Sunday, January 27, 2008

Microsoft’s Halo effect

For the first half of its 2007-2008 FY, Microsoft’s Entertainment and Devices Division has finally gotten around to making money, posting a $524 million operating income for the first six months, vs. a $423 million loss for the year before.

Revenues climbed 25% to $4.99 billion. While the division includes PC games and Zune music players, the gain is mainly attributed to Xbox 360, specifically Halo 3. So one game (with some help) accounted for a $950 profit swing and now the division is delivering 8% of the company’s profits. The Xbox team finally has a new GM, formerly of Electronic Arts.

Is this a longterm turnaround? Or is this just the upswing of a long cycle that will go negative again? Of course, we don’t have the financial transparency to understand the cross-subsidies between Xbox games and consoles (which are expected) and between Xbox, PC games and Zune (which are being used to bury Microsoft’s losers).

Microsoft is now making money off of videogames. Supported solely by games and consoles, Nintendo has turned a profit each of the past five years, but improved its margins to 20% and expecting to net over $4 billion in the current fiscal year. They left more than $1 billion in revenue on the table due to an inability to meet Christmas demand.

With Microsoft’s long predicted game profits finally here, maybe even Sony will make it into the black sometime soon. The PS3 losses have been dragging down the corporate parent’s profits for more than a year.

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