• Chart: Finances By Business Segment

A surprisingly large loss for the Home and Entertainment business segment, which includes Xbox, was the most notable feature of Microsoft's latest 10-Q filing with the U.S. Securities and Exchange Commission (SEC), in which the company reported financial results by business segment for the quarter ending Mar. 31, 2003. As in previous quarters, the company's Client and Information Worker businesses earned the highest revenues and profits, with margins approaching 80%, while the Server and Tools business also showed profitability. All other divisions continued to lose money.

(For complete financial results and a comparison with previous quarters, see the chart "Finances by Business Segment".)

H&E Loss Doubles from Last Year

The results for Home and Entertainment (H&E) were somewhat unexpected. Generally, revenues in this division correspond to sales figures for Xbox consoles. Because Microsoft loses money on each console sold, higher revenues in this division tend to equal higher losses; lower revenues usually mean a drop in losses. In an effort to reduce Xbox manufacturing costs, Microsoft recently convinced manufacturer Flextronics to shut its Xbox plant in Guadalajara, Mexico. All Xboxes are now made by Flextronics and Wistron in China, closer to where many Xbox components are manufactured and where labor costs are lower.

The Q3'03 results, however, show that the H&E division is losing more money even as fewer consoles are sold. Revenues were approximately halved from the same quarter last year, when Xbox was relatively new in North America and had just been launched in Europe and Japan. But the division's loss nearly doubled from that quarter, from US$97 million to US$190 million. Reasons for the discrepancy include a price cut for Xbox in the interim period (leading to even greater losses on each console), lower sales of other H&E products (such as hardware and PC games), and higher marketing costs from rolling out the Xbox Live gaming service in Europe and Japan in Q3'03.

The division's losses could continue to rise as Microsoft continues to lower the price of the console to compete with Sony's PlayStation 2, extends the functionality of Xbox Live, and rolls it out in more countries. (See "Xbox Expands Online Offerings".)

Microsoft's latest 10-Q filing is available at www.microsoft.com/msft/sec.mspx. For more details on Microsoft's business segments and what their financial results say about the company's strategy, see "Desktop Central to Microsoft Profits" on page 26 of the Jan. 2003 Update.