Xbox + Microsoft FY24 Q4 Results: Total +44%, Content and Services +61% (58 points from ABK), Hardware -42% (Next quarter guidance in OP)

[vixolus]

We can also now get a clear picture of the Xbox business decline:

Phil Sept 2022 Testimony:

• Minecraft at $1B annual revenue
• PC revenue for the first time $1B

Apr 22 leak:

• $6.6B 3P transactions console
• $0.6B 1P revenue console

We know Bethesda had revenue of $0.8B before being bought. So with that and MC in mind, around $2B for Xbox 1P on all platforms seems right.

We know sub revenue is $4B+ from Phil.
C&S = 4 + 6.6 + 2 = 12.6
HW rev peaked at $3.8B and is now ~$3.4B.
Total = 12.6 + 3.4 = $16B, fits perfectly with Xbox peak revenue of $16.2B

However FY24, XB yearly revenue is $15.38B, a decline a $1B, despite growth in sub revenue, PC and off platform revenue. And so we can see that Xbox software unit sales revenue has declined from $7.2B -> $6.2B in roughly 2 years.

And thats what Nadella and Amy are very worried. Xbox console revenue is still the majority of their xbox revenue, 80%+ comes from software and subs on xbox hardware. If that goes the way of the dodo then there is a $14B dollar revenue hole....

What i don’t get is they said even yesterday that content and services is their main KPI (known since they changed their executive bonus structure). Unless they plan on changing that to be only first party C&S they will likely never grow in that KPI, ever, compared to the numbers including Xbox console revenues.

Even if everything went day one elsewhere there’s still the 3rd party revenue and you’re only making 70% or less on your content by selling elsewhere.

Hood said their vision is annuity and subscription so maybe they just don’t care and will recalibrate because the margins are better in that future even if revenues are down

 

[GaiusBaltar25]

I believe the way forward for Microsoft involves publishing most or all of their games on all systems while still making hardware. The hardware would still be enticing enough to likely sell 20-25 million in a generation. The issue with the charts shown above is that there's no indication of how much profit they make. The margins on hardware are likely low, while the margins on 1P off console could be high. I also eventually expect a stripped down first-party-only Game Pass subscription to eventually make its way to Playstation and Steam.

 

[GodlyTrident]

We can also now get a clear picture of the Xbox business decline:

Phil Sept 2022 Testimony:

• Minecraft at $1B annual revenue
• PC revenue for the first time $1B

Apr 22 leak:

• $6.6B 3P transactions console
• $0.6B 1P revenue console

We know Bethesda had revenue of $0.8B before being bought. So with that and MC in mind, around $2B for Xbox 1P on all platforms seems right.

We know sub revenue is $4B+ from Phil.
C&S = 4 + 6.6 + 2 = 12.6
HW rev peaked at $3.8B and is now ~$3.4B.
Total = 12.6 + 3.4 = $16B, fits perfectly with Xbox peak revenue of $16.2B

However FY24, XB yearly revenue is $15.38B, a decline a $1B, despite growth in sub revenue, PC and off platform revenue. And so we can see that Xbox software unit sales revenue has declined from $7.2B -> $6.2B in roughly 2 years.

And thats what Nadella and Amy are very worried. Xbox console revenue is still the majority of their xbox revenue, 80%+ comes from software and subs on xbox hardware. If that goes the way of the dodo then there is a $14B dollar revenue hole....

What a strange chart without ABK. ABK also amounted to revenue in 3rd parties (it used be a third party) with COD, OW and so on.
Not to mention those are revenue charts and not a profit chart which is more important metric for Microsoft in the first place.

 

[enpleinjour]

I believe the way forward for Microsoft involves publishing most or all of their games on all systems while still making hardware. The hardware would still be enticing enough to likely sell 20-25 million in a generation. The issue with the charts shown above is that there's no indication of how much profit they make. The margins on hardware are likely low, while the margins on 1P off console could be high. I also eventually expect a stripped down first-party-only Game Pass subscription to eventually make its way to Playstation and Steam.

We have insights to how profit works at Xbox from the leaks and testimonies:

Sept 2022

• MSFT's Epic v Apple document leak had Xbox "MSFT internally accounted profit", before hardware losses, at $2.2B
• Hardware losses is refered to as hardware subsidy and is known via the court docs
  • in FY21 hardware losses were $1.5B at $499/$299. Phil talks about lower prices meaning more losses
• OI margins for 3rd party pubs aren't that big. Being a multiplat publisher is less profitable than being a 1st party publisher due to not having to pay the 20-30% fees.
  • EA and ATVI, biggest pubs by far, who even with the power to negotiate with Sony/MSFT, had ~20% or less margins
• The most profitable thing Xbox and likely Sony have is PS+ or Gold.
  • Phil says Gold GROSS (not operating or net) margin is 80%
• GROSS margin on Gamepass is as Phil says:
  • "depending on how we calculate it - 20-30%"
  • expected as Gamepass has CAQ (Content acquisition costs) and cannibilisation

 

[Pancracio17]

I believe the way forward for Microsoft involves publishing most or all of their games on all systems while still making hardware. The hardware would still be enticing enough to likely sell 20-25 million in a generation. The issue with the charts shown above is that there's no indication of how much profit they make. The margins on hardware are likely low, while the margins on 1P off console could be high. I also eventually expect a stripped down first-party-only Game Pass subscription to eventually make its way to Playstation and Steam.

I think itd be smarter to stop making Xbox devices all together and work on improving gaming on windows handhelds and the like. Maintaining the whole Xbox ecosystem costs a lot, I dont think its worth it.

Though I dont think theyll stop right away, im pretty confident theyll actually launch next gen.

 

[Copilot]

I think itd be smarter to stop making Xbox devices all together and work on improving gaming on windows handhelds and the like. Maintaining the whole Xbox ecosystem costs a lot, I dont think its worth it.

Though I dont think theyll stop right away, im pretty confident theyll actually launch next gen.

They could run every BC Xbox games library on Windows trough an official emulator.

 

[SoonyXboneUhh]

I don’t see any benefit to exit the living room right now.
Up to 50m consoles sold each gen is still a lot better than 0.

Time is not right yet. Focus will shift further, but just like Surface, you don’t exit that business completely.

 

[Mr Swine]

I don’t see any benefit to exit the living room right now.
Up to 50m consoles sold each gen is still a lot better than 0.

Time is not right yet. Focus will shift further, but just like Surface, you don’t exit that business completely.

I doubt that Series S/X will reach 45 millions as it’s selling considerably worse than the Xbox One generation.

 

[Kiria]

I don’t see any benefit to exit the living room right now.
Up to 50m consoles sold each gen is still a lot better than 0.

Time is not right yet. Focus will shift further, but just like Surface, you don’t exit that business completely.

It wouldn't reach 50m nor closed to it at this pace

And a handheld wouldn't be much helpful considering not even steamdeck sold near 10m its lifetime

With the current xbox/microsoft PR that you don't need a console anymore

Their next gen numbers gonna be much worst

 

[MrTired]

I don’t see any benefit to exit the living room right now.
Up to 50m consoles sold each gen is still a lot better than 0.

Time is not right yet. Focus will shift further, but just like Surface, you don’t exit that business completely.

If the rate at which hardware unit drop continues to remain similar to the last two quarters then they won't won't get near to selling 50 million.

We talk like Microsoft and not the market decides whether it viable or not to release another console or not.

I personally believe the will sell a boutique console which will sell for a profit day 1 with a margin of 20%. So the Series X equivalent would sell for about $850 (BoM was 700 which Microsoft gaming subsidize to tune of $200.

I doubt that Series S/X will reach 45 millions as it’s selling considerably worse than the Xbox One generation.

As right now it selling worse but I wouldn't say considerably. I believe though after the next two quarters your statement will be very close to the truth.

Xbox one X release, lack of a Pro console compared to Playstation plus Series quite frankly abysmal holiday numbers compared to other Xbox consoles will be the reason for this.

 

[KarlRemarx]

We have insights to how profit works at Xbox from the leaks and testimonies:

Sept 2022

• MSFT's Epic v Apple document leak had Xbox "MSFT internally accounted profit", before hardware losses, at $2.2B
• Hardware losses is refered to as hardware subsidy and is known via the court docs
  • in FY21 hardware losses were $1.5B at $499/$299. Phil talks about lower prices meaning more losses
• OI margins for 3rd party pubs aren't that big. Being a multiplat publisher is less profitable than being a 1st party publisher due to not having to pay the 20-30% fees.
  • EA and ATVI, biggest pubs by far, who even with the power to negotiate with Sony/MSFT, had ~20% or less margins
• The most profitable thing Xbox and likely Sony have is PS+ or Gold.
  • Phil says Gold GROSS (not operating or net) margin is 80%
• GROSS margin on Gamepass is as Phil says:
  • "depending on how we calculate it - 20-30%"
  • expected as Gamepass has CAQ (Content acquisition costs) and cannibilisation

The margins on sub services and 3rd party royalties described above are why Xbox would be utterly insane to abandon console hardware. There is little Xbox can do to pivot their games business to Windows because the incumbent there is an even stronger competitor than Sony who already receives all of Xbox' 1st party software. Likewise, with handhelds they'd be jumping from going against a single competitor who is at this point winning by default (Sony, thanks to decades of supply chain experience and investment in international market presence) to 2 competitors who handily beat Microsoft on either services (Steam) or 1st party production (Nintendo).

They need a 1st party only gamepass sub on the other platforms ASAP. This generation is a write-off for gamepass growth on Xbox hardware. If they can do that they'll achieve subscription revenue that will be subject to platform royalty fees but has zero 3rd party acquisition costs and a gigantic customer base. Reaching the broadest customer base is the most important thing they should be doing given their hardware sales. The other half of this is fixing their 1st party production management, which is an absolute disaster.

I'm pessimistic about either coming to pass because as far as I know there has been no communication of Microsoft moving away from their practice of extensive contracting (the cause of production disasters on Halo and Forza), and because the recent rearranging of the gamepass subs indicates they are happy to strip out core parts of the service with no acquisition costs (1st party games) but keep throwing money at 3rd party acquisition costs (this is the opposite of how Netflix achieved its position).

 

[SoonyXboneUhh]

I doubt that Series S/X will reach 45 millions as it’s selling considerably worse than the Xbox One generation.

It wouldn't reach 50m nor closed to it at this pace

If the rate at which hardware unit drop continues to remain similar to the last two quarters then they won't won't get near to selling 50 million.

I'm saying selling up to 50 million consoles each generation compared to non at all.
No where did I imply Series X|S will reach 50 million. And 40 or 50 million vs non at all does not really make any meaningful difference for the argument anyways.

 

[enpleinjour]

What i don’t get is they said even yesterday that content and services is their main KPI (known since they changed their executive bonus structure). Unless they plan on changing that to be only first party C&S they will likely never grow in that KPI, ever, compared to the numbers including Xbox console revenues.

Even if everything went day one elsewhere there’s still the 3rd party revenue and you’re only making 70% or less on your content by selling elsewhere.

Hood said their vision is annuity and subscription so maybe they just don’t care and will recalibrate because the margins are better in that future even if revenues are down

The margins on sub services and 3rd party royalties described above are why Xbox would be utterly insane to abandon console hardware. There is little Xbox can do to pivot their games business to Windows because the incumbent there is an even stronger competitor than Sony who already receives all of Xbox' 1st party software. Likewise, with handhelds they'd be jumping from going against a single competitor who is at this point winning by default (Sony, thanks to decades of supply chain experience and investment in international market presence) to 2 competitors who handily beat Microsoft on either services (Steam) or 1st party production (Nintendo).

They need a 1st party only gamepass sub on the other platforms ASAP. This generation is a write-off for gamepass growth on Xbox hardware. If they can do that they'll achieve subscription revenue that will be subject to platform royalty fees but has zero 3rd party acquisition costs and a gigantic customer base. Reaching the broadest customer base is the most important thing they should be doing given their hardware sales. The other half of this is fixing their 1st party production management, which is an absolute disaster.

I'm pessimistic about either coming to pass because as far as I know there has been no communication of Microsoft moving away from their practice of extensive contracting (the cause of production disasters on Halo and Forza), and because the recent rearranging of the gamepass subs indicates they are happy to strip out core parts of the service with no acquisition costs (1st party games) but keep throwing money at 3rd party acquisition costs (this is the opposite of how Netflix achieved its position).

Its pretty clear that not even MSFT/Xbox know how to solve this issue.
Xbox is declining significantly but there is no off ramp to the loss of revenue.

Satya, Amy, Phil may say that a multiplat Xbox and GP revenue is an off ramp but its just damage control of public perception.

XGS is a relatively small publisher. Bethesda was already multiplat (and was basically unprofitable), ATVI was already multiplat and like EA has stagnated in revenue ($7-7.5B annual) while costs have gone up. Mulitplat Xbox is not going to lead to quarter worthy growth.

Where is the off ramp growth going to come from then? Only PC GP and Cloud GP is left, but both adoption rates are far too slow to offset the decline of Xbox console ecosystem. Heck, both are still an open question.

We saw how Nadella/board changed the KPI when it became clear to the public that GamePass was not it.
Software revenue as a KPI changed to make it seem like there is huge growth by adding ATVI, however once those post merger YoY comparisons happe, if there is little growth or even decline.....thats when Nadella will get really upset.

 

[allan-bh]

I don't think Microsoft will bet big on consoles anymore.

Leave HW business for now doesn't make sense because they still have a significant revenue attached to Xbox consoles, but the market for next gen Xbox being smaller than Xbox Series (that will be smaller than Xbox One) could be the end of line for dedicated console hardware.

In some ways with the reports of no marketing for HW in some EMEA countries, the transition already started, I suppose the next Xbox will be a more focused machine released only in selected markets.

I believe the future for them is gaming on Windows and mobile.

 

[Lelouch0612]

A lot of their upcoming strategy will ride on the impact CoD will have on services and hardware in Q4.

Their vision isn't clear, so expect some big adjustments over the coming years, depending on what performs.

 

[GodlyTrident]

I don't think Microsoft will bet big on consoles anymore.

I guess. The next console will be basically 100% compatible with PC anyway (they are already are). So MSFT is able to monetize various platforms with their content. They will continue selling the hardware but it won't be at loss and won't matter much for them.

Leave HW business for now doesn't make sense because they still have a significant revenue attached to Xbox consoles, but the market for next gen Xbox being smaller than Xbox Series (that will be smaller than Xbox One) could be the end of line for dedicated console hardware.

The next generation hardware will have even less performance increase probably than going from Xbox One to Xbox Series X. So even more people won't migrate from the previous gen to the next generation and thus monetization will boil down to software.

The fact that 42% down in hardware led to 4% in revenue drop (without ABK, but ABK is a moot point as Xbox used to receive) and even then Amy mentioned that it was due to "bad performance of third party titles" - hardware losses do not affect the baseline at all. Would not be surprised if we will get -30% and then no drop in revenue YoY at one point.

 

[Copilot]

Without ABK, Xbox revenue is mostly stable YoY. Nintendo fell almost 50% YoY. Xbox isn't doing that bad really.

 

[KarlRemarx]

Without ABK, Xbox revenue is mostly stable YoY. Nintendo fell almost 50% YoY. Xbox isn't doing that bad really.

Comparing Xbox to year 8 of the Switch, with a year on year drop chiefly attributable to Zelda and the Mario movie, isn't the achievement for Microsoft you think it is

 

[GodlyTrident]

Without ABK, Xbox revenue is mostly stable YoY. Nintendo fell almost 50% YoY. Xbox isn't doing that bad really.

Well Xbox relies a lot on the third parties with recurring revenues (and royalties). Fortnite, COD, FIFA etc. are a huge chunks of revenue.

 

[aktoner]

Which is a shame because Surface is a great productivity tool.

Yeah my household has always favoured the surface over iPads. Great machines.

Sad to see what looks a terminal decline for Xbox hardware. Not going to get any better if Xbox heavy hitters start making their way to playstation.

It's all Doom though. Sea of thieves may be doing very well on playstation now but that ultimately boosts Xbox MAU's.