Go over last night's third-quarter earnings report from Microsoft (Nasdaq: MSFT) and you'll be treated to the usual suspects. It topped profit projections by a penny per share. It was guarded in its near-term outlook. All of its operating divisions managed small yet definite gains.
Wait a minute.
Scratch the latter.
While Microsoft managed modest gains in most of its businesses, one line item stands out like a Mac user at a Bill Gates Fan Club meeting. Its Home and Entertainment division suffered a steep 42% drop during the period. How can a company manage to grow revenue in iffy segments such as software and online subscriber services but fail to make headway in something as seemingly recession-resilient as home and entertainment?
What's the problem? It's in the game. This shortcoming is weighing heavily on the shoulders of the struggling Xbox video game console. While no one expected things to go smoothly as the company pit itself against Sony (NYSE: SNE) and its global installed PlayStation2 user base of roughly 50 million consoles, this hurts.
The company dropped the selling price of its console from $299 to $199 and has tacked on bonus incentives for the noble "razor and blades" intent of losing money on the hardware but making it up on the margin-friendly software side.
But the problem is that it is now selling the razor at a loss and folks aren't coming back for the blades. Any hope that the plan is actually working and that the 42% drop can be attributed to the price drop exclusively was dashed when it noted in last night's release that "the revenue decrease was caused primarily by lower sales of Xbox video game systems and related games in all geographic regions."
So even with a lower system price and a larger installed base of users the games aren't moving like they used to. Anywhere.
The problem isn't that Microsoft can't stand being a distant second in any venture. Its MSN.com service is tens of millions of users away from AOL Time Warner's (NYSE: AOL) America Online yet it still managed to grow its subscriber revenue by 9% this past quarter. Its fastest growing business division is also its smallest: Business Solutions.
So it's not the unfamiliarity with huffing and puffing behind a leader that's at fault here. It's just that the model isn't working. Microsoft and its shareholders' historical expectations for fat margins no doubt had them playing along with the rollout of the low-margin Xbox console. Surely, the lucrative software licensing royalties and the promising broadband-enabled delivery of software updates would make it a rich-margin Microsoftesque addition.
It hasn't happened. At this point, it's not likely to happen. While Nintendo has often appeared as the most likely console maker to bow out of the home system hardware race, maybe Microsoft should beat it to the punch and fold. The game isn't fun anymore.
Were you impressed with Microsoft's earnings yesterday but disappointed by the state of its video game business? What are your thoughts on the company's fiscal 2004 outlook? All this and more -- in the Microsoft discussion board. Only on Fool.com.
RSS Headlines
Fool UK
