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To your points above:

a) In Microsoft's 2010 fiscal year (which has ended), its Entertainment and Devices Division (which includes the Xbox 360) generated $8.5 billion in revenues and just $679 million in operating income. Considering Microsoft's consolidated operating income in 2010 was $24 billion, this $679 million only accounts for about 3% of Microsoft's profits. And in any event the Xbox 360, the PS3, and the Wii may be irrelevant given the emergence of connected televisions, thin devices, and cloud-based gaming.

b) I am moderately pessimistic about Microsoft's prospects with its Windows Phone 7 OS. There are definitely some promising signs, such as WP7’s distinctive and innovative user interface and Microsoft’s extensive partnerships with smartphone OEMs, application developers, and carriers. But there are also some definite warning signs: WP7 isn’t market ready, and it’s already mid-October; Microsoft is making it difficult for developers to convert existing iOS and Android applications over to WP7; Microsoft’s brand is weak with consumers and the developer community, especially in the smartphone market; and WP7 comes with a price tag, while the competition is free, at least on a variable cost basis. There’s also the fundamental issue of competition, which includes several ambitious and innovative companies, especially Google and Apple, that have established platforms and abundant application markets. Here are some more thoughts on WP7: http://www.fernstrategy.com/2010/10/13/the-windows-phone-7-c....

c) Bing has made some inroads in search, but laregely at the expense of Yahoo. For the year, I don't believe Bing has gained at all on Google. There are powerful network effects and learning curves in search, and tremendous scale economies. It will be very difficult for Bing to grow its share in search, much less overtake Google, unless Bing releases a game changing protectable innovation, or Google makes some kind of fatal mistake.

Fair points, counters:

a) "may be irrelevant given the emergence of connected televisions" - Don't dismiss the millions of gamers that will buy in next generation for MSFT exlusives like Halo which popped off $200m in sale in a day, bringing net total Halo copies to ~34m sold.

b) I argued for #3 which I think is in the bank with RIMM falling all over themselves. And the competition definitely isn't free, not even Android - http://www.businessinsider.com/android-costs - I believe we'll see a trend towards Win7 adoption from companies that aren't going for vertical integration.

c) I believe this is the point that holds the most water. But to continue my contrarian rant I'd say that I put some credit into the argument that MSFT is fighting this war explicitly to distract Google's attention from desktop / mobile / etc.

Regarding point a, the Entertainment and Devices division included Live, which they are heavily investing in, thus giving out a loss. The true profit of the XBox is much higher than $679 million.

And what do you mean by 'Windows Phone 7 is not market ready, and it's already mid-October' ? They're launching in 2 days in Europe and in 3 weeks in the US.

Also, from your linked article you write that Verizon won't be bringing out a WP7 phone in 2010 or 2011. Source?

Doesn't Entertainment and Devices also include the Mac Business Unit, as well? Yep, apparently, it does: http://en.wikipedia.org/wiki/Macintosh_Business_Unit

They moved/are moving (not sure if it happened yet) Mac Office into the regular Office division, FYI. I guess it's probably not yet reflected in earnings statements.

> And what do you mean by 'Windows Phone 7 is not market ready, and it's already mid-October' ?

I'm not sure what the OP meant by that, but here are some guesses:

1. If your friend emails you his address and you want to see the Bing Map to the location, you have to find a pen and paper to write it down. Then you have to open the Maps application and manually type it in.

This is because there's no copy+paste.

2. The web browser is IE7 + bits of IE8. This means very slow JavaScript, no HTML5, and a MS-locked-in web experience.

3. App developers cannot use sockets to access the internet, so most cool apps will be near-impossible to develop.

1 is patently false. See here http://www.mykindofphone.com/bring-on-bing-for-windows-phone...

>For example, if someone sends you an address in an email, the phone will pick that up and turn it into a link. Click on that and you are in Bing maps

Also, Copy paste in coming at the beginning of next year.

2. JavaScript is fast enough. See http://www.youtube.com/watch?v=zgvphQx9MY8 There's no HTML5 though but I fail to see how it creates a 'MS locked-in web experience'.

The "no HTML5" is a biggie. A lot of websites have come to rely on having WebKit based browsers on smart phones, and so their mobile content uses HTML5 features that Windows Phone 7 does not support. So you have to fall back to a really crappy experience.

Microsoft's E&D division not only includes xbox et al it also includes Windows Mobile development (coughkincough) and Live and a bunch of other crap. The xbox part of E&D is doing very, very well, and making a tidy sum for the company.

Your being overly generous. Consoles operate on a lifecycle that goes R&D > Manufacturing > subsidized early adopters > mass market > end of life. Over that cycle mass market and end of life are only profitable if they cover R&D costs and the subsidy to early adopters. Based on their sunk and the fact the 360 is not going to last 20 years they have yet to manufacture a profitable console.

What?!

Xbox is wildly profitable? xbox (original + 360) has lost MS tens of billions of dollars in its history (not an exaggeration). The fact that its just now (the last 2 quarters, an no more) pulling in profits in the hundreds of millions means that they'll break even in 5-10 years.

If you gave me $10, and I gave you back $0.50, would you consider it a "wildly profitable" venture for yourself?

In fact if I was MSFT and you gave me $25.82 (current stock price) I'd give you back $0.64 a year and a share of my stock (current dividend price).

And in fact, they've made that sale 8,650,000,000 times so far (current outstanding shares).

http://www.dividend.com/dividend-stocks/technology/applicati...

EDIT -> You're ignoring that the division DOUBLED profits over the last year, what if they maintain that growth rate?

Or 1/4 of that growth rate?

Either way YES, that's a solid return on investment.

I honestly look quite fondly on trending, and yes, xbox is trending in the right direction. But I still think calling it "wildly profitable" is silly.

Having conceded that its trending positively, in this specific business, you're only as good as your last console. Nintendo is probably the only company that can lean heavily on its brand to get it through a poor hardware iteration (its brand and its so-far good-as-gold portable product).

Keep in mind Nintendo is the only gaming company that sells hardware that turns a profit (Sony and MS lose money on console sales, or at least did on launch) and is actively trying to grow the market (and depending on who you believe, doing an incredible job of it)

The mere fact that both Sony and MS now sell hardware that imitates the Wii's functionality should tell you this isn't a poor hardware iteration.

I think Sony still sells the PS2 in several markets. That must offset some of the subsidies on the PS3

I wasn't talking about the Wii.

"what if they maintain that growth rate?"

That's a terrible argument structure. You might as well cut straight to "What if we just assume I'm right?" and be more honest about it.

http://www.joystiq.com/2010/04/23/xbox-division-posts-165-mi... says $165 million in profits on $1,670 million (1.67 billion) in revenue for the division. Saying "doubled their profits" sounds impressive, but it's not sustainable; say rather instead "increased their quarterly revenue by 5%" (or so, give or take a bit depending on the real numbers) for a better view of what that really represents. Still nothing to sneeze at (I'd take it), but not the same picture at all.

Yeah, but the entire linked post is making the same kinds of assumptions about general trends in hardware. Now, those assumption might be stronger than these (I happen to think they are), but its logic really isn't terribly better than this.

Video games platforms are a cyclic industry. It's unprofitable during the first few years when they launch their new system then it becomes a cash cow when hardware gets cheaper to produce and they don't have to spend too much yet to launch the next generation.

I believe that overall, Xbox will be profitable for Microsoft, it gives them a foot in the user's living room and could be used to stream content onto their TV. But wildly profitable ? Probably not. You've got to be Nintendo to do that : sell your hardware with a good margin from day one and sell millions of every Mario/Zelda game that you release.

Nintendo is king because they build the hardware, sell the software and have the vision thanks to Miyamoto. It's really the Apple of video games.

It seems like anytime I see someone disputing Microsoft's declining relevance, they are always talking about some rainbow that is JUST around the corner.

XBox has been a money pit, but WAIT, they are start to eek back some of the billions in losses.

The Kin died on the vine, WinCE phones were blah, but WAIT, they have a new mobile strategy.

Various search and online presence initiatives got their numbers only by being embedded as the default home page on millions of new PC's, but WAIT, Bing is taking off.

Microsoft is a HUGE ship, and it's sinking slowly. It likely has decades left, but overall it's going down, not up.

FYI, Nintendo does not typically sell hardware at a loss. While they don't get an automatic recurring component, just on the hardware, Wii margins approach Apple hardware margins.

Also, this is a must-read article about the financial and actual state of bing: http://www.businessinsider.com/microsoft-is-trashing-us-for-...

Essentially, for every 1% non-reoccurring market share (worth $150 million), MS is spending $500 million.

The number is actually "For every $1 of new revenue it generates, it spends $1 in traffic acquisition costs." (FTA) The 150/500 number you have includes all internet businesses.

The problem is here, where he compares $2 bill for internet business, and then talks about a 4% increase in search.

"Over the past year, despite losing more than $2 billion in its Internet business, Microsoft has gained about 4 search share points."

Their internet business is far more than Bing.

Ah yes, I think you are right. Still a decent article, but certainly not nearly as damning as I first thought.

Disclaimer: I'm a Mac user (iMac, iPad, iPhone 4, MBP, AppleTV... yeah... I know). Linux at work.

I actually think MS is doing really well with it's online initiative. Windows Live software is actually really nice, their Windows Live website actually does a great job integrating a large number social networks. MS Office still sets the bar for office apps (and no, OOo still suffers from missing out on basic functionality). Visual Studio is light years ahead of the competition. Windows 7 is really, really slick. And Windows Phone 7 looks nice. It's not a clone, they seemed to actually push forward with their Metro interface style. On top of all of that, you have XBox.

When you combine all these efforts together, it's very ambitious. Just think, though, for a second, what will happen if they get all these pieces working together.

That being said, I'm hoping for something special the 20th from Apple. They have the hardware, now they just need to get the software right (MS has the software right, they just need the hardware to bring it all together). Apple has the mindshare, but MS has the numbers. Also, MS has put a lot of work into it's developer tools to make app development across all these platforms incredibly easy.

Anyways, what matters to me is that whatever happens, I benefit. I want a strong MS only because it means Apple is forced to innovate and not just rest on it's laurels (which, to be frank, it feels like it's been doing for some time now).

But yeah, it's getting really interesting out there. All sorts of fun. =)

I do cringe every time I see someone talk about how the Wii is beating the Xbox. Console sales are only part of the battle, and not the big part.

People buy a Wii, play Wii sports and maybe another couple games for a few weeks, and then it collects dust. Xbox owners subscribe to Xbox live and buy new games quite frequently.

http://en.wikipedia.org/wiki/List_of_best-selling_video_game...

Total Wii games sold as of June 1, 2010: 573 million

Total Xbox 360 games sold as of December 2009: 353.8 million

Total PlayStation 3 games sold as of June 30, 2010: 315.3 million

So yes, the Wii is beating the crap out of the Xbox. Americans don't realize that the Xbox only does well in the US. Europe and Asia are a tough market for Microsoft.

"Europe and Asia are a tough market for Microsoft"

Asia is a tough market for Xbox. Europe is just fine.

They're doing bad in Asia and doing OK in Europe. The competition with the PS3 is hard in Europe, that's why I said "tough". They are number 2 in some countries (like the UK), but overall they're number 3.

PS3 in Europe as of August 17, 2010 : 16 million

XBox 360 in EMEA (including UK) as of November 13, 2009 : 10 million

Sources : http://www.computerandvideogames.com/article.php?id=260424

http://en.wikipedia.org/wiki/Xbox_360#Sales

This is counting games that come with the Wii. The Xbox does not come with one.

Xbox users pay to subscribe to Xbox live. Microsoft makes money providing the same service that Sony and Nintendo give away for free, and more people use it.

>This is counting games that come with the Wii. The Xbox does not come with one.

I call B.S. The majority of XBox purchasers buy a bundle. Whether it is the Kung Fu Panda / Lego Indiana Jones (this my Bundle...my XBOX came with 2 games) or the Left 4 Dead 2 Bundle or the Halo: Reach Bundle.

Usually if you are buying an XBox console and NOT buying a game, you're buying a replacement XBox because of the Red Ring Of Death.

And everyone who trashes Wii games forget about games like Super Mario Galaxy. Games like that can give you three months of solid playing if you want 100% completion. And no worrying about having to rush/grind through the game before another comes out so the online play is empty.

They are JUST launching their mobile platform

"Just launching"? It's the seventh iteration of the OS. It's in the name.

Fair - I should have said just launchng their contemporary OS

They started at 3, not 1. And giving how incompatible it is with WM6.5, I contend that it's fair to say they're launching a new platform. But it's far from their first try.

Not really. I have seen Windows CE version 2. I must assume they didn't start on 2. NT started on 3 because Windows 3 was the first version of Windows that was usable.

Windows CE is the base for Windows Mobile, but isn't Windows Mobile. CE version 2 didn't work on smartphones.

But I'm definitely wrong. List of versions:

    * Pocket PC 2000
    * Pocket PC 2002  (the first to work on a smartphone, based on CE3)
    * Windows Mobile 2003
    * Windows Mobile 2003 SE
    * Windows Mobile 5
    * Windows Mobile 6
    * Windows Mobile 6.1
    * Windows Mobile 6.5

source: http://en.wikipedia.org/wiki/Windows_Mobile