Why you can't write off Microsoft's consumer ambitions: Xbox

It's so easy to knock Microsoft's consumer ambitions. Microsoft isn't a consumer home run machine, but what it's done with the Xbox gives those other consumer forays some hope.

It's so easy to knock Microsoft's consumer ambitions. Windows Phone 7? C'mon. Bing? Nice, but a best case No. 2. Zune? Need we say more. In fact, tech talking heads mock Microsoft on the consumer front regularly. I'm guilty as charged on that front from time to time too.

But Microsoft's earnings on Thursday (statement) show why you can never completely write those guys in Redmond off. Microsoft isn't a consumer home run machine, but what it's done with the Xbox gives those other consumer forays some hope.

Xbox's quarter by the numbers:

  • Xbox 360 units up 38 percent;
  • Kinect launching Nov. 4th
  • Revenue of the device and entertainment division (dominated by Xbox) was $1.8 billion for the second best showing in five quarters.
  • The device and entertainment division had an operating profit of $382 million.

How did Microsoft get to the point where Xbox was a contender? The company was persistent and didn't mind dropping a lot of dough upfront.

The Xbox launched in late 2001 and Microsoft took some losses early. For the year ended June 30, 2003, Microsoft's home and entertainment unit had a loss of $1.19 billion. For fiscal 2004, Microsoft dropped another $1.21 billion. In fiscal 2005, the division had a loss of $391 million. In 2006, the home and entertainment division dropped another $1.33 billion. In 2007, Microsoft had another $1.96 billion loss largely due to the launch of the Zune and the first generation Xbox being phased out. In fiscal 2008, the entertainment and devices division was in the black with a profit of $420 million. In fiscal 2009, the Xbox unit had a profit of $169 million. And 2010 delivered a profit of $679 million.

If you do the math, Microsoft hasn't come close to breaking even on the Xbox, but you can't call the game console a failure either. In fact, Xbox 360 and Xbox Live are strong franchises.

If you play this out, it's possible that Microsoft will see some other consumer hit. Microsoft's online services business has been a money pit to the extreme. Microsoft's online services unit lost another $560 million in the first quarter. As noted last quarter, Microsoft lost $6 billion over eight years online. But Bing is showing some traction.

Maybe Windows Phone 7 will be Microsoft's consumer contender. At the Gartner Symposium in Orlando, Microsoft CEO Steve Ballmer indicated that the company was in for a long ride with Windows Phone 7.

Indeed, there seems to be a decade-long time horizon for Microsoft's big consumer efforts.

Perhaps the larger question is what conditions enabled the Xbox to become successful within the Microsoft juggernaut. And can those conditions scale to other consumer units? Can Windows Phone 7 turn a profit in a few years?

Bottom line: You can't merely dismiss Microsoft's big consumer dreams even if you're tempted. The company just keeps spending and won't shy away from long-term quagmires.

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