Microsoft’s Xbox Business Finally Becomes Profitable

by Anton Shilov
01/30/2005 | 06:41 AM

Five years after its foundation and a little bit over three years after the introduction of the Xbox console, Microsoft Home and Entertainment division announced operating profits, confirming that the console business model can work at Microsoft. The results of the group are explained by great sales of the Halo 2 game as well as rising interest towards Xbox in the USA and Europe.

According to Microsoft, Xbox business revenues were up 20% and profits up 11% in the last quarter of 2004, which was due to introduction of the Halo 2 game – the successor of the most-popular Xbox title. The Home and Entertainment unit posted sales of $1.41 billion and profit of $84 million, both were record for Microsoft. Still, the software giant will need to sustain operating profitability in the coming years, as the company needs to cover its $2 billion Xbox marketing efforts as well as the costs of hardware the company needed to compensate earlier.

“Our Xbox business fired on all cylinders and provided a strong ending to what was a great year for the platform and our partners. Not only did we achieve record software sales with our strongest games lineup to date, but we also sold more consoles than our competitors during the critical holiday sales season in the United States, and increased Xbox Live membership to over 1.4 million members. During the quarter, 6.3 million units of ‘Halo 2’ were sold, resulting in a game attach rate of over 30% to the Xbox installed base of almost 20 million consoles,” said Robbie Bach, senior vice president of the Home and Entertainment group.

Microsoft reiterated its forecast for Xbox console sales to a worldwide installed base of 21 million to 22 million, a bit higher than previous estimate of 20 million units. Such update of the guidance reflects growing interest to the consoles in general, as Sony also recently said it expected the number of PlayStation 2 consoles shipped in its fiscal quarter ending in March Sony to be 15 million units, up from 14.5 million previously.

Microsoft is expected to commercially launch its Xbox 2 console in late-2005. With the next-generation console Microsoft’s approach to its console business will be different to the current.

Microsoft Corp. announced record revenue of $10.82 billion for the quarter ended December 31, 2004, a 7% increase over the results in the same period of the prior year. Operating income for the second quarter was $4.75 billion, which was an increase of $3.27 billion over the same period in the prior year. The results of the second quarter of the prior year included $2.21 billion in compensation expense incurred in connection with the Employee Stock Option Transfer Program. Net income for the second quarter was $3.46 billion. Diluted earnings per share exceeded the company’s guidance by $0.04 and were $0.32 including stock-based compensation expense, the firm said. The software giant explained successful results by across-the-board business growth.