From a business perspective the quickest and easiest fix would have been to not produce the XBox 360; I would have saved the company over $3 Billion in losses by now.

If that was unacceptable I think the other appropriate thing to do was ask the question "Why are we losing so much money on hardware when it has been demonstrated time and time again that hardware isn't what sells systems?" ...

It would have made far more sense for Microsoft to take $2 Billion, create 100 development teams across North America and Europe which would each be funded to produce a $20 Million games for release in the initial 18 months; those that turn a profit will then be able to continue developing games while those that lose money would have their (quality) resources shifted to another development team. By the end of the generation Microsoft would have (probably) gained 100 decent quality exclusive games, 25 reuseable IPs, and 20 highly talented development teams. (If they were lucky they would have recovered the initial $2 Billion from profits off of these games)

Consider that Microsoft has lost $300 for every XBox 360 they have sold, for that money they could have given each current XBox 360 owner  a Wii with Wii Sports, Wii Play, 2 Wiimotes and 2 Nunchucks.

 This is all true, however if i were an investor or stockholder or even business owner i would say something along the line sof "Okay, where are we making our money, where are we losing this money....holy shit we are losing a billion dollars in this single division. Perhaps if we refined our focus and resources to play to our strengths we could turn less loss and possibly a greater profit in other areas"

Thats just another way to look at it. MSFT isnt hurting, and i dont presume that was anyones initial point, but if this division has YET to make this company money and still cant after its only chance (IMO) Halo 3 then perhaps it may be time to pull the plug, but then i can see your argument, throwing money into a well to keep sony at bay witht he PS3 may be worth it to MSFT.....who knows.

I think 360 will make a slight profit this fiscal year. It's not just Halo 3: a lot of other games are selling well too, and I think turning a profit is starting to become more important to the Xbox division since Sony is doing so poorly. Previously Microsoft could have tons of losses and excuse it as "we entered the market partially for defensive reasons", but there's not much to defend against anymore.

You are quite right. And as long as Microsoft keeps making huge amounts of money investors won't care if some gambles haven't paid off yet. I was just saying that is ridiculous to saying things like Microsoft doesn't care aboput losing 7 billion dollars. They are not some altruistic gods of gaming showering us with goodness. They are a company that thinks it can make hundreds of billions of dollars by getting into your living room and providing you with entertainment. They are completely behind the Xbox 360. But I have to say that they are smart and when they see andadvantage to moving on to the Xbox 720 or something else they will.

As per dschumm just said. The Xbox and Zune are strategic products designed to create direct competition to products that could hurt their flagship Windows OS. Sony originally wanted their new Playstation, at the time being the Playstation 2, to be much more grandiose then it ended up being. They wanted it to be more than just a game console but also a PC for your living room, this gave Redmond an idea. Instead of letting Sony become the only PC in your living room ,and since they weren't going to use a Windows OS, they created the XBox as well as license Windows CE for the Dreamcast.

In the end, most investors didn't expect these products to be profitable. They are viewed instead as preemptive strikes and therefore worth the investment.

As for profitability, this could be the quarter:

The first quarter of Microsoft's fiscal year ends just five days after Halo 3's launch, and Friar and Grieb said the game will contribute about $170 million in revenue to the company's entertainment and devices division, which would push it into "slight profitability" for the quarter. If that happens, it would be the first profitable quarter for Microsoft's gaming segment since it launched the original Xbox. (source)

This industry just keeps on growing and is only a matter of time before MS makes back ALL their money and more. It is not easy to break into an industry dominated by two corporations already establised like Nintendo and SONY. Currently the 360 sells the most games and accesories along with xbox live so money is being made. If the launch of Halo 3 puts them in the black then they will stay in the black for good unless some crazy shit happens. Again this industry just keeps on growing and they are in great position to make tons of money of it.

Side note, but sort of Relevant... Microsoft is looking at this from a number of angles... but the ultimate goal is ownership of entertainment of all forms in the living room... games, movies, tv shows, etc... The investment is more than just to make money from videogames.

That said, I thought MS was really in trouble with the 360, but it appears their moves have been carefully calculated. The only real "snafu" that is obviously a problem is the hardware failures... Outside of that, things are looking pretty positive for the division.

If MS has the kind of 4th Q they are hoping for this holiday, they will have a substantial lead over the PS3 for probably the entire of 2008 and much of 2009 if not longer. Assuming the PS3 does begin to catch up by then, MS would be in a position to release the next generation Xbox with whatever the winning format HD storage is along with all sorts of other interesting stuff picked up along the way this generation... A 2010 next gen box doesn't seem out of the question and it leaves the PS3 in an interesting position...

I don't think MS will pull out any time soon even if it continues to bleed money... As far as being profitable, I do think they will make some money this fiscal year, but they have a deep, deep hole to climb out of...

You're right -- they were profitable for one other quarter.

The reason they released an Xbox in the first place is to protect themselves via diversification. Their only profitable areas right now are Office and Windows, and despite seeming immune to competition, they are becoming more and more vulnerable. If a governing body can push a document standard that MS has to abide by, and MS can't 'embrace and extend' in an effort to render competing products incompatible as they typically do, then a variety of companies would release office suites with full compatibility with each other and Office would have to actually compete with them.

This would include the free Openoffice suite, which has all of the functionality that most people need. If Microsoft didn't have a dominance with MS Office, most business computers could be switched to Linux which would potentially save tons of money in the long term.

So Microsoft knows that it has exactly two profitable products, and their vulnerability is bound. It wants to diversify, and it wants to have products in everyone's house. Ultimately, it wasn't media centers pushing Windows compatibility into every home, game consoles, etc. Microsoft even wants to be a content company and sell content, deliver content, etc. Ultimately, MS is convincing its investors that it can diversify and will generate a profit. However, if the investors are convinced that MS would be better off investing somewhere else outside of the games market, they could become impatient with MS, despite MS' huge profits (since no one wants to throw money away, even if they're rich).

Because MS is a public company, it is critical for them to show their investors they *can* have a profitable year with the Xbox division. If you say, "MS is hugely profitable so these losses mean little" then you don't know what you're talking about.

Depending on how sales and their hardware issues work out, I could see the PS3 being replaced in its fifth year but the Xbox 360 lasting six or seven years. If the 360 is in the midst of generating profitable years and has a huge install base after its 5th year on the market, I can't see MS rushing to replace it even if that means Sony gets the PS4 out before the Xbox 1080. Part of the reason I believe this may be the case is because the cost of the PS3 is so high that Sony may be able to literally release something many times faster for lower cost in 5 years.

And if that is the case, would MS leave the 360 on the market behind its successor in the way they did not with the Xbox.  

This idea depends entirely on, of course, how sales do for both the 360 and PS3.  MS does have a pretty strong lead right now, but it's still early.

Let me put this simply, something that people have ignored:

Gaming wise, the Xbox has helped by including features like Harddrives instead of memory cards, enhanced online play, and a few good games series. Plus consoles that can be used to bludgeon people to death. Well, not the 360. That'll break faster than a Kia in a Destruction Derby.

Financially for Microsoft, they have lost 7 billion dollars over 7 years. For this lovely entire experiment to be profitable, they need to earn about 8 billion dollars over the next 2 years. It is at this point that financial analysts will see a return on investment.

Nintendo, the oldest though not always wisest current surviving console maker, is making about 1.5 billion in profit this year. Microsoft would require to more than double Nintendo's profitability for 2 straight years to make their project a success. This would be year 4 in the Xbox 360 lifetime, which may mean they are already thinking of the next console, and odds of their profit turning around to that degree seem a bit... low. Then the next console with launch costs, even delayed a year or two, and another blip.

As a gamer, I'm quite glad for the Xbox, as it has left many positives. As a (Very amatuer, unless someone wants to pay me, then I'm pro. leet.) business analyst, I cringe and wonder just how much they value that spot in the family room. Apparently enough to sink billions of dollars with no shown return within 7 years, or concievable return within 15.