Forbes contributor Adam Hartung dropped a bomb on the business world this morning when he forecast the complete collapse of Microsoft's business and the company's sudden exit from the entertainment market. Hartung draws on Surface's mediocre sales and the PC market's woes to claim that "Microsoft makes nothing from its xBox/Kinect entertainment division."
He goes on to make dire predictions related to Windows, Office, and Microsoft's other businesses, but we're going to focus on the Xbox comments -- they're easily the most entertaining.
According to Hartung:
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows - and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
Mr. Hartung, Reality Would Like A Word
Let's start with the claim that the Xbox division is unable to make a profit. That's easy to check -- all we need to do is consult Microsoft's own press releases.
Note that the product mix inside the entertainment division changes a bit depending on Microsoft's mix. When Zune products were on the market, they were included in this category. Windows Phone 8 devices are also counted here. The Xbox, in other words, isn't the only contributor. Nevertheless, it seems odd to claim that Microsoft "can't make a profit" on Xbox, or that Microsoft has no idea how to grow the business unit. That giant bump in FY 2011 was partly thanks to Kinect
. Smart Glass
and Xbox gaming integration on Windows 8 devices might be small steps, but they're good
Now, it's true that if we step back and consider the entire
Xbox console cycle, from 2003 - the end of calendar 2012, Microsoft has lost
$2.8B on Xbox and Xbox 360. To put that in perspective, Redmond lost $2B on its online services division (excluding a goodwill charge of $6.2B) just last year.. If we exclude the development costs of the original Xbox from those figures and only consider 2005 - Q1 of fiscal year 2013, the gap is much smaller -- only about $426M.
It was obvious from Day 1 that Microsoft would lose money for the entire run of the original Xbox, and that the Xbox 360 would lose large amounts of cash its first few years. That's why the company was strongly considering launching a next-generation Xbox
that would be profitable from Day 1. Xbox has been profitable for nearly five years, and if it hasn't finished paying back the balance sheet on the initial investment, it's at least moving the needle in a consistently profitable direction.
But let's say Microsoft wanted to get out of living rooms, even though living rooms are its best bet for continuing to interface with consumers and build a non-Windows product. Raise your hand if you think Sony
or Barnes and Noble want to buy Xbox.
This is what happens when analysts daisy chain figures together without bothering to research their work. Sony has a console, therefore, Sony would buy Xbox. Never mind the fact that Sony couldn't afford the division in the first place, doesn't need more debt, and that Microsoft would hardly prep the launch of a next-generation console by forecasting the imminent sale of the entire business. Barnes and Noble is such a ridiculous option I'm not even going to address it.
Hartung finishes off by forecasting the complete destruction and disintegration of Microsoft. Failure, according to him, is "already inevitable." Expect Redmond to lay off 50-60% of its employees within three years.
Or not. Forbes has pulled the story while I was writing this, but you can read the man's blog post in his own words at the link above.