Zune's 54% Decline Drags Xbox Division Down

There's where to cut costs

Posted by Staff
Buy my Zune. Please... buy my Zune.
Buy my Zune. Please... buy my Zune.
Digging into Microsoft's recent earnings report - the one that stated that the Entertainment and Devices Division over-performed - one element of that division stood out.

Certainly, recent Xbox 360 offerings and price-cutting save a healthy uptake of that part of the division. On the downside, however, was the Zune. If you're British, you may only have seen Microsoft's iPod beater in mythologies. If you're in the USA, where the device has been on sale since 2006, it's possible you've seen boxes of the music player lying around the place.

Well, here's what Microsoft's most recent Form 10-Q has to say:

"Zune platform revenue decreased $100 million or 54% reflecting a decrease in device sales."

Ouch. This text is followed by a slightly more detailed look at the division as follows:

"EDD operating income decreased primarily due to increased cost of revenue, research and development expenses, and sales and marketing expenses, partially offset by increased revenue. Cost of revenue increased $139 million or 7%, primarily driven by increased costs associated with the Xbox 360 platform reflecting the increase in console and video game sales. Research and development expenses increased $106 million or 29%, primarily reflecting increased headcount-related expenses associated with the Windows Mobile device platform. Sales and marketing expenses increased $83 million or 19%, primarily reflecting an increase in product advertising and channel marketing."

The six months ended December 31, 2008 compared with six months ended December 31, 2007 are described as follows:

"EDD revenue decreased primarily due to decreased Xbox 360 platform and PC game revenue, partially offset by increases in other EDD product revenue. Xbox 360 platform and PC game revenue decreased $196 million or 5%, primarily as a result of the $330 million of incremental revenue from the launch of Halo 3 in the first quarter of fiscal year 2008 and decreased revenue per Xbox 360 console as a result of price reductions during the past 12 months.

"We shipped 8.3 million Xbox 360 consoles during the first half of fiscal year 2009 compared with 6.1 million Xbox 360 consoles during the first half of fiscal year 2008. Other EDD product revenue increased $169 million or 15%, led by increased sales of application software for Apple’s Macintosh computers and mobile and embedded device platforms.

"EDD operating income decreased primarily due to increased research and development expenses, partially offset by decreased cost of revenue. Research and development expenses increased $251 million or 37%, primarily reflecting increased headcount-related expenses associated with the Windows Mobile device platform, driven by recent acquisitions. Cost of revenue decreased $112 million or 4%, primarily driven by decreased Xbox 360 manufacturing and warranty costs."

So, year-on-year, Microsoft's game revenues decreased. Although, "decreased revenue per Xbox 360 console (came) as a result of price reductions during the past 12 months", the company did manage to get 2.2 million more 360s into homes than the previous year
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Comments

OptimusP 26 Jan 2009 17:21
1/9
So, in the end, the only companies making money are Nintendo, Valve and a bunch of European and Japanese niche-developers with the brains of not jumping on HD-platforms.

Way to go industry!
Joji 26 Jan 2009 17:54
2/9
MS are a bit dense. The Zune could have been their PSP, but they've done little to sell it, even with 360 sales doing well of late.

In my opinion, Zune needs a redesign and to open up to more file formats. There's no reason why MS couldn't take on Apple, but their efforts seem half hearted at best. iPod does well through good brand and advertising, I can honestly say I've never seen any ads on tv for Zune, but plenty for 360. Does this mean MS have admitted defeat with Zune? A shame really because while I dig my iPod video, there's still a damn lot of stuff that iPod doesn't do, that Zune could

How to fix this? Try giving away Zune discounts with 360s or something, and throw some sweet connectivity between the two. Maybe even let Zune run a Live like interface. Even the possibility of Net Flix/Love Film file use between them (download a film and transfer to Zune for a fee), would surely stimulate their sales more than nothing.

Apple are leaving MS in the dust, and I guess the only thing they could do better, would be a possible portable 360. Would they want the potential burden of that though, with even PSP finding things tough?
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OptimusP 26 Jan 2009 18:13
3/9
It's all fun to say stuff like that, but in the end it's because MS is known to be a crammer.
Now Cramming is a term used for companies who force a disruptive innovation into their own structures while integrating disruptive innovations require spin-off companies with their own values and processes.

Cramming results in huge investments, bad products, unsatisfied customers (thank god gaming consoles are driven by content or else the Xbox would be even worse off) and a lack of proper strategy in function of utilising the disruptive innovation, not utilising the existing processes and values of the mother company.

MS just copies others, but doesn't integrate the thinking and processes behind it. That's a huge gap. It's like people trying to fly by just flapping their arms with some wings attached and not trying to figure it out what makes flying work.

The reason the only think works on the Xbox is Xbox Live is because MS is a software company with values and processes who make it a very good company at making software and not a so good one in making hardware. Sony is the other way around. Apple and Nintendo are so called integrated hybrid companies. They have been able to mesh software and hardware in a very integrated and albeit very controlled manner. That's why both companies don't make their platforms so open to others. They're products are not modular but integrated.
BelowG 26 Jan 2009 18:53
4/9
Well said. I would say Microsoft is more of a marketing company that HAPPENS to sell software. As much money that they throw on their ventures, its amazing occasionally something good does come out of it at all.
JimmyMac 26 Jan 2009 22:10
5/9
I smell ZunePhone.
Rod Todd 27 Jan 2009 11:21
6/9
The Zune's sales could go DOWN!??! Who'da thunk it!

SuperSaiyan4 27 Jan 2009 12:04
7/9
Just read on MCV that a spokesperson has confirmed Zune is here to stay and they have around 3million devices sold...How many of them are imports?
The thing is Microsoft creates an MP3 player for the US market only which for one is stupid, secondly its competing against the giant Apple against the iPod which is madness.
Microsoft brought out a player that was totally uncompetitive against the iPod and with products like the iPod Touch whats the point in the Zune?
As the Zune stays only in the US market it will show decline against iPod sales as Apple are in the global market.
Fatal Exception 27 Jan 2009 16:53
8/9
I would have bought one, but they wont bloody release them in the UK. I don't want an iPod because I hate iTunesm the Zune would be the next best thing!

Was p 27 Jan 2009 20:49
9/9
SuperSaiyan4 wrote:
Just read on MCV that a spokesperson has confirmed Zune is here to stay.


Sounds a bit like the dreaded vote of confidence football managers get a week before they're sacked.
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