Microsoft's Games Division's Positive Income

Microsoft has announced its financial data, and its Entertainment and Devices division (Xbox and Zune to you) is showing operating income in the black of $357m (£180.5m) for the three months to December 2007.

This contrasts with the a $302m (£152.5m) loss for the same period in 2006. It's also popped in the figures for the six month period to December 31st in both years: 2007 being a positive $524m (£264m) compared to 2006's $423m (£213m) loss.

'Operating income' in this sense means revenues (or 'earnings'), minus costs of sales and operating expenses but before the deduction of interest payments and tax.

Now, can anybody point out what happened at the end of September that would have contributed the a positive income stream for Microsoft's Entertainment and Devices division? Why, the launch of Halo 3 of course. The last week of September 2007 saw the uber-game launch around the globe. This became the best-selling game of 2007 in the USA, selling 4.6 million units.

In fact, as we reported in October of 2007, for the UK alone, "The release of Halo 3 gave Xbox 360 hardware sales a huge spike, doubling the previous week's figure... (it) put £17 million through retailers' tills through software sales alone between its Wednesday (September 27th) launch at 12:01am and midnight on Saturday (September 29th). The game made up 68% of all software sold for the 360 (in the UK), giving the platform its best ever software sales week".

This was supported in a global setting with the report that Halo 3 had,"...racked up a not-too-shabby $300 million (£147.36 million) in sales worldwide, making it what Microsoft calls “the fastest-selling video game ever"... in its first week on sale.

This lead to Microsoft telling us that, "...the game's launch doubled weekly 360 hardware sales compared to the weekly average before launch..."

Add to that the success of Mass Effect during the same period, and there's a powerful pair of revenue earners for the period in question.

The impact of the games' sales on income is, therefore, obviously immense, especially when you consider Microsoft spokesman David Dennis' comments to the Associated Press that during December there had been, "...shortages of the Xbox 360 at retailers across the US".

All this obviously good news has lead to Internet headlines regarding the division being 'profitable at last!" or "finally profitable". Not true. For a start, the division claimed an operating profit of $165m (£73m). For a next-thing, a business unit making profit in one or two periods does not make it profitable as a division if for the previous ten periods it had not repaid its start-up costs and had lost money.

Back in April last year, you may recall (if not, read this SPOnG report), 'Information Arbitrage' analyst, Roger Ehrenberg pointed out a few harsh financial truths.

"...after five years and over $21-billion invested, all they've (Microsoft) got to show for it is $5.4 billion of cumulative operating losses...", said Roger.

The question is, however, does Microsoft care?

Also, before fanboy ranting overwhelms the figures, the answer to the question: "What about the $1.15-billion write-down for Red Ring of Death Repairs!" - they were included in Microsoft's Fourth quarter 2007 earnings.

Finally, we are a little confused, having read Microsoft's figures for its second quarter as published last year, which say that in the same period in 2006, the division lost $289m not $213m. Different accounting procedures?

Tell us in the Forum.