Xbox division revs down 11%, 5.2 million 360s sold in Q4

Microsoft quarterly earnings rise 60%, but Entertainment & Devices Division sees three-month revenues fall to $2.9 billion; Xbox unit sales down 13% despite price cut; Xbox Live now 23 million strong.

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Less than 24 hours after Nintendo reported revenues for the last nine months of 2009, Microsoft announced its earnings for the October to December quarter of last year. Overall, the software giant saw record revenues of $19.02 billion, an increase of 14 percent. Net income--aka profit--was an impressive $6.66 billion for the quarter, a figure company officials credited to the rapid adoption of Windows 7 and brisk PC sales.

Despite being cheaper, holiday quarter Xbox 360 unit sales fell 13% to 5.2 million.
Despite being cheaper, holiday quarter Xbox 360 unit sales fell 13% to 5.2 million.

Unfortunately, Microsoft's overall success did not carry over to its Entertainment and Devices Division, which makes the Xbox 360 and Zune multimedia player. Year over year, the department's revenues fell 11 percent from $3.26 billion to $2.90 billion, with Xbox 360 and PC game revenue dropping by 12 percent, or $295 million. (Non-gaming revenue, including the Zune, fell 8 percent, or $59 million.) Part of the reason for the decline was the Xbox 360, which saw quarterly unit sales fall 13 percent to 5.2 million consoles despite price cuts to both its Elite (now $300) and Arcade (now $200) models.

Microsoft also repeatedly blamed the lower game earnings on unfavorable year-on-year comparisons "due primarily to the release of two significant games in the [holiday] quarter of the prior year." While never identified by name, the two titles were likely the first-party 360 exclusives Fable II and Gears of War 2, released in October and November of 2008. Major 360 exclusives for the 2009 holiday season included Forza Motorsport 3 and carryover sales of Halo 3: ODST, which launched in late September.

Microsoft also still claims its Xbox 360's software attach rate is an industry high of 8.8 games per Xbox 360. However, it conceded that "attach revenue declined [from Oct.-Dec.], given the challenging year-over-year comparison."

That said, Microsoft's report had some bright spots for the Xbox 360 platform. The company announced it decreased "cost of revenue" by 23 percent, or $478 million, mainly due to lower 360 production costs. That figure was somewhat offset by increased royalties to Xbox Live business partners, which were brought about in turn by a surge in popularity of the 360's online service. Some 23 million people have signed up for Xbox Live, an increase of 35 percent year over year, according to Microsoft. The company did not break out how many of the 23 million were paying Xbox Live Gold subscribers.

Speaking with analysts in a post-report conference call, Microsoft CFO Peter Klein said he expects Entertainment and Devices Division revenue "to trend with the rest of the game industry, and full [fiscal] year revenue should be roughly flat." Looking past the end of Microsoft's fiscal year on June 30, Klein said that the company is looking forward to the launch of Project Natal but offered no forecast of the motion-sensing system's financial impact.

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