Gaming A Disaster For Microsoft

When it all comes down to the business end...

Posted by Staff
Gaming A Disaster For Microsoft
Maybe the meme that became fact, that Microsoft's Xbox is merely a trojan horse to get into everybody's front room and control their lives hasn't been properly communicated to a chap called Roger Ehrenberg. According to his biog on the bottom of a piece on Microsoft for respected business mag, Forbes magazine, Roger runs Monitor110, an Internet data service for institutional investors - so he should know his stuff when it comes to investment predictions.

So, when Ehrenberg - having used, "objective numbers taken from Microsoft's own financial statements and comparative console sales figures extracted from VGChartz.com and Wikipedia.org", concludes that:

"...gaming has been a disastrous endeavour for Microsoft, particularly from an investment perspective.

"...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."


it's probably a good idea to take some notice. Okay, we'll dismiss the Wikipedia comment (and hope to the gods that our investment advisor - Trusty Dave - doesn't use the same source for the SPOnG pension plan). Roger bases his decision that games - rather than being a way in for Microsoft to homes, content providers and a demographic that will age into wealth - are disastrous for the company on the fact that:

"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) relative to those of the most successful console releases."


According to Roger, this means that, "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."

Mmmm, 'early' failure in Japan means that developers won't want to work with Microsoft...

...moving on to the Home and Entertainment Division rather than simply the Xbox family - that's also Xbox Live, Consumer Software and Hardware Products, and IPTV. Here, without Microsoft's vision (or myopia?) of making its productS central to every home, are the facts according to Ehrenberg:

"...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."


Roger continues with a set of assumptions based on being successful in Japan. These are basically that:

1) There are more than 19 million PS1s and 20 million PS2s Japan. This is close to the total worldwide sales figures for the original Xbox.

2) Japan is key to getting game developers to support a platform.

3) People want to buy consoles with better game libraries - so we need developers.

4) "Success in Japan is frequently a precursor to success globally".

What of the competition? Roger points out that the Wii is successful not because of its "zippy graphics and technological superiority" but because it is fun, and appeals to a broad audience. He also mentions that it is "comparatively cheap". We're not sure about putting 'zippy graphics' or 'technological superiority' in the same sentence as the 'Wii' - but innovative, fun, broad-based and cheap, all of those make great sense.

So, why is Microsoft doomed to failure? "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."

Before you start ranting on about how investment bankers know little or nothing about gaming or about what it means to gamers; or about the fact the Xbox 360 is that famed techno-trojan horse sent to destroy freedom; or that the 360 is the only real choice of console because it has support from consumers, developers and - of course from Microsoft - hold one thought: Forbes magazine is read by the kind of people who buy large amounts of stock in Microsoft.

The point here is not that one analyst might be putting 2+2 together and coming up with 22, but that Forbes is taking the time to print the analysis in the first place.

What do you think to Microsoft's gaming strategy of $21-billion apparently in to generate a $5.4-billion loss? Tell us in the Forum below.




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Comments

Showing the 20 most recent comments. Read all 42.
rob.ocelot 21 Apr 2007 21:40
23/42
Forbes has failed to realize that Microsoft has continually stated they projected no profits from the Xbox end of things until at least 2009. Forbes caters to the small-medium time investors looking to jump on already rolling investment bandwagons (ie the next to late-comers who can't think two years ahead in investments, much less five).

Let's not even count the fact that in five years physical media for games and other entertainment is likely to disappear and be replaced with on-demand broadband downloads. Who, right that this moment has the most mature online service for delivering such content? Sony and Nintendo squandered their opportunities last generation to get a decent online presence while Microsoft laid the groundwork with Xbox Live. Both N&S are starting at square one this time around which is a significant disadvantage. I hope the Wii will fare well when the introduce online (no gamer in their right mind will want to fart around typing in 16 digit numbers to hook up online with only people they know).

Essentially that article is regurgitating what Microsoft's already stated long term strategy is to Forbes' non-gamer readership with a negative spin on it.
Sageforsaken 21 Apr 2007 21:51
24/42
All consols show losses the first year or two of sales, thats because they are selling the hardware cheaper then they are making it for. The money comes from software sales. While right now the PS3 And Wii are posting better numbers thats party because they just lanched , alot of the big games are coming to 360 this summer and fall and they will be on par or better then PS3 in graphics. Also because the devleopers have already had over a year with the 360 to learn all the tricks they will probly be able to make games for the platform easier and cheap than for the PS3. I agree that Japan is important, but expecting the 360 to beat the Japan based companies on their home turf so soon is silly. Games like Blue Dragon Prove that developers are willing to give the 360 a chance even if 360 hasn't "Won" the Japanese over. That Said 360 has something PS3 doesn't, that is the ability to have games that are PC only transfered cheap and easy to their home console, which is good because i don't have 3000 dollars to drop in a gaming rig.
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DoctorDee 21 Apr 2007 23:14
25/42
Sageforsaken wrote:
but expecting the 360 to beat the Japan based companies on their home turf so soon is silly.

Why is it? Sega and Nintendo beat Atari and Coleco on their home turf in the first few years after launch.

And 360 may have only been around for a couple of years, but Xbox put in three years of trying to crack Japan before it...

Steve 21 Apr 2007 23:49
26/42
realvictory wrote:
adamamosa wrote:
While this may appear to be bad publicity for microsoft and bad news for its investors, Its great news for gamers. If it is part of microsofts grand scheme to invade our living rooms, then they will keep throwing money into the machine. Not only do you get a very nifty piece of tech at a heavily subsidised price but also they will pay the money to secure key the game releases. I think the PS3's technical superiority will eventually show on the cross-platform games, the 360 has, so far, the better exclusive titles lined up.


That is what makes me like the way Microsoft do things, too, with the XBox. They're willing to lose a lot, for my benefit. I don't like Microsoft in general, but from the games point of view, it's amazing.


Microsoft's strategy may benefit gamers in the short-term with artificially cheap hardware, but if Microsoft were to succeed in forcing Sony and Nintendo out of the gaming business, Microsoft would do the same thing they have done in other endeavors: jack up prices and stop innovating. Case in point: Microsoft has no real competition again Microsoft Office, so they can charge you as much as they want for it. Internet Explorer is another example (although it is free): as soon as MS killed IE's competition (Netscape), MS stopped introducing significant improvements to IE. It was only when Firefox started taking away IE's share of the browser market that Microsoft got off of its ass and came out with the improvements in IE 7.

So you would see the same thing in gaming: once MS had dominance and no real competition, they would jack up the price of the Xbox and stop innovating. If Sony and Nintendo were out of the video game business, you would have no choice but to buy an expensive Xbox if you wanted to to get a video game console.
realvictory 22 Apr 2007 01:32
27/42
Joakim Cöster wrote:
I don't hate Microsoft although I dislike dominance.

The 360 is a fine piece of equipment as is the PS3. The price/equipment will eventually level out. The Wii is interesting because it concentrated on changing the gaming experience at a reasonable price, the guys behind Wii had the guts to go against the main stream and do their stuff instead of chasing the others. A good lesson to learn also for entrepeneurs.

I do not agree with the article. I think the strategic move that Microsoft made is still going to pay off (how do you calculate the worth of the advertisements and the articles that the 360 generates? Just to mention one thing.) I think the article is over simplifying things greatly.


I think dominance is almost inevitable - it's a lot more likely than three competing companies to be at equal levels. It's basically "fashion," which you can't really get rid of, unfortunately.

It's lucky that Nintendo (or any company) did something "different" and was successful. As to Microsoft, I don't think they, or anyone, can successfully predict for certain what is going to happen in the next several years. Yes, there are many good aspects to Microsoft's (or any company's) game strategy, but don't blindly follow it. The sooner people start getting "on their side," saying things like "[Particular feature] is unbeatable" or "essential," and basically being over-loyal (the same with any company, though), the sooner they will stop having to put effort in - and the more mainstream, and boring, basically, games will get. Halo 3, just like Mario, just like FIFA, etc. are good in their own right, but there needs to be continuous innovation (or challenge) to keep games exciting. Don't be fooled into becoming loyal - all anybody's really after is your money, ultimately.
Joe 22 Apr 2007 04:34
28/42
Microsoft only went into console gaming because the average gamer can't run a computer without viruses, spyware, adware, trial-ware. The average gamer doesn't know how to run a windows computer anymore. But with the amount of emulators and games available for little or no money why play a 360 game when you can play a good ol' game of Mule on the Commodore 64 emulators or all the good old games like Stunt Car Racer for the C64 and Amiga.

Thumbs down to 360, boring.
smoothn00dle 22 Apr 2007 05:54
29/42
Xbox360's fate is depending on Sony. The best of Xbox360 is limited by third party developers, hardware limitation and Hollywood studio. The Sony factor is the key to Xbox360's survival. PS2 still outsold all home console hardware month by month. That is around 30 million profit per month and not include game royalties. Therefore PS3 will be sidelined till the end of this year. I believe Sony will shift PS2 development to PSP next year. PS3 will bring out the big guns like @HOME, TripleA games and blue-Ray movies at this Christmas. It will be difficult for Xbox360 to achieve the same growth rate on 2006.
ser 22 Apr 2007 09:56
30/42
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ster 22 Apr 2007 09:57
31/42
ser wrote:
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Soulxlight 22 Apr 2007 10:02
32/42
I sure hope X-Box doesn't force Sony out of the home video game market, or we'd have another "Windows" on our hands. They would eventually corner Nintendo, and control all aspects of gaming. Controlling whatever you play, and at what price you play it. Competition is the best thing that could hold on the video game industry at the moment.
Xavia 22 Apr 2007 15:37
33/42
Personally I use a PC to game, and then I am playing 10 year old games... But the Wii will be in my living room, when I can find one in a local store...

I will not buy a 360 as its a waste of money, my pc is faster, more portable and has better games...
cam 22 Apr 2007 16:56
34/42
how about don't use wikipedia as a creditable source when deal with numbers or making accusations.
Jeff 22 Apr 2007 17:04
35/42
Hasn't it always been this way? Microsoft's history shows a mentality of buying its way into a market, and using its financial prowess to force its way up from there. Will the 360 pick up more market share? Probably not, M$ had their chance by being the first one out with a next-gen console months ahead of their competition. The obvious fact that they're not dominating the console market shows how well the Xbox performs against the Wii and Ps3. Sooner or later someone in Richmond is going to decide they've dumped enough truckloads of money into their losing venture, and the Xbox will be 'retired'. Me myself, I'm going to pick up a Wii.
pawn 22 Apr 2007 17:08
36/42
this entire article is a load of s**t... if anyone has ever gamed on the 360 you will know that the graphics/gameplay/and overall quality of the products that microsoft is putting out on this console are far superior to all of its predicesors. as far as the "entertainment value" of the Wii goes; it rocks... its a great time when you have 10 people over to create mii's and act like idiots!!! but as far as the online gaming (which is non-existent on the wii) and the graphics go... the wii doesnt hold a candle to the 360.

i cant speak on the PS3 since i dont feel like spending another 600 bucks to play games i can play on the 360... so i wont really attempt it... i will say, that i have owned previous playstations and i have enjoyed them alot (i put this in so sony fanboys dont get too upset with this post) but i will say that if your buying a PS3 solely for the 1080p feature, you might be spending a little too much $$$ for not a lot of reward (the 360 does 1080i and it looks beautiful!!!)

lastly i would like to comment on the post by Xavia... play a 360 before you start bashing it... and better yet... start playing games from this f**king century (yeah frogger rocks... but id rather play something with a little better story line) !!!

l8r
pawn
Jesse 22 Apr 2007 17:09
37/42
Microsoft is in the game industry as a long term investment. They may be showing losses right now but the gaming industry continues to grow. Wait until the next round of consoles come out in 4 years or so. I imagine the next Xbox will also be a DVR or have on demand movie DLs which the 360 is dabbling with right now. As consoles become more of a central media hub for the house, they will become more appealing to non-gamers. I think Ehrenberg is failing to look at the long term, which is what any investor is interested in.
Lefty 22 Apr 2007 17:10
38/42
The xbox will never be anything more than a niche product.

Dell is now returning to selling PCs with XP (and starting to sell PCs with Linux).

Google is creating an online Office suite.

Apple has the trojan horse, the iPod, and has created a roach motel system whereby legacy Windows switchers will never buy a Windows OS system ever again after going Mac.

And Ray Ozzie and his SharePoint tech are going to 'save the day' at MSFT ?!?

Whoever doesn't conclude 'DISASTER' doesn't want to face the music.....
pawn 22 Apr 2007 17:25
39/42
hard core means staying up all night fragging someone over XBL (XBox Live) and sacrificing showers for game sessions and getting every acheivement XBL has to offer to improve your gamer score. i dont see grandma smith who bought a Wii as hard core because she can wiggle her Wiimote when her grandson comes over. the idea that the Wii is dominating the market because it appeals to all ages is a farce and a lie that will be revealed with time as only the nintendo fanboys will be left standing by the end of that system playing metroid prime over nintendos version of XBL. being hard core means BEATING a game and owning all others who try to take your title. since the wii has no online competition (yet... i will admit) it is harder to "out wario" your friends on warioware (sigle player game) or "out zelda" your friends (yet another single player game)

i own a Wii and i hope it stays around a long time... but i agree with the previous persons post, that hardcore gamers will define the path of a system and where the future of gaming will be (it most definitely will not be by some f**k at forbes magazine, thats for sure!!!)

l8r
pawn


TheScottishAlien wrote:
what actually constitutes a "Hardcore Gamer" anyway? if your talking about a system the provides games and graphics that prevent the user from leaving the screen and experiencing the world for real then the PS3 and Xbox 360 are exactly what they want; however don't these "Hardcore Gamers" also want fun original games and ideas that allow them to experience gaming in a completely different way? We've become so stuck with the idea that gaming involves sitting down and using a multi-button controller in order to mimic activities within the game. what Nintendo has done with the Wii is not "... succeeded in reaching a new audience" but rather opened up an entirely new way of looking at games. "Hardcore Gamers" may find solitude in their small controller and large couch, but now that the idea that gaming is less about mimicking activities and rather actually doing the activity more and more of these "Hardcore Gamers" will move towards the Wii.
realvictory 22 Apr 2007 23:03
40/42
pawn wrote:
hard core means staying up all night fragging someone over XBL (XBox Live) and sacrificing showers for game sessions and getting every acheivement XBL has to offer to improve your gamer score. i dont see grandma smith who bought a Wii as hard core because she can wiggle her Wiimote when her grandson comes over. the idea that the Wii is dominating the market because it appeals to all ages is a farce and a lie that will be revealed with time as only the nintendo fanboys will be left standing by the end of that system playing metroid prime over nintendos version of XBL. being hard core means BEATING a game and owning all others who try to take your title. since the wii has no online competition (yet... i will admit) it is harder to "out wario" your friends on warioware (sigle player game) or "out zelda" your friends (yet another single player game)

i own a Wii and i hope it stays around a long time... but i agree with the previous persons post, that hardcore gamers will define the path of a system and where the future of gaming will be (it most definitely will not be by some f**k at forbes magazine, thats for sure!!!)


I don't think someone who plays FPSs at night instead of having a shower is necessarily more hardcore than a grandma who owns a Wii, thanks.

It is a bit hypocritical saying that the fanboys left standing by a "system" isn't hardcore, yet whinging about how good XBL is, is hardcore.

I don't understand what there is to be proud of about being called a "hardcore gamer." Firstly, it sounds stupid, and secondly, it doesn't make any difference what people call themselves - the only difference is that some people define themselves as "hardcore" and some don't, and in some cases, it's just another word for "fanboy."

Neither would I agree that it's about beating other people - since when did people have anything to do with it? It's about the computer and me, and nothing else, that define how "hardcore" I am. Playing games because other people play them is not hardcore: at best it means you have an excuse to be playing games; at worst, it means you're playing games just because your friends are. If your friends are real people, then you are perhaps not that hardcore?

On the other hand, it sickens me slightly how easy it seems for any company to chuck some money around, launch a games console, and spontaneously pick up such dedicated fans.
agw 23 Apr 2007 08:39
41/42
I don't think the 'hardcore' define the path of where a console goes any more than the guy with the club crest tattooed on his belly determines where a football club goes. By the definition given, the hardcore are the 'elite' (or smelliest); that is, the smallest group of paying customers. The future of gaming is where the money is - not satisfying a niche group.
Ted Rawly 24 Apr 2007 17:03
42/42
Microsoft should have stuck to its guns and supported PC gaming instead of imitating Sony and Nintendo in order to sneak their "set top box" into homes. It would have had better results. With PCs MS doesn't need to sell the hardware at a loss, it could have just published the games. But ofcourse, that's not what MS was really interested in. They're after that "set top box" fantasy.

So far MS has screwed up both with consoles and with PC gaming (thanks to the Vista fiasco). The Games For Windows Live extortion scheme will be another loss for MS. Consumers generally don't like crap (once they realize it's crap!), and that's what MS is trying to shove down their throats.

I guess MS doesn't care. Unlike other companies that must produce quality products to survive, Microsoft with its Windows & Office cash cows, has billions to burn.
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