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Microsoft DIDN’T lose $400 million on Xbox One

by William Schwartz

Xbox-One

Reporting on gaming affiliated news can be tough. Particularly when fed information from normally reliable sources and when everything is being reported one way. We can only report what we have been told, and that latest report stating Microsoft had lost $400 million on the Xbox One was the news at the time and seemed legit. It appears now that it isn’t. So I would like to clear this mess up.

Microsoft did not lose $400 million on the Xbox One.

This was how it was spun to us all, pulling the wool over our eyes and making it our duty to report the shocking data to you.

From this article

“Xbox Platform revenue increased $1.7 billion, or 34 percent, due mainly to sales of Xbox One, which was released in November 2013, offset in part by a decrease in sales of Xbox 360. Xbox Platform cost of revenue increased $2.1 billion, or 72%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One.”

Now, armed with new information and a direct link to the Microsoft statement, I can set the record straight. Here’s the official Microsoft report, with the highlighted information pertaining to the Xbox division –

“Computing and Gaming Hardware revenue increased $3.2 billion or 49%, primarily due to higher revenue from the Xbox Platform and Surface. Xbox Platform revenue increased $1.7 billion or 34%, due mainly to sales of Xbox One, which was released in November 2013, offset in part by a decrease in sales of Xbox 360. We sold 11.7 million Xbox consoles during fiscal year 2014 compared with 9.8 million Xbox consoles during fiscal year 2013. Surface revenue increased $1.3 billion or 157%, due mainly to a higher number of devices and accessories sold.

Computing and Gaming Hardware gross margin decreased slightly, due to a $3.2 billion or 59% increase in cost of revenue, offset in part by higher revenue. Xbox Platform cost of revenue increased $2.1 billion or 72%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One. Surface cost of revenue increased $970 million or 51%, due mainly to a higher number of devices and accessories sold, offset in part by a charge for Surface RT inventory adjustments of approximately $900 million in fiscal year 2013.”

So what we can really discern from this is – These figures are not totals for this year, they are changes from the previous year. Secondly, the numbers pertain to gross margin, not overall profit or losses. That magic $400 million number came from analyists putting the $2.1 billion and $1.7 billion numbers together, then feeding it to us, the gaming community.

The reality is that Microsoft’s revenue from Xbox increased by $1.7 billion compared to the previous year – which was an increase of around 34 percent, meaning the starting figure from that previous year would be around $5 billion. The costs of those sales, including the manufacturing of the consoles increased by $2.1 billion, a 72 percent raise, which puts that starting figure from the previous year at the $2.9 billion mark.

I’ll quote from the now amended Forbes article “While we can use that data to attribute $7.1B in revenues compared to $5B in costs, without further information from Microsoft it’s hard to pinpoint an exact profit or loss on the Xbox One.”

If you then subtract the $5B costs from the $7.1B revenue, you get a $2.1B difference in gross margin, not profit or loss. Not anything that looks like $400 million, either.

As has been pointed out by many, game consoles hardly ever make a profit upon their release. The costs of developing, marketing and releasing a new console are huge and even if the revenue pulled in has a large increase, it takes time for that initial outlay to repay itself. This means that even if there has been a loss for Microsoft on the Xbox One so far, it is normal and to be expected. Sony are simply breaking the norm with their PS4 – but it doesn’t mean we should jump ahead stating that is now the new norm.

I hope this has cleared up the confusion and set the record straight.

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