Microsoft Profits Rise, Xbox Division Slips Into Loss

Officials from Microsoft Corp. have released details of the company’s quarterly results, revealing sales which show better-than-expected demand for personal computer software, as well as strong sales of server software and Xbox hardware. The corporation as a whole reported a net profit of $2.56 billion for the fiscal third quarter ended March 31. This compares with $1.32 billion for the same period last year. Yet despite naming the Xbox as one of its core revenue streams, Microsoft’s Home and Entertainment division (which includes Xbox, PC games, the Home Products Division (HPD) and interactive TV), still ended at a loss of $154 million for the quarter, compared to a loss of $209 million for the same period last year. However, revenues were $593 million, up from $530 million in 2004. The losses, according to the company, result from the Xbox console's continued 'negative gross margins', meaning, in effect, that the more consoles Microsoft sell, the more the company reduces its profits. With the impact of Halo 2 now much diminished since Christmas, when the division actually made a small profit, the company has no way of generating profit from the format without much stronger software sales. (This situation is largely assumed by analysts to be the reason why Microsoft is so keen to start the next generation of Xbox hardware as soon as possible, to more quickly reach hardware break-even point.) Even so, the fact that revenue is creeping up as the format matures does suggest that the Microsoft’s policy of launching the next generation Xbox early, and before the PlayStation 3, could well pay dividends. Xbox revenue increased $42 million, or 13 percent, largely as an increase in revenue from third-party games and an increase in Xbox Live memberships - also a positive sign. The Xbox U.S. games attach rate also increased to 8.0 games per console, according to industry analyst NPD. Revenue from consumer game hardware and software, PC games and TV platforms increased $21 million, or 10 percent. For the full nine months ended March 21st, Home and Entertainment revenue increased due to a 19 percent increase in Xbox revenue, largely due to the success of Halo 2, although this was partially offset by a 5 percent decline in consumer hardware and software, PC games and TV platforms. Decreases in the division’s operating loss were partially offset by an increase in costs associated with the next generation console development. These additional costs should obviously lessen as work on the new Xbox comes to an end.