From: mike 


http://www.forbes.com/home/personalfinance/2007/04/18/xbox-microsoft-nintendo-p
f-ii-in_re_0418soapbox_inl.html

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The success (or lack thereof) of Xbox 360 has been a hotly debated topic
across both the blogosphere and mainstream media, with an amalgam of sober
and utterly confused views depending upon one's vantage point: analyst,
investor or gamer.

After taking a step back and looking at some objective numbers (taken from
Microsoft's own financial statements and comparative console sales figures
extracted from VGChartz.com and Wikipedia.org), I have concluded that
gaming has been a disastrous endeavor for Microsoft, particularly from an
investment perspective.

The seeds of this failure are evident from its sales performance in Japan,
particularly when comparing its 18-week sales figures (which is about how
long the Wii, made by Nintendo and PS3, made by Sony have been out)
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This early failure in the Japanese market has a compounding negative effect
on worldwide console sales, as game developers are less willing to invest
in high-risk projects for console platforms that are shaky
out-of-the-gates, which makes it less attractive for gamers to buy these
consoles, and so on.

Let's first consider Microsoft's Home & Entertainment Division
("H&E"), which includes Xbox 360, Xbox, Xbox Live, Consumer
Software and Hardware Products, and IPTV. Making money, i.e., the creation
of long-term shareholder value, has got to be the ultimate driver of
Microsoft's gaming (and H&E) strategy, right? Well, after five years
and over $21 billion invested, all they've got to show for it is $5.4
billion of cumulative operating losses, and Xbox 360 doesn't appear to be
the silver bullet to turn things around.

I think it is also interesting to note that Microsoft's actual disclosure
shows only revenues and operating losses--I backed into and show expenses
below for explanatory purposes. Why might it be that Microsoft has strayed
from the classic "revenues minus expenses equals profits
(losses)" disclosure? Perhaps because it doesn't want investors to
focus on the fact that more than $21 billion has been invested in a
business that has performed so poorly, with unclear prospects for
improvement.

Sometimes these cold, stark facts seem to get lost in the shuffle. Xbox 360
(a meaningful part of H&E) might be a fine product, but if so, why is
it so financially disastrous to its maker? I understand the concept of
selling a console at a loss in order to lay the foundation for recoupment
of original investment, plus operating losses, plus attractive financial
return through gaming, but what is it going to take to turn things around?
Nothing short of a tectonic transformation in perception of Xbox 360
relative to its competitors.

Sure, the Xbox 360 can be righteous and cool with hard-core gamers, but
this is not a sufficiently large user base to recoup the magnitude of
investment Microsoft has made in its gaming platform. So if this is
Microsoft’s strategy, it’s got a problem. And if the strategy is really
more mass-market, then it’s got some serious repositioning to do relative
to the Wii, which is both cheaper and more accessible to Ma and Pa and
Timmy and Tammy gamer. In short, I am at a loss. Correct that: Microsoft is
at a loss. $5.4 billion and counting.

As far as Japan’s role here, consider that over 19 million PS1s and 20
million PS2s were sold in Japan alone, close to the total worldwide sales
figures for the original Xbox console. Success in the Japanese market is a
key part of getting the game developers to buy into a platform, for which
they invest substantial sums and create titles. Plus, people want to buy
consoles with better game libraries. Success in Japan is frequently a
precursor to success globally, which makes it particularly attractive for
game developers who are looking to amortize their development costs over as
large an installed base as possible.

If, for instance, the Wii is hot, you get shops like EA turning themselves
into pretzels to build their title libraries for the Wii console. And if
your particular console isn't hot? Well, let's just say that developers
aren't going to be laying out big bucks to invest in the platform.

It is instructive to look at where the last major console releases were 18
weeks after launch in Japan. Basically, if you did well in Japan during
this time frame, you had a chance to have a blow-out product. If you
didn't, well, you didn't. The Xbox did better than the Xbox 360, and even
the PS3 has done better than the Xbox 360. But success in Japan is not a
guarantee of a runaway success, as the GameCube proved. Without question,
Japan is an important and critical market for building a globally
successful gaming platform, and an early read of the tea leaves does not
bode well for the Xbox 360.

And this is clearly not lost on Ballmer's Boys in Redmond. Microsoft's
vision of the gaming console as the window into the living room is a big,
big bet, and one that clearly hasn't paid off thus far. The emphasis on
HDTV as being a key factor driving broad-based console sales kind of misses
the point. Is the Wii successful because of its zippy graphics and
technological superiority? No. It is successful because it is fun. And
because it appeals to a broad audience. And because it is comparatively
cheap. The Microsoft strategy sounds more like a niche strategy for
hard-core gamers, in which case it's investment in a console strategy
should be smaller and more targeted.

Microsoft needs to take a long, hard look at its gaming strategy--and, in
fact, its entire H&E strategy. At what point, regardless of its
virtually endless financial resources, does it say "enough is
enough"? Would we have been better served by returning the extra cash
to shareholders rather than investing it in a franchise that seems to have
questionable prospects for turning around? These are the kinds of questions
Microsoft management should be asking. And hopefully, for shareholders'
sakes, they are.
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Looks like Wall Street agrees.
http://finance.yahoo.com/q/bc?s=MSFT&t=5y&l=off&z=l&q=l&c=aapl,^IXIC


 /m

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