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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: Xbox division earnings
By TakinYourPoints on 2/7/2013 6:45:26 PM , Rating: 4
It is pretty small. Take the last decade and it is break-even at best. It is slightly in the red or slightly in the black depending on the quarter.

The important thing at this point isn't the entertainment division's income, Windows and Office pays for the whole party. What's important is consumer mindshare. As badly as Microsoft has flubbed numerous consumer products, they hit a home run with the XBox. They should be leveraging the brand even farther, tying it in more with WP and Surface and such.

As for income, that's pretty standard for the "Sony" loss-leader style of selling consoles. All the profit is in the latter part of a console's lifecycle. Microsoft took a bigger hit than was expected because the XBox was such a monumentally defective piece of hardware.

RE: Xbox division earnings
By augiem on 2/8/2013 12:27:11 AM , Rating: 4
It is pretty small. Take the last decade and it is break-even at best. It is slightly in the red or slightly in the black depending on the quarter.

Just for the sake of killing boredom, I found figures from the last 10 years of Microsoft's annual reports. It's a little complicated because for some years MSN, Windows Mobile, Zune, embedded systems, and some other services were lumped in with the Xbox. Anyway...

Home and Entertainment
Operating Income
2002: -1,135m
2003: -1,191m
2004: -1,220m
2005: -391m
2006: -1339m
2007: -1969m
2008: 426m
2009: 351m
2010: 517m
2011: 1,257m
2012: 364m

Total: -4,328m

The total is probably dragged down significantly by the other things included in the "Home and Entertainment", but, yeah, guess it's not really a money maker.

RE: Xbox division earnings
By Strunf on 2/8/2013 7:30:02 AM , Rating: 2
It's normal for companies that jump into a new market (for them) to not really make money the first years, the xbox by itself wasn't so bad the problem was that SONY already had established a HUGE fanbase with the Playstation and they also had many Playstation only titles, MS eventually realized they had to fight fire with fire and started having exclusive titles too.

The Playstation 2 also had many hardware problems, between the Xbox and the PS2 the PS2 only had a slightly higher reliability.

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