). THAT is when Sony will release the PS3 (and not before)... because you release at the moment at which it will hurt MicroSoft the most. They'll have sold a ton of machines at a loss... won't be anywhere near recouping that loss... in effect, they're at their weakest point. You hit them when they're ready to make their "real" move. Besides, in the meantime, even if Sony's profits go "down" because of 360 sales, MicroSoft's losses will go up even MORE than that. Think long term strategy here... it's not just about selling units... it's about beating the competition. Beating competition on the level of MicroSoft doesn't just mean selling more units... it means driving them out of the business entirely with more losses than their shareholders will allow. Anything less and they could ride it out.
In simplest words... wait until MicroSoft has lost as much money in consoles as to have a noticeable installed base, but before that base is wholly committed to the platform (ie. has a lot of good games that the owner's enjoy)... then hit with superior hardware at a competitive price, and with a lot of launch titles to hammer the choice home. Hit at the right moment, and hit hard with the intention of causing serious financial trouble to your opponent as much as increasing your own profits.
I don't know about you... but I can almost FEEL the stockpile of traded in Xbox 360's at EB Games when the time comes.... and all of that will add up to a huge loss for MicroSoft... because the business model is to profit on game sales... and without games enough to compete against a stronger platform (expecially when they couldn't beat Sony even WITH better hardware THIS time around), they're going to be in serious trouble. Remember too that this is very much like the strategy MicroSoft employed unsuccessfully against the PlayStation 2 (they launched at a perfect time with somewhat better hardware... but were, and still are, unprepared to take advantage of such an edge).
...
So when will PS3 launch be? Not totally sure, but I bet it won't be until right around the time of Halo 3... just long enough to get a bunch of Xbox 360 owners annoyed that they don't have Halo and have had a mostly useless machine for 10 months. My bet is that Sony comes out of the gate with as many launch titles as the 360 has at the moment, plus a few "killers" that we've already been drooling over to seal the deal. In effect, don't expect a spring launch as the 360 will need to lose more money than that before Sony cares (hey... they're still making lots of money on the PS2... why bother rushing it?). Think this time next year.
But again... the launch date is just speculation... the financial data above is not.
And... in case you doubt the numbers:
MicroSoft's financials: http://www.microsoft.com/msft/ar04/nonflash/10k_fr_da.html
Sony's financials: http://www.sony.net/SonyInfo/IR/financial/ar/2004/Segment.pdf
Nintendo's financials: http://www.nintendo.com/corp/report/fiscal2004.pdf
and: http://www.nintendo.com/corp/report/NintendoAnnualReport2005.pdf
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