Bach: Xbox Business Profitable Next Year

Microsoft's Robbie Bach (right), president of the Entertainment and Devices Division, has said that the Xbox 360 business will become profitable in 2008 and he outlined the ways in which Microsoft plans to make money with the console.

by James Brightman on Friday, May 04, 2007

Microsoft has been in the console video game space for nearly six years now, and the Xbox business has yet to be profitable. In fact, one analyst believes it's been a "disastrous endeavor" for the company. For the nine months ended March 31, Microsoft's Entertainment and Devices Division (EDD), which houses the Xbox business, just reported an operating loss of $693 million.

EDD President Robbie Bach doesn't expect the losses to keep piling up, however. In a new interview with eWeek.com, the executive explained Microsoft's thinking behind making money on Xbox and he promised that the business would indeed be profitable in 2008.

"Right now we're doing a pretty good job," he said. "We're humming pretty well in the business. Our costs are a little higher than we'd like, [but] we're pushing those down; there are good initiatives underway to drive that. Game attach rate [is at the] highest level in history for a game console at this stage in the life cycle. The same with our peripheral attach rate. Xbox Live has over 6 million members.

"The pieces are in place to drive the proverbial billion dollars. Specific date—oh, that's going to depend on what happens in pricing, which partly we control, partly we don't. You know what happens in component costs—mostly we have pretty good influence over that, but there are places where we don't. Pricing on memory goes up and down seemingly like a yo-yo, so [we have to manage] through that. So, it's a business that will be profitable next year—we'll make money next year and that will be the first time, which is pretty exciting. And then the next two or three years are the place where you need to make tracks, and the next two or three years are where you have to make money."

Bach also explained the ways in which Microsoft can make money, mostly focusing on the standard "razor and blades" model, but also adding in services like Xbox Live and the sale of peripherals.

"There are three ways to make money on an Xbox," he stated. "Generally it's not on the hardware itself; we'll probably be gross margin neutral on that over the life cycle of the product and try to break even on that. The second thing you try to do is you make money on the games themselves, and there are two models there. One is first-party games that Microsoft produces. The other is games that Electronic Arts or an Activision produces, and we get paid a royalty on those games. The third place you make money is on Live, and where we actually have a very nice service that's scaling very well, and that is a business model that's subscription, ad-based, and download-based. It kind of has the full gamut of business models associated with it, and I think you're going to continue to see that grow. And then the final place you make money is on peripherals, so game controllers, cameras, steering wheels, a whole other set of things."

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