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February 28th, 2008, 21:25 Posted By: Shrygue
via Next Generation
In September 2005, Microsoft’s Xbox division reported it had lost a total of four billion dollars during its four years of involvement in the console race. For any other company that might have been the end of their involvement in the industry. For Microsoft, it was the necessary price to gain a foothold in the burgeoning videogame market and the prelude to, two months later, launching the Xbox 360. With that move, Microsoft forced the beginning of the current generation.
The timing was always intended to give the 360 a head start on its competitors and had mixed results: on the one hand, consumers upgraded and the 360 certainly got its lead in early (to the tune of nearly ten million units), but on the other the allegedly rushed testing of the hardware resulted in the infamous ‘Red Ring of Death’ phenomenon, and the costliest warranty extension in videogame history. But more than two years since that launch, and now facing some stiff competition, is the 360 in the dominant position Microsoft claims – or does the console rule an empire built on quicksand?
The 360 has several major achievements to its name: a software catalogue currently unmatched by its competitors, a peerless online service, and arguably the best traditional controller of those available. It has created a fiercely loyal community and worldwide sales stand at 18 million worldwide, with around seven million of those in North America. Returning to that $4 billion (£2 billion) ‘investment’ in entering the market, fiscal 2008 was always cited by Microsoft as the year in which it expected the Xbox division to begin turning a profit.
The last two financial quarters have seen positive results. Over the period of July 1 to December 31 2007, the Xbox Entertainment and Device Division reported an income of $522 million (£263 million) from a total revenue of $5.53 billion (£2.8 billion).
The division also incorporates PC games and accessories, phone operating systems and Zune, but Microsoft itself attributed the increase in revenue primarily to ‘increased Xbox 360 console sales, videogame sales led by Halo 3, Xbox Live revenues, and Xbox 360 accessory sales’.
Wondering just how big or small a part of Microsoft the division is? That total revenue of $5.53 billion was part of a $30.3 billion (£15.2 billion) total revenue in the same period, so some rough-as-they-come beer mat sums would tell you it’s about 18.25 per cent – a proportion that, even allowing for the varied products contained in the division, puts to rest the sneery idea that Microsoft can simply afford to throw money at the brand. And sure enough, the 360 has hit Microsoft’s business targets: in particular, Bill Gates’ E3 2006 prediction that the console would sell 10,000,000 units by the end of 2006 was surpassed by nearly half a million.
But think about the figures for a moment. If 1.5 million 360s were sold by the end of 2005, 10.4 million by the end of 2006, and 17.7 million by the end of 2007, then the Xbox 360 sold significantly fewer units in 2007 than it did in 2006. The bad news doesn’t stop there: 2007 saw its head start battered aside by the unstoppable Wii, with little chance of redress, and the PlayStation 3 reaching the 9.5 million unit mark worldwide. The only territory in which it outsold the PS3 was North America, and without the sales spike around Halo 3 things would have looked considerably worse.
It seems strange that this is the case. After all, with its obvious attributes and its late-2007 software lineup, why didn’t the Xbox 360 dominate the year, and the Christmas period in particular? Microsoft began 2007 with a huge unit lead, its biggest game properties due to arrive on the shelves, plus a significant marketing spend, and in the event managed to sell less hardware than the previous year.
Of course, hardware sales are only part of the story, and software is where the real money lies for platform holders and third parties: in this respect, the 360 is in rude health, boasting an attach rate of seven games per console, far in advance of Nintendo and Sony’s figures, as Phil Spencer, the general manager of Microsoft Game Studios Europe, is keen to point out: “If you’re a third party thinking about where your game might work, the 360 has got to be at the centre of your business case.”
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