Why the Xbox Means So Little to Microsoft

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It is as if the Xbox One mattered to Microsoft Corp. (NASDAQ: MSFT) — at least financially. The world’s largest software company boasted it sold two million devices in 18 days. And in a negative note, the supply of Xbox One consoles has gotten low. So much for a huge surge in holiday sales. Whatever happens to the Xbox will have nothing to do with the success of Microsoft. The revenue it generates is so small compared to Microsoft’s big divisions that Xbox One sales are a rounding error.

In the quarter that ended on September 30, Microsoft had total revenue of $18.5 billion and operating income of $6.3 billion. Its Entertainment & Device segment, in which Xbox sales get counted, had revenue of $2.1 billion. Unfortunately, the segment posted a loss of $15 million. The segment also includes sales of other Microsoft hardware. Revenue from Skype, one of the company’s strangest acquisitions, is in there as well. Even if Xbox One is a huge success, the operating income contribution to Microsoft’s overall numbers will be modest, or less than that.

The theory behind why the Xbox One is important to Microsoft beyond revenue is a stretch. Xbox could be Microsoft’s portal into the American home. It could be used as an Internet-connected device that operates in the place of set-top boxes, PCs, Apple Inc.’s (NASDAQ: AAPL) Apple TV or the loads of other devices that sit atop American television sets.

The Xbox does have music and video services, as well as apps and a fitness program. The NFL has a programming deal with Xbox. And there are the games, which are at the heart of why most people buy consoles at all. However, none of these entertainment services is unique, and most have tremendous competition as Americans sort through whether they should have a half a dozen or a dozen devices or services to content with in whatever home entertainment centers they have.

Microsoft has had a dream that it might eventually matter in the hardware sector. That dream has been advanced by the launch of the Surface tablet and ongoing support of Windows-powered smartphones. None of these initiatives has worked very well. The Xbox is the most successful among them. At least Microsoft can boast enough Xbox unit sales to say the device is almost viable, financially.

Xbox One sales may give Microsoft some bragging rights. However, in the matter of Microsoft’s P&L, it means very little.

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