No, Microsoft hasn't lost $400 million on Xbox One

In the past week, many articles have hit the web claiming that Microsoft lost $400 million on its relatively new Xbox One console since it launched in November. That would be an interesting fact if it weren’t completely untrue.

The stories all cite Microsoft’s recent 2014 fiscal year financial results as the source of the information, such as today’s Forbes article, though many got their incorrect interpretation of the data from a NeoGAF forum topic. What Microsoft’s financial statements actually say about its Xbox One revenue is much different than what many of the headlines are claiming.

In the computing and gaming hardware segment of its yearly financial results, Microsoft provided the following statement:

Xbox Platform revenue increased $1.7 billion or 34%, due mainly to sales of Xbox One, which was released in November 2013, offset in part by a decrease in sales of Xbox 360. … Computing and Gaming Hardware gross margin decreased slightly, due to a $3.2 billion or 59% increase in cost of revenue, offset in part by higher revenue. Xbox Platform cost of revenue increased $2.1 billion or 72%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One.

There are two key things to note about Microsoft’s statement. First, this data reflects gross margins (revenue and the cost of revenue), not overall profit or losses. Secondly, and far more importantly, these figures are not totals for the year – they represent the changes over the previous year.

What does this mean? It means Microsoft increased its total revenue from Xbox by $1.7 billion compared to the previous year, while the cost of those sales – including what it costs to manufacture consoles – increased $2.1 billion. Microsoft’s revenue in this category, $1.7 billion, is an increase of 34 percent, which means the starting figure from last year was roughly $5 billion; the $2.1 billion cost of revenue increase is a 72 percent raise, which puts its starting figure at $2.9 billion.

Adding those figures together, that means Xbox sales resulted in roughly $7.1 billion in revenues against roughly $5 billion in costs. That’s not a $400 million difference that outlets such as Forbes are citing – they obtained their erroneous figures by simply adding the yearly increases together.

Still, however, the figures in Microsoft’s report don’t equate to profit or loss. Subtracting the $5 billion costs associated with Xbox production and other areas from Microsoft’s $7.1 billion Xbox revenue only represents gross margin, not the overall profit or loss.

So is Xbox One profitable for Microsoft? It’s impossible to say without Microsoft providing the necessary information. There are numerous factors that go into such a figure, but Microsoft has said it isn’t selling the Xbox One for a loss, and a teardown of the console reflected that. It’s also important to note that manufacturers don’t make a lot of money in the first year or two of console’s life, as parts are relatively expensive to ensure the consoles are fairly powerful when they first launch. Over time, the prices of those parts decrease as technology advances. It was much more expensive to buy the same type of RAM two years ago than it is today, for instance.  

In the end, though, how much does this actually matter to gamers? Not a whole lot. The only reason this is even a discussion is because some websites are trying to increase their traffic by writing articles that elicit reactions from fans of one console or another. Those conversations would probably be more worthwhile if they included correct information, however.

Image via Microsoft

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if on next years of share-holder meeting there still voices saying to ditch xbox division, at that time can be assured that for this year xbox division are still bleeding indeed.

Anthony, one of the best articles I've read on this site. Be proud. Keep this up and Neowin will be one of the best sources for facts in the tech industry. And that's important.

On the flip side, I'm not sure how much traffic a fair and factual article like this may bring so it may not be all that lucrative for you, considering Neowin's pay structure for freelance writers. No good deed goes unpunished, etc.

Darth Tigris said,
Anthony, one of the best articles I've read on this site. Be proud. Keep this up and Neowin will be one of the best sources for facts in the tech industry. And that's important.

What facts? I see only speculation. No one knows for sure what Microsoft's financials (certain divisions at least) mean because they are deliberately obfuscated in order to hide losses. I suspect that the Xbox is probably losing 1-2 billion a year on average.

There is one certainty though. The same division the Xbox is in includes Android royalties. That gives it a $2B boost. Great for plugging big money sinks like Xbox, Bing, and Surface.

Darth Tigris said,

On the flip side, I'm not sure how much traffic a fair and factual article like this may bring so it may not be all that lucrative for you, considering Neowin's pay structure for freelance writers. No good deed goes unpunished, etc.

I doubt it will get much traffic because it's an insubstantive defensive of Microsoft. No conclusions can be reached using the figures from this article, thus it's meaningless.

Edited by simplezz, Aug 12 2014, 3:01pm :

I dunno, I trust internet sleuths over any kind of objective fact-checking! Everyone knows internet sleuthing has a much better track record! Just like how Redditors totally nailed the identity of that bo--oh, they didn't? Oops.

Xbox itself isn't losing money I'd say, but there could still be a initial R&D costs for developing the XB1 in the mix that hasn't been made back yet, but the key here is that they're selling XB1s for a profit, I think it's safe to say this. And also that they're still selling a good number of 360s as well, and those aren't losing any money this late in their life, it should be a good chunk of profit on each 360 as well.

So yeah, while we can't know the exact figures at this point I don't think it's losing anything, profits and margins are probably down due to the initial development costs of the XB1 and so on but those should be gone next year.

George P said,
Xbox itself isn't losing money I'd say, but there could still be a initial R&D costs for developing the XB1 in the mix that hasn't been made back yet, but the key here is that they're selling XB1s for a profit, I think it's safe to say this. And also that they're still selling a good number of 360s as well, and those aren't losing any money this late in their life, it should be a good chunk of profit on each 360 as well.

So yeah, while we can't know the exact figures at this point I don't think it's losing anything, profits and margins are probably down due to the initial development costs of the XB1 and so on but those should be gone next year.

Depends, for example the APU is more expensive than Sony's but is the RAM cheaper, manafacturing at certain levels but not selling well can cost more. The game promotions, particularly in Europe are not free and some behind the scenes discounts rather than official all add up. Xbox Live subs may be down as users migrate to other platforms while Xbox One has moderate success and 360 use tales off. I think much like Sony, a game or subscription on top sees them making a profit to begin with and by now things should be better but I think Xbox is struggling and needs to spend their way out so in the red they will be. Last gen is dying a lost faster which can't make up the difference.

Making money on Xbox or not, it is less important to Microsoft if you look at the larger corporate picture.

They need fresh consumer eyes on the Microsoft brand in order to stay relevant in the marketplace with all of their different product and service lineups. Xbox is a way to hook consumers coming to their doorstep where they can then talk about other things like Surface, Office, phones, games, hardware, etc. They want you to be invested in their Microsoft ecosystem, and this is the 'foot in the door'. It is a means to an end... a business model.

If Xbox is losing money, they have enough from other product segments such as enterprise, Office 365, etc. where enough money is being made to dump into the products that are losing money. As long as the company is continuing to generate revenue and profit for shareholders, that is all that matters in the end.

burritodave said,
Making money on Xbox or not, it is less important to Microsoft if you look at the larger corporate picture.

They need fresh consumer eyes on the Microsoft brand in order to stay relevant in the marketplace with all of their different product and service lineups. Xbox is a way to hook consumers coming to their doorstep where they can then talk about other things like Surface, Office, phones, games, hardware, etc. They want you to be invested in their Microsoft ecosystem, and this is the 'foot in the door'. It is a means to an end... a business model.

If Xbox is losing money, they have enough from other product segments such as enterprise, Office 365, etc. where enough money is being made to dump into the products that are losing money. As long as the company is continuing to generate revenue and profit for shareholders, that is all that matters in the end.

Unfortunately for your story, it's false. Normal people with an Xbox don't go out and purchase office 365 or a Windows Phone because of it.

And it truly make no sense to pump money into a money losing endeavor, which is what the Xbox has historically been for Microsoft. Why make $12 billion just to lose $2 billion on another division if you don't have to? The result of the money losing Netbook scheme saw companies like HP and Dell thinking about retracting out of the PC business altogether, for example.

Gods and Kings said,

Unfortunately for your story, it's false. Normal people with an Xbox don't go out and purchase office 365 or a Windows Phone because of it.

Er... So that is why there is no integration with Xbox and your Windows Phone? That's why Zune music was never connected to Xbox? That's why Microsoft never offered Xbox Live subscriptions with Office 365 Subscriptions? You never see any ads on Xbox for other MS services like Bing? (Oh wait, Bing is built into the Xbox console)

Dude, why do you think that Apple, Microsoft and Google invest so much in revenue losing ventures like putting their tech in public schools? It is so that even though you don't necessarily go out and immediately buy a new iPad or Chromebook, you are more open to looking at those companies' services later on if they offer something you may want later in life. Kids and teens of today are the adult consumers of tomorrow.

Edited by burritodave, Aug 11 2014, 9:12pm :

burritodave said,

Er... So that is why there is no integration with Xbox and your Windows Phone? That's why Zune music was never connected to Xbox? That's why Microsoft never offered Xbox Live subscriptions with Office 365 Subscriptions? You never see any ads on Xbox for other MS services like Bing? (Oh wait, Bing is built into the Xbox console)

Dude, why do you think that Apple, Microsoft and Google invest so much in revenue losing ventures like putting their tech in public schools? It is so that even though you don't necessarily go out and immediately buy a new iPad or Chromebook, you are more open to looking at those companies' services later on if they offer something you may want later in life. Kids and teens of today are the adult consumers of tomorrow.


It doesn't matter what they integrate. Truth is people don't go purchasing Office 365 subscriptions or Windows Phones because of Xbox. The smartglass app exist for iOS and Android as well.

Also, Apple doesn't "invest" in "revenue losing ventures" at all. Every product they sell, including the Apple TV, is a standalone billion dollar business.

Just download the 10-K and analyze it yourself. The computing and gaming hardware revenues totaled 9.6 billion with a gross margin of 893 million for the 2014 fiscal year. With that kind of numbers, there's no way in hell MS is making any money in that segment. MS's SG&A historically ranges anywhere in the low to high 30% of the total revenue. The expected net loss on the computing and gaming hardware segment will be extremely large even before doing a detailed audit.

doh said,
Just download the 10-K and analyze it yourself. The computing and gaming hardware revenues totaled 9.6 billion with a gross margin of 893 million for the 2014 fiscal year. With that kind of numbers, there's no way in hell MS is making any money in that segment. MS's SG&A historically ranges anywhere in the low to high 30% of the total revenue. The expected net loss on the computing and gaming hardware segment will be extremely large even before doing a detailed audit.

You can't analyze it yourself in terms of Xbox sales, which is what this article is specifically about. Those figures include Surface and smartphone hardware.

Anthony Tosie said,

You can't analyze it yourself in terms of Xbox sales, which is what this article is specifically about. Those figures include Surface and smartphone hardware.

So then, Xbox One, Surface and/or smartphone is/are burning money.

The last I heard, the Xbox 360 was costing Microsoft $2 billion a year. Considering that the Xbone is doing even worse, that number is probably even higher. Don't forget that Microsoft is good at hiding loses and creative accounting.

LOL.....WHAT!?!?!?!?!?

Xbox (All versions of Xbox) division has lost $3billion as a whole over the past 10yrs.

I thinks ya math is a bit off

simplezz said,
The last I heard, the Xbox 360 was costing Microsoft $2 billion a year. Considering that the Xbone is doing even worse, that number is probably even higher. Don't forget that Microsoft is good at hiding loses and creative accounting.

So you know someone in Microsoft with good cred, or did you last hear from VGChartz or something.

Why do you think some of the potential CEOs wanted to break the Xbox brand away from Microsoft? I think it would be a huge mistake, but the consoles cost MS a lot, but with their market share, they are able to get their back

Showan said,
LOL.....WHAT!?!?!?!?!?
Xbox (All versions of Xbox) division has lost $3billion as a whole over the past 10yrs.
I thinks ya math is a bit off

Not according to expert analysts:


If we start with the overall traditional [Entertainment and Devices Division] business that actually loses money before corporate allocations and back out the nearly $2 billion 95 percent gross margin Android phone royalties, we conclude that Xbox platform plus Windows phone and Skype lose about $2.5 billion per year, and we estimate that the Xbox platform may account for roughly $2 billion of this," Sherlund said.

http://www.gamesindustry.biz/a...tent-royalties-says-analyst

Unless you know something he doesn't?

fusi0n said,
Why do you think some of the potential CEOs wanted to break the Xbox brand away from Microsoft? I think it would be a huge mistake, but the consoles cost MS a lot, but with their market share, they are able to get their back

Exactly. There's only one reason that shareholders and analysts are calling for Microsoft to sell off Xbox - It's a money sink.

simplezz said,

Not according to expert analysts:


http://www.gamesindustry.biz/a...tent-royalties-says-analyst

Unless you know something he doesn't?

Yeah, that story again. Look, you're just finding fuel for your fanboy perspective. This analyst doesn't know any more than any of the rest of us that are looking at the numbers. It's a sexy analysis that gets them attention, but it's as rooted in 'trooth' as was the source point of this article.

And, for the record, Sony and many other companies do 'creative accounting' to minimize the impact of unflattering financial or sales numbers. Singling out MS for this shows your hand. Move along now.

Xbox as a whole, over the years has cost them some $$$...

But there is no way they would even bother going this long if they were losing $2-bllion a year....

No company, not even mega billion dollar corporations would put up with losing $20billion over a 10yr period...

Showan said,

But there is no way they would even bother going this long if they were losing $2-bllion a year....

That's only an estimate. It probably varies every year. No one knows for sure because Microsoft hides the real figures behind clever accounting. It's safe to say though that Xbox, Bing, and hardware like Surface don't pay for themselves. If they did, Microsoft would be quick to trumpet the figures.

Showan said,

No company, not even mega billion dollar corporations would put up with losing $20billion over a 10yr period...

Microsoft has two major cash cows, Office, and Windows. And a few minor ones like dev and server tools. That's what's funding all those losses. The problem is, they all revolve around Windows, an OS that's slowly becoming obsolete.

Mobile and the cloud are existential threats to the hegemony of Windows. It has neither the price advantage nor the ecosystem advantage any more.

simplezz said,

Exactly. There's only one reason that shareholders and analysts are calling for Microsoft to sell off Xbox - It's a money sink.

Uh, no. They're calling for a spin-off because when it comes to stocks, the sum of the parts is always greater than the whole.

simplezz said,
The problem is, they all revolve around Windows, an OS that's slowly becoming obsolete. ... Mobile and the cloud are existential threats to the hegemony of Windows. It has neither the price advantage nor the ecosystem advantage any more.

Not this again. :rolleyes: Got a source for "obsolete"? Because everywhere I'm looking I see the exact opposite. PC sales are rising, and are expected to do so again next year. Look at any market share chart in that hardware class.. nope, Windows is still king and no sign of slowing down. Of course tablets sell very well too, people don't upgrade their PC's anywhere near as often versus devices that are virtually disposable, no brainer.. plus when people buy a mobile device, they generally don't toss their old PC out the window, not sure where you're getting that idea from. Also, that cloud stuff? Microsoft is one of the biggest players in that too, and PC's just happen to work very well with that too.

This is why I can't stand when news sites are even allowed to post false information like that. It's damaging to company's reputations. They actually made quite a bit with Xbox One and I'm glad. It's an awesome console.

j2006 said,
This is why I can't stand when news sites are even allowed to post false information like that. It's damaging to company's reputations. They actually made quite a bit with Xbox One and I'm glad. It's an awesome console.

How much did they actually net from Xbox One so far? Have they recouped all the money for designing and creating the Xbox One? I haven't seen anything that they have, but I could be wrong.. Same goes for Sony's PS4.. It is going to take a while before either brand actually creates a net profit from their consoles..

j2006 said,
This is why I can't stand when news sites are even allowed to post false information like that. It's damaging to company's reputations. They actually made quite a bit with Xbox One and I'm glad. It's an awesome console.

We actually don't know if they "made quite a bit" or lost money (or hovered around the break-even point). But the $400 million loss being cited is completely inaccurate.

Anthony Tosie said,

We actually don't know if they "made quite a bit" or lost money (or hovered around the break-even point). But the $400 million loss being cited is completely inaccurate.

What's sad is that companies like Forbes are reporting this crap. They and Business weekly are becoming gossip sites instead or site where you can get quality information from.

Xbox hasn't really ever been profitable for MS on paper.. It's more of market share is where they make their money back.