MS claims higher profitability on the 360 but it sounds like they are simply selling fewer units which is why their losses declined.  Basic law of business, selling more of something at a loss only worsens your losses.  Seeing as profits and revenues fell 20% at the same time both hardware and software sales declined seems to indicate they haven't improved their overall per unit profitability much on the 360. 

Yes to everyone pointing out that the Zune and other products are in the division, that is true.  However by any rough calculation the Xbox group dominates the division (hardware&peripheral&Live sales alone must be around $500-600 million for the quarter).  Total software is near $400 million also so that doesn't leave much room for other products.  It is possible that the smaller divisions are pushing the overall profit margin around on the margin but it is unlikely that they are having a big enough influence that they would hide the 360's return to profitability.  Until MS releases a more accurate breakdown all we can tell is that the 360 is still not doing well profit-wise (especially since the extended warranty on their shoddy 360 was one of the reasons given for the loss, something that will continue to hit 360 profits).  The only question is just how badly it is still doing.

I dont know too much about the Zune, but cant the PSP do everything the Zune can, just... cheaper... and also play games?

I think they are just trying to clear out stock of old model 360's for more efficiently manufactured models - which leads me to believe that a price drop will come in 2008 after 2007 becomes profitable for Microsoft with games like Halo 3..

I think the whole "cool" thing about the Zune was the ability to share music & videos. But there's a 3 day/play limit on those shared files. It also will not play any protected files purchased from Napster, iTunes, Rhapsody, and EVEN songs previously purchased from MSN Music service. Also, songs that you only listen to for a few seconds but then have to stop for any reason count as one play.

It's basically something to go after the "hardcore" tech people yet it's so limiting that they don't want it.

Apples and oranges. Completely different form factors.

 Except you get a lot more memory for the Zune (internal HDD) for the same price of a PSP and even the largest memory stick. That's about it, though. Microsoft really should have thought that through, and had something actually enticing about it. A larger screen than the iPod just doesn't cut it.

People here should be smart enough to understand why they only shipped 500k so I wont address that.

Now as for 360 hardware losses, it's really hard to tell, yet last 3Q they shipped 1.7m 360's and lost 402m, this time it was 500k/315m. I'm not sure what to make of that, but the fact they shipped less than 33% as many yet only narrowed their loss ~100m says to me 360 hardware is NOT the major contributor to their losses.

 What is, I dunno, but I suspect a lot of crap like marketing expense for Zune and 360, a bunch of warranty costs, stuff like that.

I've been hearing stuff the last few months such as that MS is demanding 10% component cost reductions from their 360 suppliers every quarter (which adds up very quickly, 40% in a year), and so on. So there's no doubt in my mind they're pushing 360 cost reduction aggressively. 

Plus I dont see what is so expensive about 360.  I know the die sizes and what they cost on the PC front, it shouldn't be that much. There's nothing that expensive in 360 anymore, it's chips are not state of the art by PC standards at this time. Oh well, this makes me question when they will do a price cut, and also makes me think Sony is probably losing even more on PS3 than we know. 

Allow me to put on my MS fanboy hat for a minute:

 The unfortunate thing about this is that we cannot really tell if it's a troubled quarter for the 360 in terms of profit or loss. The entertainment division is alot of things. Unless MS has a breakdown of how the 360 did, we can't really say a whole lot.

However, imo, a decrease in the losses is good, considering you have the Zune to pay for along with other things. IMO, once the 65nm process comes along for the 360 on a typical basis, the 360 should turn the corner for profitability.

Primarily, I expect the 360 to have a bonkers quarter for this holiday between great s/w sales in GTAIV and a MS-made Halo 3.

The real true downside is the fact that MS only shipped 500k units. It proved what we all believed: MS flooded the market. However, they did actually ship units this quarter, showing that atleast a bit of the systems have been sold from December, and are now in need (atleast somewhat) of restocking. MS should be able to move 750k-1m for the next 3 months, or far more if they dropped the price.

To sum it up: No real defining news for or against MS, other than the fact the H&E division, as a whole, is not a good thing for MS. However, considering that loss costs MS 1% of their total cash on hand, its not a hugely bad thing.

IMO, alot of those loses are probably R&D on 360 gadgets, Zune junk and so on. Once MS gets the Zune straight, we should see some profits soon.

 + rep if VGChartz had it.  It sounds like maybe Legend11 is economics educated.  Take a quick look at the product lifecyle matrix and you'll find microsoft executing exceptionally well:

 Cash Cow

These products have a high market share and are in the maturity stage of the product life cycle.
They are well-established products in a well-established marketplace. This means growth is
slow, but because the products are in the maturity stage they cost little to support (research
and development and initial promotion have been done) and their high market share means
they produce high amounts of revenue. The organisation can choose to reinvest this revenue in
new product development, or hand out bonuses or dividends to shareholders.

Rising Star

These products are growing quickly and have high or increasing market share. They are
products that show potential for becoming high earners for the organisation.

Problem Child

These products sell in a high growth market but have a low market share. So there is potential
for these products to do well, if the organisation can think of a strategy to turn the problem
child into a star. This may be a new promotional campaign or a redesign of the product;
whatever the strategy, there will inevitably be a cost involved. In the short-term, they may cost
the organisation money; however, if they are nurtured they may become good revenue earners
in the longer term.

Dog 

Products in well-established markets (low growth) which have a low or declining market share
(they are in the declining stages of the product life cycle. This often means that the products
don’t pay for themselves, and that the organisation has to support the products with cash from
other products, such as the cash cows. It may seem that the easiest thing to do in this
situation is to remove the product. However, this is not always the case. Often the removal of
these products can affect the sales of other products within the portfolio, so the decision on
what to do with these dogs needs to be taken very carefully.

The XBOX 360 is probably considered a problem child (or question mark as some call them).  Given the basic understanding of how corporations look to fund new ventures with existing cash cows, I'd say microsoft is fine.  All the doomsday analysts and others saying microsoft suxors and is DOOOOMED!!!111!!! need to go back to school and learn how efficient companies operate.