Microsoft Xbox One: Can Gaming Make Money?

Image via Barone Firenze/Shutterstock

It’s not all that clear whether the decade or so Microsoft Corporation (NASDAQ:MSFT) has spent in gaming has done the company any good. The company’s second console, the Xbox 360, was incredibly successful, but if research and development is taken into account nobody is sure whether the console made the company enough money to justify its existence. Some even insist that the Xbox 360 made no money at all.

The problems with predicting the success of the Xbox One relate to Microsoft’s accounting practice. The console is dumped in with other businesses in the Entertainment and Devices division. It’s difficult to figure out how much money it makes itself. One thing is clear, it’s nowhere near the margins of the rest of the business.

Xbox One Losing Money

Nomura analyst Rick Sherlund released an interesting report back in August. He said that the Entertainment and Devices division was being saved by revenue from Android licensing. The Xbox was actually losing money. If Sherlund’s estimates were right the Xbox 360 was losing money at the end of its lifecycle. That’s not a good sign for the Xbox One.

Even if the Xbox 360 made money, its margins are coming in much lower than those of Microsoft Corporation (NASDAQ:MSFT) core business. There is little argument about that. The question is whether it is worth it for Microsoft to continue pushing the device in the face of low, or negative, margins.

Microsoft has already lost millions if not billions on the Xbox One. The company has invested a huge amount of money into the development of the console and it will need to make that back over the next ten years. Hopes of making a profit off of the Xbox One are not in vain, but the profitability of the division is certainly less that Microsoft investors expect.

Some have suggested that Microsoft do away with the Xbox One division. They argue that low margins and unstable business are bad for a company that should be concentrating on enterprise. Microsoft appears to see things differently, however.

Xbox One Takes The Living Room

The Xbox One isn’t really about making a profit, it’s about the One Microsoft strategy. The Redmond company wants to control the living room so that it can sell more Windows 8 devices across the board and more Microsoft Corporation (NASDAQ:MSFT) services to business.

The company appears to believe that a games console should be the center of this strategy. Even if the Xbox One is losing money, the company is going to push it in order to tie together its dream ecosystem. The plan may work, but it seems to have had little effect during the lifetime of the Xbox 360. Not many Xbox users sported a Zune.

The Xbox One might make money or it might not, but it is always going to be controversial at Microsoft Corporation (NASDAQ:MSFT). The division just doesn’t fit in, even with the move toward hardware at the company.  With the Xbox One buried deep in Microsoft accounts, we may never know if it actually makes money.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.