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"Pst... an $84 million profit on $1.37 billion revenue for the Entertainment and Games division does not confidence create"

XBOX turning in its first profits creates plenty of confidence alright.
Last year, CFO Connors predicted that XBOX wouldn't even be profitable at all in this iteration.
Game consoles always make losses or low profits to start off with, until they get well established.
With XBOX live now having 1.4 million users, a very adequate installed base, games flying off the shelves, and even more great games coming this year, the XBOX will just grow from strength to strength right into when XBOX 2 is released.

Besides Microsoft can afford it.

With a record net income of a massive $3.40 Billion, Microsoft easily makes far more profits than Sony or Nintendo and can outlast them in any price war.

"XBOX turning in its first profits creates plenty of confidence alright."

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, I'd consider selling some stock. Microsoft is using its E&G division as a wedge to get into the home theater market, but I question the wisdom of using a console that's relied on two games--Halo and Halo 2--to make any marketplace ripples.

"Game consoles always make losses or low profits to start off with, until they get well established."

Yes and no. Nintendo has managed to make profits on every console it's sold since the NES. It's Sony who adopted the "lose money on hardware, gain money on software" model. The problem is that Microsoft hasn't even gained money on software sales except for this year, and the gain--in the face of Halo 2, the most pre-ordered game in history, which raked in more money on its opening day than most movies do, and sold 6.5 million copies to date--is miniscule. I'm glad they've finally posted a profit, but if it took one of the best-selling titles in videogame history to do it, they have problems.

"With XBOX live now having 1.4 million users, a very adequate installed base, games flying off the shelves, and even more great games coming this year, the XBOX will just grow from strength to strength right into when XBOX 2 is released."

Xbox Live stagnated at 995,000 users for about a year, and it again took Halo 2 to bump the number of subscribers up. Meanwhile, depending on which report you look at, more people use the PS2's online capabilities.

"Besides Microsoft can afford it."

Tell that to their shareholders, who are getting increasingly nervous about the Xbox.

" With a record net income of a massive $3.40 Billion, Microsoft easily makes far more profits than Sony or Nintendo and can outlast them in any price war."

Except that we're talking about the gaming industry, and Microsoft's revenue does NOT come from the gaming industry. Brute forcing the Xbox into the market will not work.

I own an Xbox. I have four games for it: Halo 2, Soul Calibur II, Ninja Gaiden, and Halo. Meanwhile, I've owned my PS2 for about a year and have around 16 games for it, in a far wider variety of genres than the Xbox offers. The Xbox was Microsoft's foot in the door regarding the game industry: stop trumpeting it as a magical success. Xbox2 stands a chance of being a success: Xbox will go out in a year as a console that had some good hardware ideas, bridged the gap between PCs and consoles, but couldn't even trump a weakened Nintendo. Microsoft's proved it can at least stand the gaming industry--now it has to try to become a serious competitor in it.

Tecmo and Bungie can't save them forever.