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Microsoft Game Division Triples Profits In Strong Quarter
Microsoft Game Division Triples Profits In Strong Quarter
January 28, 2010 | By Chris Remo

January 28, 2010 | By Chris Remo
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More: Console/PC



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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Comments


John Giordano
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Microsoft made a larger profit because they canned a lot of people. Celebration!

Kevin Jones
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@ John Giordano :



"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).

John Giordano
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Kevin, It says right in the article that X-box revenue is actually down and that "Microsoft's EDD division as a whole more than made up for that shortfall with lowered R&D and marketing expenditures"



They laid off 5000 people last year, so of course profits are going to be up.

Kevin Jones
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@ John Giordano



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

Mark Harris
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It's a business, they are there to make money. Sometimes layoffs are part of re-organizing a company to increase efficiency and focus on core products that adds agility and a possibility for future growth-oriented investments. Other times layoffs are a short term cost cutting fix that cripples a company's ability to adequately staff projects and kills employee motivation. We'll see where the dust settles on these layoffs a few years down the road.

T K
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The main reason profits were up on down revenue is because MSFT is still losing money on Xbox hardware. The layoffs are a much smaller driver on the profitability. Read through the financial release more closely they site the reduction in "cost of good" which is the cost of the Xbox hardware primarily. By selling fewer Xboxes, their margins are actually better. Ironically the fewer they sell, the better the profits. However, they ultimately need to ship more boxes to ultimately drives software royalties. In addition, the reason revenue is declining is because of the price cuts on the Xbox. Even if they ship a comparable number of boxes, if prices get cut by 10-20%, this comes straight off of the revenue line.

Camilo R
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TK"By selling fewer Xboxes, their margins are actually better."



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.

John Giordano
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Kevin,



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.

Camilo R
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Christian Keichel"What you suggest would be right, if the 360 is sold with profit"



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.


none
 
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