I just got this off of Microsoft's website and the earnings statement has been pretty telling. If you don't mind thesource, I put the information on a spreadsheet so that it can be more easily understood.
Anyway, here is my analysis:
First of all, Microsoft's corporate revenue has increased by 1.5 billion from the 2nd quarter that they have for comparison. That is a lot. But, their income has increased only by 200 million...which isn't nearly as much of an increase. Why? The obvious awnser is that their expenses incurred have jumped up big time.
Next, we have its Gaming and Entertainment division which includes HD-DVD related business. Out of microsoft's other 5 divisions, this wasn't the only one that had a greater loss than what was recorded for the 2nd quarter of 06, but what makes this unique is that all the other increases of losses were very miniscule. The .65 billion increase in losses is no small matter.
What does this mean?
Well, for almost 2 years now, Microsoft has lost money on the 360. Even with having the most units sold, and a highly profitable online service which is just gravy on top of the software sales, and sharing with nintendo of being the only 2 consoles to sell for greater than what they cost to make, there is something going on that isn't good. So, the problem isn't that its revenues are too low, or that they just aren't selling enough (like sony), but rather that the gaming and entertainment's divsion has just too many expenses.
I blame 2 things:
1. HD-DVD . Microsoft has no doubt thrown a lot of $$$ into the format, but the problem is that it isn't working and they are going through the business equivalent of throwing amounts of $$$ that would make donald trump drool away.
2. 360's reliability- Microsoft has had to spend a lot of money on labor for reburbishing the 360's, rent and equipment for diagnosing problems and providing a physical place to get it done, and unknown amounts of $$$ on replacing everything. Also, keep in mind that microsoft has reallly just started getting into the console business. Nintendo has had several consoles, sony has had experience making electronics for a long time. Basically this is the kind of mistake that a beginner makes. Not to say that microsoft makes a bad product, b/c its games are great, just that the reliability issue is one of those things that a company more experienced with hardware, not just the software needed to run it, would probably have been able to avoid.
Now, microsoft has gone a long way towards fixing this problem, but microsoft will still have this problem into 2008, as it will just take a while for all of the unreliable 360's to be refurbished and sent back with better heat protection.
The given its bad performance, the thing to do for all of us armchair analysts is to figure out just what impact this will have on the future.
The biggest problem that I see is that its gaming and entertainment division is just cash-poor right now. It just has not been making enough $$$$. We have already seen the effects of this, as microsoft just has not been able to compete with sony when vying for exclusive software titles. Or in other words, it hasn't been able to help with development costs, as an enticement to win exclusive titles.
So, given that the expenses of the 360 reliability problem are slowly going down, will we see a resurgence of microsoft's competitiveness in getting exclusive titles, or will we continue to see sony get most of them (disregarding the wii)???
Will microsoft even have the $$$ to drop its prices? The said that they would drop them, I just don't know about it. Personally, I think that it would be a good idea to just drop the console price to a number that they can grow into but this has been debated endlessly around here so i'm not going to expand on that.
Personally, we have seen a decrease in sales lately, and given sony's success with getting exclusives, I don't think that they will be as successful as they have been for the early part of 08 at least. Microsoft corporate is going to only give its gaming and HDDVD division so much money in their master budgets, and to just let them have as much as they want would be pretty irresponsible. So, they have to be conservative somewhat, and that is why I think that the big problems that the division is still having will affect them somewhat in the future.
What do you think about this, thesource?
