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  (Source: AFP)
Consoles were a second option for Microsoft

Despite the success of the Xbox, that was not Microsoft Corp.'s (MSFT) first choice plan in the gaming space, according to an IGN interview with a former Microsoft executive.  Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, says his former employer only decided to build the Xbox after a falling out with Japanese gaming giant Sony Corp. (TYO:6758).

I. Sony Console Worried Gates

The original Xbox and its successor, the Xbox 360, had their low points (red rings of death, for example), but have established themselves as a popular console gaming option, selling millions of units.  The gaming unit is perceived as one of Microsoft's strong performing businesses.

Perhaps predicting both the rise of the console and tablet as replacements/challengers to the traditional PC, Bill Gates reportedly in the 1990s sounded the alarm when Sony announced the original PlayStation.  Seeing Sony jump into the market, Microsoft became determined to beat its former partner, who was turning its back on PC gaming for a non-Microsoft alternative.

Describes Mr. Kempin:

The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend... but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.

The original PlayStation launched in 1994.  Then in 2000 Sony introduced the PlayStation 2, which added PC-like media player functionality and broader support for online gaming on third-party servers.  A year later Microsoft countered with the Xbox.

II. Crafting a Console

The payoff of consoles -- by Sony's model, at least -- has traditionally been the licensing fees paid by game publishers.  The hardware itself is often sold at-cost, or even at a modest loss.  For that reason Microsoft had trouble convincing a PC maker to hop onboard the Xbox experiment.

Joachim Kempin
Joachim Kempin, a 20 year veteran of Microsoft is spilling the dirt on the history of the Xbox. 
[Image Source: Twitter]

Recalls Mr. Kempin, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

As for Xbox profitability, he argues that developers have always been the winners; that Microsoft has managed to break-even, but not do much better than that.  He comments, "They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

Xbox 360
A former Microsoft exec. claims the Xbox is not a big money-maker for the tech giant.
[Image Source: Gamasutra]

Microsoft is currently diving into a third-generation console, which is expected to launch this holiday season.  After trumping Sony in the last generation (dubbed by some as the "seventh-generation") of consoles, there are some trouble signs for the upcoming Xbox 720.  While the spec looks somewhat similar to Sony, Sony's hardware is reportedly slightly more powerful and considerably easier to develop for.

Microsoft also may alienate customers with its stance on used games; reportedly it is tying purchases to your Xbox Live account, as a means of stopping game resale (which it earns no cut from).  Sony, while a long time support of strict digital rights management, has not yet announced a similar anti-resale provision.

Source: IGN

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RE: Happy Tony
By Mitch101 on 2/7/2013 6:02:57 PM , Rating: 2
Server, Client, Office = 3

I count about 50+ products they make money on and there is one this list doesn't seem to include LICENSING.

Windows and Windows Live
Revenue: $19,024,000,000
Operating Income: $12,281,000,000

Business (Office, Exchange, SharePoint)
Revenue: $22,186,000,000
Operating income: $14,124,000,000

Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $17,096,000,000
Operating Income: $6,608,000,000

Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $8,913,000,000
Operating income: $1,324,000,000

Online Services (Bing, MSN, Hotmail)
Revenue: $2,528,000,000
Operating income: $-2,557,000,000

Microsoft products (and earnings) are divided into five divisions: Windows & Windows Live, Microsoft Business, Server and Tools, Entertainment and Devices, and Online Services. The types of products and services provided by each segment are summarized below:

Windows and Windows Live – Windows operating system, Windows Live applications and web services, Microsoft PC hardware products.

Microsoft Business – Microsoft Office (including Office Web Apps and Office 365), Microsoft Exchange, Microsoft SharePoint, Microsoft Lync, and Microsoft Dynamics ERP and CRM.

Server and Tools – Windows Server operating system, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, Windows Intune, Windows Embedded, System Center products, Microsoft Consulting Services, and Premier product support services.

Entertainment and Devices – Xbox 360 console, games, and accessories (e.g. Kinect), Xbox LIVE, Windows Phone.

Online Services – Bing, Microsoft adCenter, MSN, and Atlas online tools for advertisers.

RE: Happy Tony
By Pirks on 2/7/13, Rating: 0
RE: Happy Tony
By BifurcatedBoat on 2/7/2013 6:42:37 PM , Rating: 2
I'm surprised you would buy anything but Apple. Why a Surface instead of an iPad?

RE: Happy Tony
By Pirks on 2/7/2013 6:59:03 PM , Rating: 3
No, I'm not against buying Apple devices because they are Apple, I just avoided Macs because of high price for not enough return for the buck and also weird preinstalled OS X instead of much more convenient Windows, also Mac has really lousy GPUs that are bad for gaming which also turns me off. Then I avoided iPhone just because the screen is way too tiny, Galaxy Note is so much more convenient and better for web and games (my mostly used kind of software on the phone), also I keep my music on 32GB MicroSD which is super convenient but works only with BB and Android phones hence I mostly used to buy BB7 and Android hardware in the past. With tablets right now Apple has close to the best tablet in iPad but still... I wanted SD card and I wanted widescreen tablets since I love my Walking Dead on a wide screen, this show looks lousy on 4:3 screen of iPad, and other movies too. Hence I went for Surface but then later I realized that Surface RT was a bad choice, I should have gone for Clover Trail Win8 tablet - all the advantages of Surface plus all my Windows software like MPC-HC and all sorts of nice Windows games like Plants vs Zombies, so right now I think Samsung Android phones are the best (with WP8 very close but still lacking a few important things like nice big screens) and Clover Trail Win8 tablets are the best for home tablet stuff. It's all about better screens and expandability/USB/SD support in case of tablets. If only Apple were making iPad with SD card, USB and 16:10 screen without moronic battery-devouring Cretina :(

RE: Happy Tony
By Tony Swash on 2/7/13, Rating: -1
RE: Happy Tony
By Pirks on 2/7/2013 7:03:49 PM , Rating: 2
Microsoft desperately needing every ounce of carrier goodwill to enable them to kick start Windows 8 phone as a viable phone platform
Apple kickstarted iPhone without any carrier support or carrier promotion whatsoever, so why MS can't do the same?

RE: Happy Tony
By Tony Swash on 2/7/13, Rating: -1
RE: Happy Tony
By Pirks on 2/7/2013 8:57:59 PM , Rating: 2
Huge iPhone demand? Really? Then why they sold only 270,000 in the first quarter of its availability, huh? Are you just fantasizing about "huge demand" or what?

Skype is an actual disincentive to carriers, and FaceTime is not? How so? I can see through your double standard Tony :P Don't even try to push your BS on me man, won't work.

RE: Happy Tony
By SPOOFE on 2/8/2013 5:10:37 PM , Rating: 2
Then why they sold only 270,000 in the first quarter of its availability, huh?


RE: Happy Tony
By tayb on 2/7/2013 7:27:27 PM , Rating: 2
Interesting that you mentioned Skype because one reason cited for the lack of carrier support for Windows 8 is Skype, for obvious reasons carriers don't want voice over IP, they hate it.

Carriers hated VOIP a few years ago but not anymore. Verizon and AT&T charge by the GB for data and throw in voice and texting for free. Their biggest moneymaker by far is data. With the new data plans offered by Verizon and AT&T they would probably actually prefer that you talk on Skype and buy more data.

The real reason Microsoft is having trouble getting carrier support from Verizon (AT&T isn't an issue) is because Microsoft is refusing to allow Verizon to pre-install spyware as they do on every Android phone.

Also, Skype is available as a free download on every available smartphone so I don't know what makes you believe bundling it with Windows Phone would make carriers angry.

RE: Happy Tony
By sprockkets on 2/7/2013 6:59:25 PM , Rating: 2
Where you pull that from, last quarter? You do know they redid their divisions years ago just to hide their money losing products by reporting them with ones that actually make money?

But hey, I love the Online services part, only lost 2.5 BILLION that round.

RE: Happy Tony
By Mitch101 on 2/7/2013 7:57:53 PM , Rating: 2
Doesn't really matter it shows Microsoft is far from a one trick pony. I could even break out how many companies they partially own as well which are also money makers. Heck they have a 10% stake in Dell now. The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

Every company has money losing divisions but when you add it all up Microsoft makes tons of money. They can afford to lose 2.5 billion. They probably made more than that on Android licensing. If you look at the big picture over time if Microsoft can corner the home media market there is a ton of money to be made there.

Microsoft is starting to chip away at the Phone market, the tablet market is questionable but Microsoft has deep pockets and they can play for plenty of years trying to establish one, and Google search will fall someday because Bing is actually really good or something better will eventually come along. Some things take a few years to establish. Im amazed at the people who think its easy to enter an established market base and expect a company to make tons of cash on year one.

RE: Happy Tony
By sprockkets on 2/8/2013 12:47:45 PM , Rating: 2
They make money on windows and office. That's it. Lucky for them the xbox is finally making money after bleeding for so many years.

And this?

The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

What are you talking about? The Gates Foundation isn't Microsoft.

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer

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