Beyond the PC

Although Microsoft’s main home entertainment strategy is establishing the Windows PC as a digital media hub, the company has two other major home entertainment businesses—Xbox and TV platforms. Microsoft entered these businesses primarily as a hedge against market changes that could reduce the PC’s relevance in the home, and their development does not necessarily fit in with the company’s main home entertainment strategy. Nonetheless, these products, particularly Xbox, are beginning to fit in as spokes to the PC-based hub, and ties among them could grow stronger in coming years.

Xbox

Console gaming seems like a natural business for Microsoft to be in. Overall, the home video gaming industry earns more than US$20 billion per year, and the main product sold is software—a very familiar business for Microsoft, and one in which margins can be extremely high.

However, unlike Microsoft’s other software, Xbox requires the company to build hardware, which offers much lower margins. In fact, Microsoft sells each console at a loss, hoping eventually to make it up on game sales and through services such as Xbox Live. As a consequence, Microsoft has probably lost close to US$2 billion on the business since its inception in fall 2001. (The company does not reveal Xbox profit or loss figures, but includes Xbox in the Home and Entertainment business segment, which has lost more than US$2.5 billion since the company began reporting profit and loss by segment in July 2002.)