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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