Microsoft may form Halo of profit over entertainment unit

What's the launch of Halo 3 mean for Microsoft? Aside from midnight lines and happy gamers it means that Microsoft's entertainment and devices division could be pushed over the profitability line.

What's the launch of Halo 3 mean for Microsoft? Aside from midnight lines and happy gamers it means that Microsoft's entertainment and devices division could be pushed over the profitability line.

Amid the Halo 3 hubbub (

Microsoft may form Halo of profit over entertainment unit
gallery, review) let's not forget there's a big business here. Halo 3 could make four out of five of Microsoft's business units profitable (entertainment and devices and online services lose money). For the fiscal year ending June 30 Microsoft's entertainment and devices unit reported revenue of $6 billion but an operating loss of $1.9 billion. While the entertainment and online services divisions are smaller relative to the Office and Vista juggernauts they do represent Microsoft's future growth prospects.

According to Deutsche Bank Securities analyst Todd Raker Halo 3 channel checks point to fiscal 2008 revenue topping $310 million with upside to $430 million. Raker had estimated revenue of $242 million.

And given the different prices of Halo 3 editions--Legendary for $129.99, Collector for $69.99 and Basic for $59.99--margins should be strong. These variable prices depending on edition are becoming a Microsoft calling card as the software giant did something similar with Vista.

Raker estimates that just the variable pricing can add $65 million to Halo 3's total revenue figure.

Add it up and JP Morgan analyst Adam Holt expects that Halo 3 should help Microsoft meet its goal of making its entertainment and devices unit profitable--possibly as soon as this quarter. Holt is banking on Halo 3, sales of titles such as Madden 08 and lower Xbox costs due to a move to 65 nanometer technology.

The big question is whether Halo 3 can drive sales of Xbox 360 consoles. Says Holt in a research note:

"We expect the Halo 3 release to be a catalyst for Xbox 360 console sales in the holiday season as many casual gamers who have yet to migrate to the Xbox 360 platform are likely to do so after the Halo 3 release and the recent console price cuts."

And if Halo 3 doesn't drive Xbox sales it could be seen as a flop from a business perspective. Dawn Simon Talbot, an analyst at Soleil Securities Group, said she "will not consider the Halo 3 launch a strategic success until we can determine whether it is driving not only Xbox-to-Xbox 360 conversions, but also increased Xbox-360 market expansion."

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