Is Xbox the Success Story Microsoft Claims?

If Microsoft wants the Xbox One to become a hit, it’ll need games like the upcoming “Ryse: Son of Rome” to reach blockbuster status.

Microsoft earns $2 billion a year from Android royalties, according to an analyst, thanks to an aggressive campaign of threatening to sue any Android manufacturer that doesn’t sign a patent-licensing agreement. By mid-2012, Microsoft secured agreements with the majority of Android manufactures worldwide, including Samsung and HTC.

Where did all those billions go? According to Nomura analyst Rick Sherlund, some 95 percent of it is pure profit—and it goes to hiding losses in Microsoft’s Entertainment and Devices division, home of the Xbox. (ZDNet walks its readers through Sherlund’s formula, which hinges on Microsoft earning roughly $5 in royalties per Android unit, multiplied by 70 percent of the total Android units sold every month; as with any analyst supposition, it helps to take his math with an appropriate grain of salt.)

Without that infusion of Android cash, Sherlund argues, the Entertainment and Devices division would bleed around $2.5 billion per year, with the majority of that coming from Xbox.

Sales of the Xbox 360 have slowed ahead of the anticipated launch of the next-generation Xbox One later this month, although revenues from Xbox Live online services remain strong. Whether or not the console is actually contributing to Microsoft’s bottom line, analysts continue to debate whether the company should spin off Xbox as its own gaming concern: a financial workup by Bloomberg suggests that Xbox would be worth $17 billion as a spinoff.

But if Sherlund’s hypothesis is correct, a spinoff simply isn’t feasible: Xbox Incorporated would lack the constant infusion of outside cash in order to stay solvent, something it currently receives from the Microsoft mothership.

Of course, there’s always the possibility that something’s off in Sherlund’s numbers, and that Xbox runs at either breakeven or in the black after many years of steady losses. But even if that’s the case, it’s unlikely that Microsoft will spin off Xbox anytime soon: Xbox One is the centerpiece of the company’s attempts to dominate the living room. In addition to playing video games, the console offers streaming-media, Skype, and a variety of entertainment apps.

But this “all in one” approach presents some significant risks. Cheap set-top boxes and Google dongles can stream content for a fraction of the price of the Xbox One; tablets and smartphones are capable of playing games in addition to running apps and streaming movies; and many casual gamers are probably satisfied with their current PC or game console. The rise of Valve’s Steam platform (65 million active user accounts and climbing) and the upcoming PlayStation 4 (backed by a massive Sony marketing campaign, and designed to appeal expressly to hardcore gamers) will further complicate matters.

That puts an incredible amount of pressure on the Xbox One to perform—the future of the platform is at stake. And if it’s leaking cash behind the scenes, that’s probably not making things any easier.

 

Image: Crytek