Xbox, the video game console that Microsoft introduced nearly 14 months ago, is technologically sophisticated and, by many accounts, the best way to play games against competitors over the Internet.
But the advantages have not translated into the returns Microsoft had hoped for. It has sold 9 million Xbox consoles, on the low end of its projections; it continues to lose money on each one it sells; and it remains desperately behind Sony, whose PlayStation2 is selling at a record pace. Wall Street analysts have mixed opinions about whether Microsoft's early effort has been successful, but they agree that it has a way to go.
Avid game players like Brian Green, 26, who spends hours each week on both consoles, have a simple explanation for why Microsoft has yet to make the inroads it sought.
"The Xbox is cool," he said, "but the PlayStation is where the games are at."
That is not good news for Microsoft, because people tend to buy electronics based on the amount of software they can use. Sony learned that lesson two decades ago, when its technically superior Betamax video recorders were swamped by VHS machines that had more tapes available.
Makers of video games are starting to produce more games for Xbox, but the 2-to-1 gap with PlayStation will take some time to close. And while Microsoft, which has more than US$40 billion in cash on hand, can afford to be patient, analysts and investors wonder how much time and money it is willing to invest before it starts to turn a profit.
The issue is of no small significance. The market for consoles and video games is worth more than US$9 billion a year. Even while losing on selling consoles, Microsoft could still make a lot of money from game makers. They pay the console makers about US$10 for each copy of the games they manufacture -- and they made well in excess of 50 million games in the US last year. Games typically sell at retail for US$50.
For now, though, there are only losses for Microsoft. It declines to say how much it loses on each console, but industry analysts estimate the figure at close to US$100. Sony, by contrast, does not sell PlayStation2s below cost.
Part of Microsoft's problem is the ambitious design of Xbox: its chipsets and other electronic components are more expensive than those of the PlayStation. Microsoft has also been unable to realize certain economies of scale because sales have not been as robust as expected.
Joseph Osha, a semiconductor analyst at Merrill Lynch who follows Nvidia, a company that makes the graphics processing chips for the Xbox, said Microsoft had had to "pull back sharply" on its orders. He estimated that Microsoft had 1 million to 1.5 million unsold Xbox chipsets, which are the brains used in Xbox consoles.
Microsoft is too big to have its stock price move significantly on sales of Xbox. But the effect of all that idle Xbox inventory is evident on its profit-and-loss statement. In a recent filing with the Securities and Exchange Commission, Microsoft said its home and entertainment segment, which includes the Xbox and television divisions, lost US$348 million in its most recent quarter on sales of US$1.28 billion. In the period a year earlier, the home and entertainment unit lost US$180 million on sales of US$833 million.
On a micro level, investors "don't like it because they lose money on every piece of hardware they sell," said Michael P. Wallace, a video game industry analyst at UBS Warburg. But, he added, "on a macro level, they're in the No. 2 spot."
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