You think that's something?  I bought Super Street Fighter for $40 and I've spent about $30 on downloadable costumes.  Virtual goods are coming close to surpassing retail goods in that instant!

Honestly having spent the last generation in the online subscription space in massive titles. I perhaps more then most do appreciate the necessity for a subscription base that is strongly motivated towards retention. Rather then models that are almost entirely based upon micro-transaction models. The free nature of which is both incredibly unfair, and is very rarely actually a good deal. In other words the players that opt to pay monthly fees usually spend far less, and they are actually getting a fair playing field. Meanwhile the players you opt for these supposedly free services usually end up paying more money, and they are compelled to do so just to be competitive with other players.

Basically Microsoft has a vested interest in keeping Live as neutral a service as possible, and preventing the more extreme abuses that go on elsewhere. That subscription service is like a shield that honest gamers can use to their own benefit. That prevents greed from harming a good online experience. Microsoft may let developers sell some real meaningless crap over Live, but thats just the point. The stuff being sold is by far meaningless. Your being sold things that don't disrupt existing games, and throw the balance to whoever has the most cash wins.

Imagine a free or exceedingly cheap space where almost everything is for sale including I win buttons that come in over a hundred different flavors. Imagine jumping into a game of Halo 3, and running into a guy who gets to carry twenty plasma grenades. Imagine your frustration as this guy runs out tossing a flurry out in the field. Hell he doesn't even have to aim. Then you ask him after the game. You know after he handed your ass to you. How he got so many grenades, and he says well he bought a ammo booster from Bungie for only five bucks. You might get pissed, but in truth you probably go and get yourself even. You go buy the booster, and thus before long everyone has bought the booster. Then a week later you run into the same guy, and now he starts out each match with a rocket launcher, and guess what you find yourself going to buy the rocket booster pack, but its only six dollars right.

That is what has happened to many a gamer in games with little or no subscription fees. Without the threat of losing those fees developers are free to wallow in their own crap. They just sell you every thing they can, and don't feel any sense of compunction about unbalancing their own games just to force you to buy equality. Don't laugh I have seen a lot of very smart people get sucked into this black pit. One week they would tell me about this great free game, and a month later they are telling me that they have blown over sixty dollars on extra content that is basically required to keep them on top of the game, and even then they are oblivious to the fact that they will spend the same amount of money the next month.

Usually it takes them a few months to realize they are chasing a dragon, and cut these games off cold turkey. The truth is for a competitive gamer micro-transactions are like a highly addictive drug. Just like most drugs the first taste is free, and before you know whats going on your bleeding your wallet dry to feed the beast. I have seen decent gamers destroy their lives playing games they can't win. I have even had the misfortune to know a couple that quite literally went all the the way to destitution. You can't help, but feel bad what someone is telling you they have to sell their rig to pay for car repairs. They could have afforded a few months earlier, but had blown all their money on virtual items you know just to be a winner.

No I would rather give Microsoft fifty bucks a year. I would rather pay for Microsoft to safeguard my experience rather then let them just play the door greeter. You know welcome to Live our responsibility ends here. Oh and before anyone says anything about Sony. This is a company that provides retail space to gold farmers, and does a lot of the stuff I mentioned earlier on the PC. Now if you aren't seeing much of it on PSN. To that I say wait a while. Words of wisdom subscription service means quality, and if your not getting it then you at least can get your point across by refusing to pay.

That figure is f'ing amazing.  I don't understand where all the costs are for the EDD to regularly only post quarterly profits of  ~$150 million then.  I'm sure that part of this 1.2 billion is profit, plus they must be making money off the 360 hardware  and accessories sales, then there's all the game sale royalites - wtf can be costing them that much?. Is it zune , windows mobile 7, office for mac?! Do they have marketing budgets of >500 million p.a.?

Damn. Xbox Live is a Gold Mine!

No wonder they call it Xbox Gold! Haha....yes I know it wasn't that funny >.<!

@fumanchu

Marketplace on Live is a vending space provided by Microsoft to suppliers of content. Think of it like this Microsoft owns the shelf, and developers are allowed to use the shelf on contingency. Microsoft isn't usually the retail provider. They get a percentage of the sale in lieu of a rental fee. Microsoft doesn't take a risk, and the provider only pays what sales make possible. Usually Microsoft is just taking a small cut of the sale. So for the sake of an example if a developer sells a game for six dollars Microsoft may get fifty cents from the sale. Frankly I think it is simpler then even that.

Anyone who uses Microsoft points knows there isn't a direct correlation between points, and the money that is used to purchase them. One hundred points doesn't equal out to one hundred cents. Instead a hundred points equals out to one hundred and twenty five cents. I suspect that for every hundred points you spend on a product the developer recieves one hundred cents, and Microsoft just pockets the twenty five cent difference. Basically you could say that Microsoft gets a cut of twenty percent from each sale, and adding in their own products you may say in total that they generate a revenue of twenty five percent from the service. Thus a revenue of 160 million dollars annually. Then you must subtract costs since the Marketplace isn't subsidized by subscription services the space must by paid for by revenue, and I know that must seem small.

However they have to pay for employees, real estate, technology, and access. Along with the research and development to upgrade the service over time. Once all those costs are covered only then does Microsoft get into the area of profit which isn't all about reinvestment. First that money needs to get split between dividends, and to fund other product development. Just as other projects funded the development of the Marketplace. Which brings up the really important part. I think it is apparent that it isn't existing products that drive down profit from the EDD. I know everyone wants to blame the Zune, but lets be real a existing product unless it is being sold at a significant loss isn't going to consume massive amounts of profit. There is little doubt for me at least that this money is getting funneled into new product development at a staggering pace.

That said it doesn't even need to be technology that will be readily available this year, next year, or the year after that. I have mentioned this before, but nobody ever notices. Hell nobody ever responds, because I don't think anyone really grasps what I am saying. Microsoft is angling to be the premiere software supplier for the robotics market. They are even developing the development kits for autonomous robotics, and and working on universal operating systems. They are trying to corner a market that won't even be profitable for twenty years. Up until now robotic software has almost always been in house. Microsoft is planting a seed of dependency for future robotics, and mark my words you will hear the same cries of foul in twenty years when Microsoft has a near monopoly on that market.

The point being is that the figures are misleading, and the EDD looks like Microsofts version of the Skunk Works. Where all the market penetration both short and long term is probably likely to be found. Frankly the fact that it is actually generating real profit is frankly goddamned scary.

@ Dodece

I can understand that the virtual goods revenue equates to a fractional proportion through third-party services and content.  I guess I just thought that with all the other subscription revenue and avatar clothing, that more of this amount would be reflected in their net profits, which surely doesn't have costs that directly negate this success.   

I'm not sure that I see the connection between the robotics software and the EDD division either? Surely they wouldn't be funneling money out of the least lucrative section of the business. Especially amidst talks of investors speaking out to return to higher margin businesses.

Anyway, I'm not going to pretend like I know anything about business or marketing - I just see big numbers thrown around from time to time and then read stories about how investors and journalists are crying for Microsoft to cease and desist the EDD, so I'd like to know which product/research is undoing all this success.

Your question is in fact the answer. The EDD is seemingly designed to be a conglomeration of variables, and that makes the division entirely unpredictable. Without the ability to predict likely outcomes it makes it more difficult for the competition to make proactive moves in anticipation. Think of it like this in Astronomy there is a concept called the Standard Candle. Scientists know certain objects have a set magnitude at which they shine. Knowing this they can measure the dimming, and are thus able to plot the objects location. Along with any objects that are nearby. Basically its what most of us would call a frame of reference. The EDD has no standard candle while if say the console business was lumped in with the Windows business the profit would be easily deduced. Just minus out the base line which is Windows a product whos performance is well understood.

Honestly I am not sure whether it was Microsofts intention or not to make this Chimera. That said it certainly frustrates most everyone who tries to unravel the variables at play. Making others over estimate or under estimate. Hell you can hide whole new product lines unseen in that mess. Never having to explain to anyone where money is going. The point I was making with the robotics was that Microsoft doesn't think like other companies. Most companies respond to change, but few ever plan to be the architect decades in advance. That is kind of like being the guy who was developing the jet engine before the Wright Brothers proved powered flight was possible. Basically it isn't linear thinking, and that is really something quite unique.