Article written by Greg Aldridge.
Published on 29/04/2011 at 01:00 AM.
In dramatic contrast to Nintendo’s results earlier this week Microsoft’s Entertainment & Devices Division, corporate home of the Xbox 360, has recorded strong growth during the last quarter. Gaming is the minnow in the Microsoft divisional pond though, its contribution to the company’s overall performance almost getting lost in the noise.
It is quite some overall performance though from the giant of the PC software world. As a whole Microsoft have recorded a revenue of $16.43 billion for the three months to 31 March 2011, up 13% on the previous year’s figure.
The company’s operating income of $5.71bn is up 10% while its net income is up 31% to $5.23bn. With revenue from the Windows desktop OS down it has fallen to the other divisions to generate the increases.
“Consumers are purchasing Office 2010, Xbox and Kinect at tremendous rates”, says Microsoft’s chief financial officer Peter Klein, “and businesses of all sizes are purchasing Microsoft platforms and applications”. It is not the number of copies of Windows Server 2008 and Microsoft Office you are here to read about though, so we will brush those aside.
A bigger percentage make for a better headline
You will have already noticed from this article’s title up at the top of the page what the gaming-related headline figure Microsoft would like you to take away from their quarterly financial results is. A big, fat 60% increase for their Entertainments & Devices Division, which we should note also includes Windows Mobile as well as all things 360.
More important than simply knowing the increase is of course to know which number has risen by that amount. It is the division’s revenue (sales) which is up 60% (or 59.92% if you round to two decimal places) to $1,935m from $1,210m in the same quarter last year.
Perhaps the more important figure though is that of the division’s operating income, which subtracts things like the cost of manufacture and marketing from the revenue. For that figure they have recorded a smaller, but still significant, rise of 50% with the operating income growing from $150m to $225m.
The Pros and Cons of Selling a Popular Console
Bolstered by Kinect the Xbox 360 has had a great quarter, selling another 2.7 million units during January, February and March, which makes it their record third quarter to date for 360 unit sales.
Compared to the same quarter a year ago, when it sold 1.5m, it has recorded a unit sales increase of 79%. The strong quarter makes its life-to-date total now 53.6m as of the 31st March 2011.
Kinect sales for those three months were almost as high as those for the Xbox 360 itself with the IR-equipped, human-tracking sensor selling another 2.4m units to add to the 8m it sold following its release in the previous quarter.
That success is not without its drawbacks though. While in the earnings press release Microsoft are keen to highlight the strength of Xbox 360 and Kinect sales, if you dig a little deeper, those sales are not all good news.
In their own analysis of their financial performance during the quarter you can find the statement, “Cost of revenue increased $1.1 billion or 41%”, with the key factor being identified as the “increased volumes of Xbox 360 consoles and Kinect sensors sold”. Which strongly suggests that hardware is still an overall loss-leader for Microsoft (i.e., they sell hardware at a loss to generate revenue later in its life cycle though software and Xbox LIVE subscriptions).
One interesting point to consider is that now Microsoft have made a concerted effort to push the 360 further into the ‘casual’ side of gaming with Kinect, how much more of a hard sell will it be to encourage those more casual gamers to purchase a Gold subscription? You would also have to believe that those are also exactly the sort of gamers likely to purchase fewer games. Will the cost of the hardware at some point mean that Kinect has been too successful?
It is not only the hardware side of gaming that is causing them some hurt though. They are facing higher costs providing online services, “including traffic acquisition costs and royalty costs relating to Xbox LIVE digital content sold”. There you have a couple of reasons for the relatively recent increases in the cost of Xbox LIVE Gold subscriptions.
And the crystal ball says…
Microsoft are clearly expecting more good news from their Entertainment & Devices Division in the coming months. For the three months to the 30th June 2011 they are expecting the division’s revenue to record growth of 25% on where it was a year ago.
When it comes to gazing deeper into the murky haze of the mists within their mystical crystal sphere they give nothing away, instead choosing just to tease us gamers. All they have to say for the division’s expected performance in their next financial year, which starts July 1st 2011, is that they “expect momentum to continue, with more to be shared at E3 in June.”
Any guesses as to just what that “more” might be?