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FTC leak: Xbox hardware was subsidized $1.5B in FY2021 (largest in history) + lots of info (9.6M XBS planned for FY2022)

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Hardware subsidized by $1.5B, Xbox Series had largest launch day of any Xbox, Xbox One S supply on track to permanently run out in December 2020
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Our FY21 Gaming P&L has a $1.5B hardware subsidy with the $499 and $299 price points on our consoles,
that's our largest hardware subsidy ever in the Gaming P&L.
• Our FY21 budget for AM is about $930M which does not meet the traditional 10% AM YoY growth that we'd
be running Gaming under for the past 5 years. This was an agreement going into the FY and shows MS
investing more than our mean in Gaming in FY21. We appreciate the investment and are on target to exceed
this budget.
• Gaming will have it's largest revenue year ever in FY21 reaching $12B in revenue and Q2 FY21 will be our
largest revenue quarter in Gaming's history.
• We had our largest launch day for Xbox console with Scarlett but will fall behind Xbox 360 in the quarter due
to supply.
• Somewhat random anecdote but we are also selling 20x the weekly runrate of Xbox One S right now and will
be sell out permanently this month leaving us with Xbox Series S and Series X as our two consoles in
market. There is real console demand but we still see the global console TAM as 200M units/generation, so
we do not anticipate console TAM growing.

Phil believes Xbox could've sold 10M at launch (2-3x what they had)
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I believe we could be selling 2-3x the number of console we are going to sell this quarter if we had the inventory.
And if we did that our hardware subsidy on the P&L would also grow to 2-3x the number we have now. I believe
could have sold 1 OM console this year and more next year with supply. Sony has done 15M+/year in some years
and I believe we could get close with our product lineup, price points and game lineup coming. But I also do not
think this is the right thing for our long term strategy given our investment.

Xbox has higher gross margins and accountability margins than Sony despite the install base difference
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On the capital allocation that we are making in Gaming, I believe our investments in content and xcloud are critical
to realizing our potential in Gaming. Amazon Luna and Google Stadia do not have the console strength we have
giving us developer engagement, gaming community and catalog of content. But they also do not have the console
subsidy on their gaming P&L that we have which could be an enabler for them. And other the other side we have
Sony with PS5 and a very analogous hardware subsidy. Sony's Gaming P&L runs at lower GM and AM %
margins than our Gaming business even though they have 2x the console IB.


xCloud had $500M in FY2021 and Games $1B, 7nm cost Xbox (and PlayStation) 20% volume at launch

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Bringing this back to our console volume now and for the next year. We are trying to thread a needle of investing in
a disruptive future which requires real capital allocation ($500M in xCloud this year, $1 B in games) while also
competing with Sony. Yes, TSMC/AMD yield on our 7nm die is costing us about 20% of our console volume we
planned for in our launch quarter (Sony has similar yield issues). We could add 20% to our Q2FY21 console
volume and we'd still feel considerable constraint.


Xbox planned to ship 9.6M XBS in FY2022 and reach 31M Game Pass subs, could ship 12M but FY P&L hit would be too large even though lifetime value of consoles would be positive
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As a team we are starting to work through our FY22 plan. Right now we have 9.6M consoles in our FY22 plan, 31 M
Xbox Game Pass sub ending balance and 22.5M game streaming entitlements. We will be investing in our V3
blades for xCloud and see concurrency in xCloud as android, iOS, PC and Xbox One will be streaming clients.
Early numbers in our planning, we see $14.5B in revenue but we also have a $700M AM gap to our growth
commitment for FY22 which we will work. We will land an FY22 plan that meets our AM commitments, this isn't an
ask for relief. One area we will likely constrain, again, is console volume. Just like we could likely sell 2-3x the
consoles we are selling now with supply I think we could sell 12M+ consoles next year with supply but with
considerable subsidy. The LTV for these units is positive but the FY P&L his is sizeable. I realize that what I'm
typing is almost the exact definition of the innovators dilemma.
 
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vixolus said:
Profit and Loss
Post automatically merged:


Phil says when asked if AM means “Profit” he says “That is the percent of your revenue that you keep in profit.”
Click to expand...

Doesn't detail the costs.

Have you read balance sheets?
There are a dozen items that are "percent of revenue" all with varying costs: gross profit, EBIDTA, net income, operating income etc

There is an obvious reason why we have GAAP accounting standards and AM is not that. Its an internal MSFT metric that has no detail on the calculation.
 
Xbox's having higher profit margins I believe was expected as in general (due to higher digital skew) Xbox generates more profits. Especially at that time as PS5 was selling at loss I believe.
 
enpleinjour said:
Doesn't detail the costs.

Have you read balance sheets?
There are a dozen items that are "percent of revenue" all with varying costs: gross profit, EBIDTA, net income, operating income etc

There is an obvious reason why we have GAAP accounting standards and AM is not that. Its an internal MSFT metric that has no detail on the calculation.
Click to expand...
"We have both gross margin targets, and accountability margin targets/profit. We have to grow the business at the topline, the revenue, and the profitability of the business," Spencer said.

"If we're not able to grow enough revenue to cover cost increases, we have to find other ways to cut costs to meet accountability margins, you can see job eliminations, cutting back on spend on other things in the market, because the profitability of our business is non-negotiable at the company."

www.tweaktown.com

Xbox is a separate business unit where profit 'non-negotiable'

Xbox is a separate business unit with its own profit targets within Microsoft: 'There's no part of our business where I get to lose money over time'
www.tweaktown.com www.tweaktown.com

They have gross profit margin targets too according to Phil + must be profitable. This was already known.
 
GodlyTrident said:
Xbox's having higher profit margins I believe was expected as in general (due to higher digital skew) Xbox generates more profits. Especially at that time as PS5 was selling at loss I believe.
Click to expand...
I'd argue that PS5 still sells at a loss. The overall profit margins are very thin and game production cost alone doesn't explain it imo.
 
Welfare said:
www.tweaktown.com

Xbox profits revealed in new FTC leak

Gamers, investors, consumers and competitors finally get a concrete answer on just how profitable Microsoft's Xbox video games division actually is.
www.tweaktown.com www.tweaktown.com

Derek Strickland looked into the accountability margins and found this

93375_31_xbox-profits-revealed-in-new-ftc-leak_full.png
Click to expand...
you know that's not bad for a console that had an anemic Game line up and basically only operates NA/EU/UK and barely sometimes in Asia
 
Derek has that chart labeled as July 1 -2022 - March 2023, but the source says FY22 Q1-Q3. Isn't that July 2021 - March 2022? One of their best lineups and strongest quarters.
 
Vena said:
This year will also be impacted if they really are pushing for that forecast of theirs, would have to be a big loss leader to do it.
Click to expand...

Probably, Unless they are hoping increased software/mtx pick up the slack. I think people forget how slow last year was for big 3rd party releases on top of the hardware shortages
 
Do you if XBOX accounts for 3rd party revenues - like Sony or just the royalty, like Nintendo? Seems like revenue is too high just for accounting for the royalty. It’s probably GMW. Since: 1. We know the hardware margin/loss2. We should “know” what the margin is of the 10%-30% take rate on 3rd party games3. The remainder is Game Pass and 1st party content margin If #2 is most of the profit, then it is not crazy for #3 to be a loss in Game Pass offset by 1st party publishing profit.
Click to expand...

Saw this post shared and wanted to bring this up. They ask if revenue accounts for total revenue rather than just third party royalty cuts. I'm not sure 100%, but based on a 2020 report talking about Xbox content & services revenue it is just third party royalties?

Microsoft 2020 Annual Report

www.microsoft.com www.microsoft.com
FY20 says
  • Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live (transactions, subscriptions, cloud services, and advertising), video games, and third-party video game royalties.
FY21 says
  • Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising.
FY 22 says
  • Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services.
 
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So it seems overall Xbox is nicely profitable enough.

Also seems like shortages were as much a product of fiscal constraints as physical production ones if I understand that right.

What has to be a blow to Phil though is, since this information, xbox hardware demand just dried up now, and is pretty anemic.

Honestly Xbox supply constraints (there still seems to be intermittent stock) could still be a P&L issue? Maybe they're only "permitted" to ship so many? Or am I crazy?
 
salesguy said:
So it seems overall Xbox is nicely profitable enough.

Also seems like shortages were as much a product of fiscal constraints as physical production ones if I understand that right.

What has to be a blow to Phil though is, since this information, xbox hardware demand just dried up now, and is pretty anemic.

Honestly Xbox supply constraints (there still seems to be intermittent stock) could still be a P&L issue? Maybe they're only "permitted" to ship so many? Or am I crazy?
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I don't think you're crazy. They are not in the business of selling as many consoles as they can spend. They have to run a profitable business and try to hit a certain margin/growth %. Ever console made was/is like $200 lost, so bulk ordering a bunch of consoles would absolutely tank their P&L values. I think it's a combination of factors for manufacturing and the P&L constraints based on these emails.
 
salesguy said:
Honestly Xbox supply constraints (there still seems to be intermittent stock) could still be a P&L issue? Maybe they're only "permitted" to ship so many? Or am I crazy?
Click to expand...

Judging from these communications, that's not an unreasonable extrapolation to draw. Selling now vs selling later means taking a bigger fiscal hit per box. However, without a full analysis of customer spend across years of ownership and concepts like brand momentum, selling 'later' might also have other costs vs selling now independent of just the strict analysis of per box sale profitability. Those kinds of questions are a little beyond the scope of these comms.
 
That's pretty crazy. Doesn't bode well for pricing of Nintendo's next console. Especially if the rumor of comparable hardware are to be believed.
 
PlayStation's margins are an issue. No wonder they changed price strategies on 1st Party software ($70 pricepoint, holding MSRP) and refuse day one Plus.
 
fiendcode said:
PlayStation's margins are an issue. No wonder they changed price strategies on 1st Party software ($70 pricepoint, holding MSRP) and refuse day one Plus.
Click to expand...
What makes it even crazier is that during the FY mentioned in the chart, Sony had God of War right? While Xbox had nothing first party wise
 
The last bit is interesting.
TAM = Total Addressable Market

So Phil/Xbox believes that the market for high-spec consoles would remain capped at ~200mil maximum, which the numbers across the past 3 hardware cycles kinda point to being true, with PS4/XBO being ~140mil and PS3/360 being ~170mil. Nintendo may compete in the space against them, but it does so just as much with supplementation (read: multi-homing) as it does with outright substitution of rival hardware outside of Japan, while PC acts as the primary point of console consumer attrition for SIE and MS. So it makes sense for those 2 to chase the PC market with their own content as diligently as they have, but I don't know if they'll be able to stop said consumer attrition that way, as more and more games see day one PC releases.
 
Welfare said:
www.tweaktown.com

Xbox profits revealed in new FTC leak

Gamers, investors, consumers and competitors finally get a concrete answer on just how profitable Microsoft's Xbox video games division actually is.
www.tweaktown.com www.tweaktown.com

Derek Strickland looked into the accountability margins and found this

93375_31_xbox-profits-revealed-in-new-ftc-leak_full.png
Click to expand...
He should've used operating profits instead of net profits for Nintendo, for comparison sake. It seems Sony is struggling to make profits thanks to the high development costs of first-party titles and the low profit margin of hardware sales.
 
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Terrell said:
The last bit is interesting.
TAM = Total Addressable Market

So Phil/Xbox believes that the market for high-spec consoles would remain capped at ~200mil maximum, which the numbers across the past 3 hardware cycles kinda point to being true, with PS4/XBO being ~140mil and PS3/360 being ~170mil. Nintendo may compete in the space against them, but it does so just as much with supplementation (read: multi-homing) as it does with outright substitution of rival hardware outside of Japan, while PC acts as the primary point of console consumer attrition for SIE and MS. So it makes sense for those 2 to chase the PC market with their own content as diligently as they have, but I don't know if they'll be able to stop said consumer attrition that way, as more and more games see day one PC releases.
Click to expand...
Include multi console user / homes and the total addressable market is really just that. Might even be slightly lower.
There is really not much growth when you look at population growth and emerging markets getting internet access etc.
 
Concurseiro do Futuro said:
Sony is doing some bad investments lately, like PSVR2 and PS Portal. Their profits could be way higher.
Click to expand...
It’s a muddle of things. One issue for Sony is they generally sell a LOT of software at a loss. Their bundles are pretty fantastic deals made to push hardware but it does mean their games basically pulling in very little revenue post launch.

Their TV/film push will be interesting. Could make a difference as the above also means their games have a large audience and brand awareness.

They are also starting to do the Apple thing of selling expensive accessories to their players. Which is fine but am not convinced it’s driving game revenue. Which really should be their bread and butter. Instead Sony seem to have decided to primarily be a console producer who makes the majority of their sales off third party.

That’ll be a problem once the Activision deal goes through.
Welfare said:
www.tweaktown.com

Xbox profits revealed in new FTC leak

Gamers, investors, consumers and competitors finally get a concrete answer on just how profitable Microsoft's Xbox video games division actually is.
www.tweaktown.com www.tweaktown.com

Derek Strickland looked into the accountability margins and found this

93375_31_xbox-profits-revealed-in-new-ftc-leak_full.png
Click to expand...
Honestly it’s just good to have three competitors all focusing on different niches doing so well. Sony number is a bit low for ROI but it’s not like they have big internal competitors pushing out PlayStation.
Vena said:
This year will also be impacted if they really are pushing for that forecast of theirs, would have to be a big loss leader to do it.
Click to expand...
The European deals must be pretty big loss runners. Am expecting them to do the same in the US for Black Friday. Should move a massive amount of consoles. Profitability will depend on the upswell of their games and accessories but I think they will take a decent hit here.
 
Derek Strickland deleted his table after confusing the margin of liability and the profits.

With Activision Blizzard, we will finally have concrete figures on real Xbox profitability
 
Avitsky said:
Derek Strickland deleted his table after confusing the margin of liability and the profits.

With Activision Blizzard, we will finally have concrete figures on real Xbox profitability
Click to expand...

Here's also Derek's tweet about it



I went ahead and took the chart down. It's tough to compare these types of numbers.
Click to expand...

Reporting some of David Faulkner's tweets about the accountability margin as well; hopefully it's a good contribution



Accountability margin would include only that which would be accountable to their business segment.Given the methods in which MS accounts their expenditure I highly doubt this margin includes any MS software or hardware costs, including cloud and servers
Click to expand...



To spread those costs across division would be quite complex and needs a basis (like hours or volume used or something like that). The cost of doing so has no real value internally and would need to be reversed upon reporting, costing more accounting time (1/X)...

If they did bother to put it into the P&L it would be as a SG&A (Selling General & Administration) cost, which sits below the Operating Profit/Operating Income/Accountability margin.This those costs would not be part of those margins (2/X)...
Click to expand...



Last point on this is that Microsoft have started in the notes of their financial reports is that costs stay with the main division which incurs them. Meaning costs for cloud sit in the business cloud segment, windows OEM costs sit in the business computing segment.

None of this is unusual or illegal I will point out. It's pretty standard stuff with global business reporting
Click to expand...
 
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