Has Xbox actually been profitable? I understood that overall, they're still down a net few billion. I can see how entertainment and taking over the home and living room (especially after their moronic handling of Media PC) is important, but I don't think it's been a cash maker by itself.
A quick search turns up one article[1] claiming 3BN loss over 10 years.
As far as Azure, I'd be surprised if they've recovered all the money they've put into engineering and so on. Maybe if you consider they had to do a lot of similar work for MS online.
I honestly think the Xbox is their gamble on "the next big thing". I don't think it's about the games. I think it's about the living room presence. And in my mind that is Apple's next big battle, and Microsoft has a huge head start. Cable boxes are going to die/morph into the game consoles. If I had to make a prediction, I could see Apple and Nintendo working together on a competitor...
But Xbox is just their entry into the next battlefield: the living room and tv.
Here is the VC question: how are you making money off a box in the living room? Who is buying it? Why?
What does it bring that a tivo that plays netflix and hulu doesn't already? Of anyone I know, they either have no cable (younger gen), where they just hook a computer into the tv to watch online content, they have cable and a tivo or provider DVR (mid aged families) or they are >60 years old, don't want anything to change, and can't learn to use a dvr even when I guide them through it (my grandparents).
Who is your audience? Why? What value are you delivering they don't already have in their living room? How is that going to save your company? How is an xbox one, which, while not sale-subsidized by license fees like the 360 or ps3 were, isn't making you healthy margins but supposed to provide revenue generation?
Or it's the entrance to your home, entertainment-wise. How long do you think that cable companies are going to be putting these hideous, power-eating, under-performing boxes from Motorola / whomever in your house, which serve essentially minimal purposes. In my hypothetical future, game consoles replace those. Why have 3 pieces of hardware when you can have one (wifi router + cable box + xbox)? As TV changes over the next X years, I think Microsoft is positioned very, very well to make moves in this space. They have the weight to lean on the Comcast / Verizon / Cox / Turner / take your pick, and the technical ability to make things work.
Looking further down the line, you can see a future where home automation is centered around your central console, another area where I think Microsoft could make some moves. In a sense, they could own the operating system of your home. But this is probably a decently long ways out, so who knows.
> How long do you think that cable companies are going to be putting these
Well, as long as they are "free" and subsidized by bills. People like free, and cable companies usually give out the ancient hot DRM DVRs for free with subscriptions. I don't see people lining up to replace their DVR with an xbox (which isn't an actual replacement, it has no coax in or tv tuner).
> Why have 3 pieces of hardware when you can have one
Xbox doesn't have DOCSIS either. You can't put a cable modem in it. You maybe can use it as a router, but you can use anything with a land line ethernet plug as a router, or you could get a hotspot as a router.
> you can see a future where home automation is centered around your central console
I see this, but xbox one is so locked down, expensive, and it uses gamepads, not tv remotes. I don't see people keeping the xbone on as a media sync server, when you could buy a router with attached storage for a quarter the price.
In my mind, the end user wouldn't pay $400+ for the device, it'd have wifi and whatnot built into it. The content delivery system would subsidize the cost. And honestly the majority of the market could give a shit about being locked down.
The answer to your question is proprietary gamer content. There's a certain generation that will spend big money to have an ideal gaming experience, and a subset of that set doesn't like that on PCs.
I know the audience you speak of won't do this, but Steam big picture mode does solve that problem. Plug pc into tv via hdmi, get a bluetooth adapter or just use a corded 360 or ps3 gamepad, play games. You can even do that with a gamer grade laptop which also happens to be portable, albeit expensive.
I see a full-os media server box plugged into the tv that can act as router, sync server, tv dvr, game console, and with miracast etc provide displays all over a home, but I don't think xbone is sophisticated enough to do it. Does it even support non-xbox gamepad input?
XBox is only profitable if you read the data very carefully (ignoring sunk costs), or if you take the 360 _on its own_, ignoring the original and XBox Live. It will probably eventually be profitable, but it isn't now.
I'd be astonished if Azure is profitable; AWS isn't, and it sees vastly higher volume at similar prices. And, of course, profitability for Azure is a messy concept; is it profitable when it makes more than they spend on it, or when it makes more than what they spend on it plus what they're losing by selling fewer Windows Server licenses to Amazon et al?
XBox has made far less money than a stock buy back plan would have therefore it was a bad idea. I don't know the specifics on Azure but it's still in the rounding error stage.
An earlier comment about how better it would have been for Microsoft to just do nothing. Maybe, from a money perspective. But meanwhile they did research, tried out designs, products, services. It's not all loss.
There's more to the trip than the destination. There's a whole ride where things happen and have a value in themselves. Unless we only value the shareholders' money.
Yes, but sane CFOs have to evaluate "what's the best use for this money?" and trade off share buy-backs (or overt dividend declarations) against other investments the company could make.
So, it's perfectly reasonable to say that any investment with dramatically worse return than a share buy-back is a financial loser. If you'd like to argue it's a strategic winner, then change the time window or otherwise make the financial analysis take those strategic gains into account (with an appropriate discount to compare NPVs).
> Yes, but sane CFOs have to evaluate "what's the best use for this money?" and trade off share buy-backs (or overt dividend declarations) against other investments the company could make.
Sure. That means they decide between investing a certain amount of capital in some projects, or returning that capital to the investors.
> So, it's perfectly reasonable to say that any investment with dramatically worse return than a share buy-back is a financial loser.
Not, it's not reasonable. Investing on a project has return for the company, but dividends or buybacks don't. They're in a different category. I think OP wanted to say "it would have been better to invest the money at the risk-free rate than investing on that project".
CFOs are paid to and should be evaluated on creating/optimizing returns for the owners of the company (the shareholders).
If the return from a project for the company (and the therefore the shareholders) is greater than that of a dividend/buyback, do the project. If the dividend/buyback is the idea with the best return, do that.
This evaluation works whether on a projected/discounted look-forward basis or a backward looking basis. In both cases, you have to model assumptions about the path not taken.
Note that most established companies have a portfolio of ideas. Few operating companies return most of their net profits to shareholders. (some companies setup as financial instruments do/must, and whether a REIT is an operating company or not is a question, but Microsoft certainly is an operating company and returning 100% of net profits, even if that were the best idea they had on first-order evaluation, would be a terrible idea.)
It does this only because the market thinks that management thinks the shares are undervalued. If things are "efficient" then a buyback and dividend are equivalent Conversely, if shares are overvalued then a dividend payment is better for management.
At any rate, the relevant thing to compare Microsoft's investments to is the opportunity cost of the money. If Ballmer spent ten billion dollars on a project that netted only a 3% ROI, then shareholders would have been better off receiving that money and putting it into other companies.
Dividends are taxed at the same rate as capital gains, so it should make little difference to a shareholder if a company paid him 1000 dollars or raised the resale value of his stock by 1000 dollars.
No, because your forced to pay capital gains early thus having less money to compound. Try simulating it with 10% growth vs 5% dividend (which is used to buy the same stock) and 5% growth for 10 years.
Oh for Microsoft, maybe. I'd love to have rounding errors like that! A more salient question for now is, is that a rounding error for Amazon, Rackspace, Heroku, etc. as well?
