Microsoft Earns $2 Billion per Year on Android, Hiding Massive XBOX Losses

Android Funds XBOX and Windows Phone

Android Funds XBOX and Windows Phone

This is like two juicy news stories in one … the first being that Microsoft has successfully leveraged its patent muscle and is earning a massive $2 billion annually from Android patent royalties across a range of handset makers, and the other is that huge operating losses from Xbox and Windows Phone consume all of that profit and more!

According to a report from Business Insider, Microsoft earns $2 billion per year in revenue from Android patent royalties – and has about an 85% profit margin on those earnings! So for all of the efforts their legal team put into getting per-phone royalties … it all heads to their bottom line.

From the article:

This money, says Sherlund, helps Microsoft hide the fact that its mobile and Xbox groups are burning serious cash.

Sherlund says that if you back out the Android profits, Microsoft is probably losing $2.5 billion on Skype, Xbox, and Windows Phone. Of that, $2 billion in losses are attributable to the Xbox platform.

Investors are blind to Xbox’s struggles, says Sherlund, because they are “concealed by the hugely profitable Android royalties.”

Looking at those numbers makes me wonder if Apple wouldn’t have been better off taking the same approach – imagine if they were also grabbing $10 off of every smartphone Samsung was selling!

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7 replies

  1. I vastly prefer PC gaming to consoles, but that $2 billion loss is pretty misleading without context. Microsoft (and Sony) has initially sold consoles at a loss. It happened with both the Xbox and Xbox 360. There’s no reason to believe that they’d suddenly change their MO, and consider that the Xbone requires a lot of new infrastructure; for instance, they’re offering free dedicated servers for multiplayer support and cloud processing to all developers. If there was going to be a time when they’d be taking a complete loss, it’d be now, before they get a cut from the sales of games, licenses, royalties, etc.

    But if someone didn’t know about any of that (and you’d be surprised by how many don’t know that Microsoft and Sony sell their consoles at a loss), they’d think the sky was falling!

    • Read it again. The $2B loss isn’t from console sales; it’s from the platform. That includes games and licensing. Despite now turning regular profits, the XBox platform has yet to earn a profit over its lifetime. Even its profitable quarters are questionable as they magically appeared after a divisional restructuring in 2007, prior to the current restructuring that lumps it with Android royalties. The way Microsoft shuffles the XBox group around, you’d think they had something to hide.

      • *You* read it again. What do you think it’s costs to start what is effectively a new platform and a good portion of infrastructure? Yes it IS a new platform–PowerPC to x86, a derivative of a derivative of Windows 2000 to a hypervisor, etc. The fact that they happen to have the same brand name doesn’t mean anything.

        Furthermore, if you go to the Business Insider “report”–which suggests that they did any actual work for this blog post; they didn’t–you find that it’s a rehash of a comment made by Goldman Sachs-turned-Nomura analyst Rick Sherlund that doesn’t provide any sort of basis for these figures.

        This is the same analyst that has been saying for YEARS that Microsoft should sell Xbox and Bing, because those two are outside Microsoft’s focus. (He also thinks that Facebook should buy Bing, which is hilarious because Facebook doesn’t need it.) He’s also on record as saying that Microsoft should double-down on Microsoft Office and shift focus away from Windows. Sherlund is solidly on the side of Microsoft becoming a business-centric organization, so why should I just blindly accept these numbers that just happen to support his position?

        Michael’s throwaway aside, Microsoft IS trying to become more like Apple: more consumer-facing, more vertical. Setting aside my own feelings on the wisdom of this new path, why WOULDN’T you stick Xbox into the same division alongside all the other consumer products? It should be a no-brainer for end-user products to play well together. In fact, if you really want to indulge in accounting conspiracies, why not take a look at Azure? Azure is decided NOT profitable. Now note how much of the new Xbox and Xbox services is being backed by in-house cloud computing. THAT makes me go “Hmm…”

        • So you agree the $2B loss is not misleading, and your actual objection is that the loss is worth the investment. Okay, I’m fine with that. I also believe XBox could be strategically viable.

          I say “could be” because it remains unprofitable despite a lack of disruptive competition. Nintendo did initiate some disruption with their low-cost, motion-controlled Wii, but XBox and PlayStation held strong to their high-end gaming niche. However, XBox is still stuck in that niche with minimal progress in becoming a mainstream media device. An unprofitable, niche product, like XBox, is highly vulnerable to disruption. As long as their main competition is limited to Sony, which hasn’t disrupted an industry since the Walkman, XBox should be fine, but to defend against a wildcard, like Apple or Google, they need to expand appeal and profit.

          • I think you may have replied to the wrong person.

            I’m not sure which is more absurd: that Sherlund is expecting people to believe that Xbox has cost Microsoft $2 billion this year (and that’s THIS year only; nothing was stated about previous years) without showing any sort of proof (extraordinary claims require extraordinary proof), especially when he is strongly biased against the division in the first place; that “news” entities are once again passing off an analyst’s word as fact without checking to see what sort of conflicts of interests he may have; or that people are actually believing him without question.

            • It is interesting – because of the new reporting structure it is hard to figure out what actually happened in the last year with XBOX compared to other stuff, but with the previous structure we knew that XBOX division lost a total of $3 billion over 10 years (http://www.neowin.net/news/report-microsofts-xbox-division-has-lost-nearly-3-billion-in-10-years).

              So I think the assertion of a $2 billion loss in a single year, like you say, is a bit absurd.

              But I saw another table that tried to make the reports for 2012 and 2013 line up, and estimated a ~$2 billion difference between the years. I wonder if THAT is what the analyst is talking about – a differential loss of profit?

              That still doesn’t make sense – we KNOW that Microsoft wrote down $900 million from the Surface, and that they reported quarterly impact from prepping for Surface 2 and (I think) that the cut-rate sales of Surface 1 hurt margins as well.

  2. I think there are a few things at play here:
    – No one is debating that Android earns Microsoft a ton of cash.
    – Microsoft is clear that those royalties are folded into the same numbers as XBOX and Windows Phone.
    – That division has lost money for most of its existence.

    OK, so what … ? When you break down Sony’s numbers you also see similar things. It basically shows that the home console segment is not very profitable as a stand-alone business.

    And yet the analyst things a good idea would be to spin off XBOX? Huh?

    To me that would be the death of XBOX AND the death of Microsoft. SO MUCH of the good will that people have for Microsoft now is based on XBOX – while Apple and Google have been earning their evil wings, Microsoft has been providing Bro Culture something to go along with Doritos and Mountain Dew! :)

    I think Microsoft has built a business model that includes not being profitable in their gaming division, but as they say there are rewards other than $$!