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Microsoft Game Division Triples Profits In Strong Quarter
by Chris Remo [PC, Console/PC]
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January 28, 2010
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Tech giant Microsoft saw its second fiscal quarter profits rise 60 percent year over year in the three months rounding out 2009, outpacing a 14 percent revenue gain.
Along the way, its gaming group, Entertainment and Devices Division, cut costs on Xbox 360 hardware and marketing to post strong profits -- even as revenue declined.
Overall for the firm, "exceptional demand" for Windows 7 led the company overall to bring its profits to $6.7 billion in the quarter that ended December 31, from $4.2 billion the previous year. Revenue was up to $19.0 billion from $16.7 billion.
So far, Microsoft has sold some 60 million copies of Windows 7, calling the software the fastest-selling operating system in history.
Entertainment and Devices Division, a larger division that includes the Xbox 360, Games for Windows, and Zune, managed to triple its profits even as revenue fell.
Decreased sales of Xbox 360 consoles and games were the main reason for the falling revenue, with quarterly console unit sales dropping to 5.2 million from 6 million. The firm noted that "decreased revenue from Xbox 360 video games was due primarily to the release of two significant games in the second quarter of the prior year" -- likely to be Gears Of War 2 and Fable II.
But Microsoft's EDD division as a whole more than made up for that shortfall with lowered R&D and marketing expenditures, and other cost reductions.
Specifically, Microsoft said its cost of revenue decreased 23 percent to $478 million, thanks to lower hardware costs for Xbox 360. However, that was partially counterbalanced by the company paying out greater amounts in Xbox Live royalties. Marketing spend went down by $75 million, and R&D expenses went down by $50 million.
Overall EDD revenue fell 11 percent from $3.3 billion to $2.9 billion, but profits rose 188 percent from $130 million to $375 million.
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"Microsoft made a larger profit because they canned a lot of people. Celebration! "
Nonsense!
The XBOX 360's bigger profits came from lower Xbox 360 console manufacturing costs (Moore's Law), decreased marketing costs for the Xbox 360 platform, and much higher revenues from XBOX Live, which now has 23 million members.
E&D(XBOX( 360 profits
$375 Million profit in the last 3 months compared to $130 Million same Quarter last year.
$686 million profit in last 6 months up 100% over last year.
60 milion Windows 7 units sold in just 3 months is insane. Microsoft made more profits(double) in just 3 months ($6.7 Billion) than Nintendo made in the entire last 9 months($3.3 Billion).
They laid off 5000 people last year, so of course profits are going to be up.
Revenue is different from PROFITS.
Profits is revenue minus expenditure. The EDD(XBOX Business), registered an operating profit of $375 million in the December 2009 quarter, as compared to only $130 million in profits in the same quarter in 2008. That's an increase in profits for the XBOX business of $245 million in the December 2009 quarter.
Get it?
In addition, MSFT laid off 5,000 from the WHOLE of Microsoft. The EED division is only a tiny part of Microsoft as a whole.
You'd better read the entire MSFT eanrings report right here:
http://www.microsoft.com/msft/earnings/fy10/earn_rel_q2_10.mspx
"60 milion Windows 7 units sold in just 3 months is insane. Microsoft made more profits(double) in just 3 months ($6.7 Billion) than Nintendo made in the entire last 9 months($3.3 Billion). "
Useless comparsion, it only would make sense to compare Microsoft EED profits and Nintendo profits, cause this is the division that is actually competing with Nintendo.
That doesn't make sense. That would only work if all costs were variable costs and they're not. There are fixed costs that will be incurred no matter whether more or less hardware is sold. The more systems sold = the more profit because there's more revenue to offset the fixed costs. Variable costs are a fraction of the system's cost.
What you suggest would be right, if the 360 is sold with profit, if it is still sold with loss, it would be possible, that selling fewer 360s is reducing the hardware loss and increasing the overall profits, cause some of the fixed costs only appear, if you acutally sell an Xbox360, not if you manufacture it.
I didn't read anything about the profit/loss per console for the 360 in the last years, don't know, if they managed to get profit from the console sales.
The fact that they made less revenue and still made a profit means that they had to decrease their expenditures. Company-wide layoffs are a method of quickly decreasing expenses in corporate business so that the company can quickly show a profit.
Why do you think so many companies purged their workforce last year so that we now have a 10 percent unemployment rate in the country? You think they did it just to be mean to people? No, they wanted to quickly show profits so they can recover their stock price.
In any case, the profits in the EDD division are not from product success as X-box revenues were down. It can mostly be attributed to layoffs, project cancellations, reduced R&D, reduced marketing, and other cost-cutting measures.
The only way that it wouldn't work is if variable costs per system is greater than the selling price per unit. That's very probably not the case because the 360 is made up of cheap components. Variable costs per unit include direct materials, which we know it's not more than the price MS is charging for it.
So it seems extremely unlikely to believe that costs per unit are greater than the price per unit. Fixed costs are always present and are part of the cost of the product going into cost of goods sold, they include cost of overhead, cost of space, cost of manufacturing equipment, etc.. The way to offset this, is too sell more units, this is all of course withing a certain magnitude.
Furthermore if variable costs were greater than the set price, there will still be a way to reduce losses by increasing sales depending on the Fx/Vx ratio.
"cause some of the fixed costs only appear, if you acutally sell an Xbox360, not if you manufacture it."
You have to manufacture the system before you can sell it. Those costs tied to each system are the variable costs, not the fixed costs. Fixed costs will be incurred regardless of the sales and are usually sunk costs.
You are completely right about the fixed costs here.
We don't know for what price MS is selling an XBox360. Take the Arcade model for instance. Amazon sells it for 179.99 US$ inluding shipping.
Amazon will see a profit even if the selling it below the list price, which is 199.99 US$. So I think it is safe to say, Amazon pays less then 179.99 US$ for every XBox360 Arcade. Lets take as an complete out of the blue assumption, that Amazon pays 150 US$ for each Box.
I don't really see MS using cheap components. and with an end price of around 150 US$ MS has to built the unit and ship it to the retailer. I think, even with optimated processes, it will be difficult to manufacutre without loss, cause in 2005, they were making a loss on each unit, and they sold the arcade model for around 450 US$, if I recall correct.
In 2006, Nintendo claimed, they were making a small profit from every Wii and I think we agree, a Wii should be cheaper in production, then an XBox360 Arcade . Maybe MS has managed to cut down production and shipping costs that much. But on the other hand, the fact, that they sold less consoles and had an reduced revenue by higher profits CAN be a sign for still selling at loss.