| Lingyis said: why hasn't it occurred to anyone that MS is in the game business to diversify? and that it was bill gate's vision to combine everything onto a home entertainment hub? it seems like our memories just don't go back that far, 7, 8 years, or whatever it is. MS needs XBox and future incarnations more than Sony does. MS needs the diversification. Stopping Sony entering the PC business? Are you suggesting a pre-emptive strike? At a cost of like $5 billion against 1 company? That's preposterous. They're doing this because it just happens that it's in line with their strategy. There's one thing shareholders and analysts have in common, and that's short-term gains. The things with MS is that insiders probably control 30, 40% of the company, so there's unlikely to be a shareholder revolt. That is why they can afford to keep this going as part of the management's "vision". $1 billions a year only like 10% of Microsoft's profits, so in the name of diversification, it's utterly affordable. Again, Microsoft NEEDS diversification. And quite frankly, I believe it will eventually pay off; not necessarily as a successful gaming console, but something that resembles an entertainment hub. Of course, this is more Gate's than Ballmer's vision. We will see what direction MS management decides to take the XBox. as a gaming console, the brand has been an unprecendented failure, but MS can use the expertise and technology gained from this "investment" to turn it into something else that could easily be more successful. Sony acquired numerous businesses during its heyday. Microsoft has done comparatively little to diversify. XBox is essentially their only foray outside software.
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The simple answer is that MS didn't think it was going to turn into a $5 billion pre-emptive strike. They thought originally they would be able to turn a profit by the 3rd or 4th year and that the next Xbox would be profitable within a year. Overall they expected it to not actually cost them any money long term. Then poor sales necessitated early price cuts, then they discovered their contract with Nvidia was poorly worded and was costing them somewhere between $10 and $20 per unit, then non-Halo 1st party games continued to flop, then the bill for launching a super machine 1 year early came due.... In short it simply bled more money than MS imagined. That's not to say that MS didn't plan to stick around and make money in the business, just that it could have easily been a secondary concern.
The shareholders would probably have a tough time getting a majority vote to force MS out of video games, but that's not the only way a shareholder revolt can occur. If the major shareholders begin to loudly grumble and raise hell at mettings MS will have to listen eventually, if only to stop the negative press. Major shareholders could also threaten to dump some or all of their shares and buy Apple is another tactic that has been used before. So just because they can't muster a majority doesn't mean they are powerless. I know shareholders were demanding MS diversify back in the 90's. At the time MS was resting on its Windows/Office laurels and doing nothing. However, I don't think losing $5.4 billion over 5 years ($1.4 billion in 2006 alone) is what they had in mind.
Admittedly that $5.4 billion is out of the $100 billion MS has had in profit and cash these last 5 years which isn't too much. That being said had MS just invested the $26 billion they spent on Xbox in the stock markets it would have earned them over $32 billion instead of the $21 billion they got. That's how business' gauge business ventures, not just on profits but on whether they made more than they would have from average investements at around 8% a year. Seeing as the 360 is still showing no signs of profitability (per unit profitability is good but I doubt they are close to paying off initial costs and R&D yet and unit profits will disappear if they have to cut the price soon), I think it is fast getting to the point where MS will never be able to earn enough in video games to be overall profitable, assuming they become profitable at some point. MS has a lot of money and the shareholders want it to diversify but that doesn't mean MS couldn't be doing something better with its money or that shareholders are happy with how it is spending the money to diversify.
