Microsoft Reports Record Revenue and Earnings

You raised lots of good points here.

"Not for me. If I was a stockholder, I would be very interested in Microsoft's business model for the Xbox2, and if it didn't satisfy me"

This is the way I see it.
Microsoft biggest sources of revenue today are desktop Windows and Microsoft Office, with servers rapidly catching up
Trouble is, desktop Windows and Office are never really going to grow that fast any more. Microosft already has most of those markets and they are matur markets.
With revenues around $40 Billion, Microsoft needed to get into a big high growth business to be able to continue to grow well.
With the vid games business has worldwide is projected to have revenues of $56 Billion by 2008 (http://www.indystar.com/articles/4/209613-8534-223.html ),its the right business for Microsoft to be in.

#1, Microsoft is using an amended for of Windows for the XBOX, so they don't have to write a new OS for it.

#2 Microsoft is using a verion of Direct X from Windows for the graphics of the XBOX.

# 3, when Microsoft started with Windows , back in 1983 I think, it took nearly 7 years till 1990 before Windows really took off.
Microsoft made huge losses developing Windows all those years, with little or no sales.

#4, point 3 also applies to Microsoft Word and Excel. In fact Microsoft had to do an entire re-write of excel.
Today both Windows and office generate huge revenues and profits.

#5, Microsoft already caused Sega to leave the console business.
I think Nintendo may be forced to concentrate on their hand held consoles sooner or later, or be marginalized in the desktop console business, leaving the spoils to Microsoft and Sony, whose market shares and profits will go up accordingly.

#6, I think XBOX Live is going to be big and provide a source of recurrent revenue for Microsoft.

# 7, when XBOX 2 comes out (probably late this year), its going to be a much closer fight with Sony's PS2 whenever that comes out.
Expect XBOX 2 to get into the black much sooner than this current XBOX.

Compared to Windows, Windows NT and other current big revenue Microsoft products, the XBOX has made a profit remarkably quickly and can only grow from strength to strength.
It was always better for Microsoft to use its huge profits and cash reserves to take losses and enter into a high growth business, than just sit back and count the money and watch their growth slow to nothing.

In the interest of brevity, I won't quote, but just reply to each point:

1) That's fine, but it really has no impact on new console games. Consoles have used proprietary APIs and OSes for 2 decades and grew fine. Microsoft using its own OS in its own console really isn't worthy of much mention or consideration.

2) Actually, developers include whichever version of DirectX they programmed with on the game disc itself, rather than coding for a static version of DirectX in the XBox's firmware. Good move by Microsoft--but PS3 is using OpenGL, nullifying that advantage.

3,4) The console market is completely different. Microsoft doesn't make the hardware, and has to deal with outside contractors for that. More parties leads to less overall profits. Sony has an advantage because it's a gigantic consumer electronics company--they spent $2 billion on the R&D for the PS2 alone. Microsoft is a software company.

5) Sony caused Sega to leave the console business, not Microsoft. Microsoft licensed WindowsCE for the Dreamcast's OS--if anything, they had an interest in the console succeeding. In addition, Microsoft didn't enter the console market until the Dreamcast had already died. It wasn't market anticipation of the Xbox that caused faultering Dreamcast sales.

6) It could very well be, but Microsoft needs to tweak its business model regarding the service. EA refused to participate in Xbox Live because of Microsoft's royalty and licensing models. Now when you play an EA game over Xbox Live, you're actually using Xbox Live as a middleman between you and EA's servers, not Microsoft's. I'm sure Square would love to bring Final Fantasy XI to the Xbox, but Microsoft wouldn't cave for their PlayOnline service the way they did for EA's. This has to change.

7) Xbox2 is slated for the Christmas season of 2005, or so the rumors go. However, it's not the PS2 Microsoft is competing against: it's the PS3. Microsoft will find themselves in Sega's position back when they launched the Dreamcast: they'll be the first to market with a good console, but Sony will have mindshare, and their newest console will launch a few months after Microsoft's. Nintendo is showing off their new console, code-named Revolution, at E3, and Sony's rumored to have a PS3 presentation set for E3 as well. This will not be easy for Microsoft. If they revise their business model, Xbox2 could indeed be profitable. However, it's going to take software, not hardware, to truly make money off the Xbox2--and that's the Xbox's biggest failure, a lack of quality titles.

You have to stop looking at the videogame market as an extension of the software market. It's nothing of the sort. Microsoft is a software company that's found itself in the position of a hardware vendor. Microsoft obviously approached the gaming market the same way they did the operating system market (example: their Xbox Live royalty structure) and they got burned. It's going to take more than new hardware to win the console wars.

"1) That's fine, but it really has no impact on new console games. Consoles have used proprietary APIs and OSes for 2 decades and grew fine. Microsoft using its own OS in its own console really isn't worthy of much mention or consideration"

Oh yes it does.
FACT: You need an OS top run your vid game console.
FACT: If Microsoft didn't have Windows, they'd have had to develop an OS for their console from scratch, same as Sony and Nintendo did at far greater cost to Microsoft.(Linux is out, Microsoft wouldn't use it for obvious reasons).
FACT: Having a ready made, very good Windows 2000 OS to use cut down drastically on the cost and time to market of the XBOX console.Microsoft developed their console much faster than Sony did with their Playstation.
Its IS very relevant.

" Good move by Microsoft--but PS3 is using OpenGL, nullifying that advantage"

My reply to that is the same as above.
It still saved Microsoft a great deal of costs and time to market of the BOX.
I don't care if Sony "nullified" any advantage or not.
It was Sony that was already in the market.Microsoft was the challenger.
It was up to Microsoft to nullify any advantages Sony had.
Using Direct was one of the ways they did just that.

"The console market is completely different. Microsoft doesn't make the hardware, and has to deal with outside contractors for that. More parties leads to less overall profits. Sony has an advantage because it's a gigantic consumer electronics company--they spent $2 billion on the R&D for the PS2 alone. Microsoft is a software company"

I don't even know where to start on this one.
Not a single one of your points makes much sense.

To start off with, If anything the fact that its hardware makes my point even more valid.
Lets take Windows NT for example.
Microsoft started writing NT in 1987 when they brought in David Cutler and his gang from Digital.
It wasn't till 1996 when NT 4 came out that Microsoft actually started making any real profits on NT. That is NINE solid years!
Today, without NT, Microsoft will be in very deep trouble indeed.
During all that nine years, the cost of developing NT kept going thru the roof every year as they took on more programmers and as they paid the original programmers even more money.Some of those guys writing NT were making $500,000 per year at the time, plus stock options.
If you take the XBOX which is being made in China at very low cost, if anything the cost of making the console keeps going down every year..
Comparing NT or the original Windows to the XBOX, Microsoft has been able to turn it round much faster than most of their big software projects, in part because their cost of production for the hardware keeps going down every year, whereas costs for their software projects had always gone up.
The fact that the XBOX is hardware helps buttress my point rather than distract from it.
As for your talk about Sony being "a gigantic company" spending $2 Billion on R & D alone as you put it, it just made me laugh.
Microsoft is spending to the tune of around $6.8 Billion on R & D per year right now. Makes Sony's $2 Billion look like tiddlywinks doesn't it? :)
http://news.com.com/Microsoft+plans+to+boost+RD,+jobs/2100-1016_3-5053516.html

Second point of course is Sony is in deep trouble.Their consumer electronics business like TV's, VCR's, DVD's, camcorders etc etc are barely making a profit if at all, and they are taking a beating from Samsung in all of those products.
In Sony's latest results reported on Jan 26, their sales were down to the tune of 7.5%.
Microsoft quarterly profits are currently running at over twice that of Sony.

Extract from Sony's results:

"Sales for the quarter dipped 7.5 percent to 2.15 trillion yen (US$20.9 billion; euro16.07 billion) from 2.32 trillion yen.

Sony said its electronics sector suffered as sales of TVs and portable music players dropped.
.................................
In recent years, Sony has suffered from competition from cheaper Asian rivals such as Samsung Electronics. It has also fallen behind Japanese rivals such as Sharp Corp. in liquid-crystal display TVs and Matsushita Electric Industrial Co., which makes Panasonic brand products, in DVD recorders. "

Sony is in deep doodoo.
They are in no position to fight a nasty knuckle down price war with Microsoft when the net generation of consoles come out, while Microsoft is financially stronger than ever.

"FACT: Having a ready made, very good Windows 2000 OS to use cut down drastically on the cost and time to market of the XBOX console.Microsoft developed their console much faster than Sony did with their Playstation. Its IS very relevant."

No, it's not. Name one person who bought an Xbox because it's running a modified version of Windows. You can't do it, because none exist. People buy game consoles for games. Developers go to where the gamers are--right now, they're in Sony's camp, and the PS2 is a miniature b!tch to develop for. You need to clear away some misconceptions you have about the console market.

"I don't care if Sony "nullified" any advantage or not."

You should, because the console market is a competitive one. Why is it that Microsoft using DirectX is an asset, but Sony using OpenGL isn't?

"Microsoft is spending to the tune of around $6.8 Billion on R & D per year right now. Makes Sony's $2 Billion look like tiddlywinks doesn't it? :)"

No, not really. Sony spent $2 billion on R&D in the years preceeding the PS2's launch, only on the PS2. Microsoft, five years later, is spending $6.8 billion on R&D FOR THEIR ENTIRE COMPANY. You aren't appreciating the situation Microsoft is in: it's a software company in a hardware market. My points didn't make sense to you because you can't grasp this concept: Microsoft has entered into an extremely competitive market, one that is almost an inverse from the operating system/computer software market.

"Sony is in deep doodoo. They are in no position to fight a nasty knuckle down price war with Microsoft when the net generation of consoles come out, while Microsoft is financially stronger than ever."

Sony is in no such trouble: they are buoyed by their PlayStation divison and are using the PS3 as a leverage point for their new technologies. They will do whatever they can to continue dominating the console market. They are the 800lb gorilla, not Microsoft, and it doesn't matter if Microsoft has good sales of Windows this year: they need to have good sales of their console, or they won't be making an Xbox3.

I also find it hard to see how Sony is suffering from Samsung's competition, given that they are cooperating with Samsung in the LCD market.

"Now when you play an EA game over Xbox Live, you're actually using Xbox Live as a middleman between you and EA's servers,"

Most games played on XBOX live are played on Microsoft's own titles like Halo and Halo 2.
EA is of little relevance right now on XBOX Live.
And XBOX Live is still smoking anyway.

"It wasn't market anticipation of the Xbox that caused faultering Dreamcast sales. "

It played at least a part in Sega's decision.
Product pre-annoucements have been affecting rival products for years.
That is why Microsoft's rivals accused Microsoft of using pre-annoucements to freeze rival products during the Microsoft anti-trust trial.

"Microsoft will find themselves in Sega's position back when they launched the Dreamcast"

If you think Microsoft is lil ole Sega,you have another think coming.
Microsoft is one of the toughest, fiercest, smartest competitors on the planet.
Plus Microsoft has more money than anyone else.
Plus Microsoft's market share for the XBOX went UP last year against the PS2 and Gamecube, and ended the year selling more XBOX's than PS2 and Gamecube for the holiday season.
I haven't even mentioned Sony's weakening position in their core consumer electronics business, where they are getting a clobbering from South east Asian rivals like Samsung.

I'll back Microsoft in this war any day.
I like their chances better than Sony's.

"Nintendo is showing off their new console, code-named Revolution"

Nintendo has been in the vid game business for over 20 years?
Microsoft has been it it for just 3 years, and they still have managed to clobber Nintendo in their very first attempt at selling vid game consoles.
Lets not forget that Nintendo's profits were down a staggering 43% in their latest quarter, due in part to sluggish Gamecube sales brought on in part by the XBOX.

http://www.bloomberg.com/apps/news?pid=10000080&sid=auAoykaxHB00&refer=asia

If you think Nintendo which got clobbered by Microsoft's very first XBOX console is going to beat Microsoft in the next generation, I got a winter skiing slope in Florida I wanna sell ya.

"However, it's going to take software, not hardware, to truly make money off the Xbox2--and that's the Xbox's biggest failure, a lack of quality titles. "

Yeah?
For a console that "lacks quality games" the XBOX managed to do remarkably well in 2004 didn't it, accounting as it were for some three of the top 10 games sold in 2004, with Nintendo's Gamecube, which apparently has all these "quality games" accounting for exactly ZERO of the top 10 video games in 2004.

http://www.gamespot.com/gba/rpg/pokemonred/news_6116499.html

"You have to stop looking at the videogame market as an extension of the software market. It's nothing of the sort"

Umm it is.
Read your own post above, dude.
All those "quality games" you keep going on about is software, and that is where the profits are, and that is exactly where Microsoft did very well last year.

"Microsoft obviously approached the gaming market the same way they did the operating system market (example: their Xbox Live royalty structure) and they got burned"

Umm Microsoft just announced profits for the XBOX, record sign ups for XBOX Live, record games sales etc etc.
Where is the "burning" going on at?

"No, it's not. Name one person who bought an Xbox because it's running a modified version of Windows"

Listen, nowhere have I even come close to saying anyone bought XBOX consoles because of Windows.
Read my post dude.
I am talking about cost of development and speed to market.
Now that is the important part as far as Microsoft is concerned, and that is exactly where having a ready made Windows 2000 came in very handy.
My point is as valid as ever.

"You need to clear away some misconceptions you have about the console market."

I think its you that needs to clear the cobwebs from your head.

"Why is it that Microsoft using DirectX is an asset, but Sony using OpenGL isn't?"

Simple
I explained that already
Sony was in the market first with all the advantages.
It was up to Microsoft the new comer, to try and neutralize Sony's advantages,not the other way round.

"No, not really. Sony spent $2 billion on R&D in the years preceeding the PS2's launch, only on the PS2. Microsoft, five years later, is spending $6.8 billion on R&D FOR THEIR ENTIRE COMPANY"

Sony has a huge array of consumer electronics products that they need to keep spending huge amounts of R & D on just to fend off all the fierce competition they are getting from their South East Asian and Japanese rivals.

Today, Microsoft (at $6.8 Billion on R&D) outspends Sony in R&D by far no matter how you twist it.
Its not even close.
And again, Sony's R&D has to cover a vast array of consumer electronics products.

"Sony is in no such trouble: they are buoyed by their PlayStation divison and are using the PS3 as a leverage point for their new technologies. "

Sony's in deep trouble alright
They sales just keep falling, and they are facing fierce competition everywhere they look from nimbler, better South East Asian rivals, and even other Japanese rivals.
Read again their latest quarterly results that I sent you from Forbes above.

"I also find it hard to see how Sony is suffering from Samsung's competition, given that they are cooperating with Samsung in the LCD market."

Samsung is clobbering Sony in every other consumer electronics product they are competing in.
In fact it was Sony that sued for peace in the LCD business.
That still leaves DVD's, camcorders etc etc for Samsung to just keep taking share away from Sony.

"And XBOX Live is still smoking anyway."

1.4 million subscribers after 4 years, two of them stagnant at 1 million, is not smoking. Let me put it like this: out of the 6.5 million Halo 2 copies sold, only 400,000 are being played online.

And the largest games publisher in the world allowing its games to be playable online on the Xbox ISN'T of relevance? Go look up some Madden sales.

"It played at least a part in Sega's decision."

No, it didn't. The threat of bankruptcy did. After cancelling the Dreamcast, Sega turned into a publisher and spun its in-house development studios off into second-party companies. Microsoft had nothing to do with this, and you're giving the company credit where none is due.

"If you think Microsoft is lil ole Sega,you have another think coming."

I didn't say they are Sega, I said they are going to be in Sega's position: first to market with a highly-anticipated machine on the horizon. In some ways, that's worse than being last to market. Please stop inferring sinister anti-Microsoft comments in the rationale I'm posting.

"I like their chances better than Sony's."

That's fine. Personally, I think Sony's decade-long control of the console market will continue, with Microsoft making gains, but not to the detriment of Sony's overall market share. This is for a lot of reasons, but partially because the overall growth of the console market will allow both companies to gain sales without affecting the overall market share percentages.

"Lets not forget that Nintendo's profits were down a staggering 43% in their latest quarter, due in part to sluggish Gamecube sales brought on in part by the XBOX."

Sorry, but no. Last year, Nintendo continued to profit off the Gamecube thanks to their price cut to $99. This year, Nintendo's profit projections (not actual profit earned--profit PROJECIONS) were reduced because of the diminishing exchange rate between the yen and the dollar. Microsoft is #2 in the US, tied in Europe, and #3 in Japan. They haven't clobbered anything, only found a niche.

"For a console that "lacks quality games" the XBOX managed to do remarkably well in 2004 didn't it..."

Yes, Halo 2 sold a lot. Not many other games did. Microsoft profited so much off of Halo 2 because it is the game's publisher, and it owns Bungie. Would you care to list the other high-profile Xbox-only titles that have been released in 2004? I can name one: Ninja Gaiden. And Ninja Gaiden sure as heck did not contribute to Microsoft's profit margin, given that it didn't sell nearly as well as Halo 2.

Oh, can you list Microsoft's Halo 2-equivalent for 2005? It ain't Forza Motorsport, I can tell you that.

"All those "quality games" you keep going on about is software, and that is where the profits are, and that is exactly where Microsoft did very well last year."

Having one or two AAA-quality games (Halo 2, Ninja Gaiden) available 9 months apart does not constitute a year that's gone "very well." You're missing the point: besides Halo, what does Microsoft have? The answer is "not much." This is the same concern Take-Two's shareholders had: besides Grand Theft Auto, the company had nothing. Take-Two has since purchased Visual Concepts from Sega and Microsoft's sports games division. Let me repeat this: Microsoft sold their sports games division. This means there will be less Xbox games, not more.

"Where is the "burning" going on at?"

Their overall market share, the percentage of Xbox sales to Xbox Live subscribers, the amount of Xbox-exclusive games released (and desirability compared to PS2-exclusive games), and the amount of third party companies developing games for the Xbox. Like I said before, Tecmo and Bungie can't keep Microsoft afloat.

You can continue treating me with hostility, or you can realize Microsoft has an uphill battle ahead of them. Pick one. You'll hear no more about me on this topic: I've made my points.

"1.4 million subscribers after 4 years, two of them stagnant at 1 million, is not smoking"

THREE years.
XBOX was launched Nov 2001.
And for an online games system that was started from scratch and only uses broadband, with an installed console base of around 16 million, its smoking alright with 1.4 million users.
A very solid start, I call it.

"out of the 6.5 million Halo 2 copies sold, only 400,000 are being played online."

Halo 2 ADDED another 400,000 to XBOX Live.
That is not the same as saying the other 1 million XBOX live users did not buy and play Halo 2 as well.

"And the largest games publisher in the world allowing its games to be playable online on the Xbox ISN'T of relevance? Go look up some Madden sales"

EA is not relevant on XBOX Live as at today.
Overwhelming majority of games played on Live are for Microsoft's home grown titles.

"No, it didn't. "

Og yes it did.
I remember at the time quite a number of analysts out there made a reference to the upcoming Microsoft XBOX when talking about the possibility of Sega getting out of the console business.

"In some ways, that's worse than being last to market."

And in lots of ways its much better too ,like Sony benefited from being first out against the XBOX

"Sorry, but no"

Umm yes.
I repost Nintendo's LATEST results (Jan 26,just 2 days ago).
Hopefully you can still read.

"Jan. 26 (Bloomberg) -- Nintendo Co., the world's biggest maker of hand-held game machines, had a 43 percent drop in third- quarter profit on slower-than-expected game sales and the yen's rise against the dollar. The company cut its full-year forecasts. "

http://www.bloomberg.com/apps/news?pid=10000080&sid=auAoykaxHB00&refer=asia

"Slower than expected game sales". Get it?

"Yes, Halo 2 sold a lot. Not many other games did"

XBOX had THREE games in the top 10 2004.
How many did the Gamecube have again? ZERO.
That is what this discussion is about.

"Having one or two AAA-quality games (Halo 2, Ninja Gaiden) available 9 months apart does not constitute a year that's gone "very well."
"

Having THREE top 10 gmes in 2004 is.

"Oh, can you list Microsoft's Halo 2-equivalent for 2005? It ain't Forza Motorsport, I can tell you that."

Let me turn that around and ask you: can you list a GTA San Andreas for PS2 in 2005?
Nope.
But I can list that same GTA San Andreas very likely for XBOX in 2005.
Meanwhile Halo 2 will never be on PS2.

"Their overall market share, the percentage of Xbox sales to Xbox Live subscribers, the amount of Xbox-exclusive games released (and desirability compared to PS2-exclusive games),"

Didn't realize you can't read too.
XBOX console market share for 2004 went up every single month of 2004.
XBOX Live percentage to XBOX console sales went UP as well, and while XBOX has Halo 2 exclusive, San Adreas is likely going to appear on XBOX this year.
What is there not to like?

"So ya gotta wonder why the company is taking such desperate measures, like denying security updates to pirated copies of Windows.... "

Trying to prevent thieves from stealing their product is not "desperate measures".
Its called obeying the law.
Every company on the planet does it.
If you think its such a great idea to steal, leave your door open at night and when you go to work, so thieves can have free and open access to your property.
How about that?

"and pricing the european stripped-down version the same as the full-bloat version. "

Stripped down nothing.
Microsoft has to offer a Windows version without Media Player according to an EU ruling. Period.
Of course its gonna cost the same as Windows with media player.
Consumers can choose which one they want.

"MS obviously isn't hurting for revenue, so it looks like it's an obvious and serious attitude problem."

Come again?
Hurting nothing.
You obviously can't read.
Umm read the Microsoft earnings statement again, will you?
Microsoft's revenues and profits are smoking.
Something that pbviously gives you great pain. GOOD!

#1, Microsoft is using an amended for of Windows for the XBOX, so they don't have to write a new OS for it.

That comment brings up a point that affects your later predictions of Nintendo's console demise. AFAIK, there is no version of Windows for any of IBM's chips, but all three next-gen consoles will be running them. Nintendo's already on an IBM POWER-based platform, but Sony and Microsoft have to create a software system to run on these new IBM chips.

# 3, when Microsoft started with Windows , back in 1983 I think, it took nearly 7 years till 1990 before Windows really took off.

That was simply because Windows was completely unusable until 3.0. I used Windows 286 for a while, but went back to a regular DOS shell task switcher because Windows brought the computer to its knees while giving me no real extra functionality. At the time, my 8MHz Atari ST could blow away a Windows 286 installation in performance and usability.

Microsoft took such a loss on the XBox by design. They were new to the market so were willing to take a huge loss leader to break into it. Unlike Windows, the XBox was actually a very capable, competitive system from the beginning. Although not as stable or well-designed as the competition, it provided an approximately equal gaming experience.

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