Microsoft is a publicly traded company, and as such every quarter they publish a report with their activities, plans, profit, losses, and other information shareholders and investors need to make sure the company is running fine. The people in the business that put out these statements, however, have an interest in making sure things look good because their jobs depends on it. This means that despite financial disclosures and reports being heavily regulated, companies still can (and do) exploit loopholes and statements to convey the story they want to tell. The bigger and more complex a company is, the easier it is to confuse things, hide things, and manipulate the story.
In July 21st, Microsoft released its earnings for the 4th quarter of its 2014 financial year. Last Saturday August 9th, almost a month later, a few stories started popping up claiming that Microsoft has so far lost $400 million dollars, I am sure you have seen them:
Microsoft: $400m losses on the Xbox One
Microsoft Loses Over $400 Million on the Xbox One
Xbox One Lost About $400,000,000 in Gross Margins for Microsoft During Latest Fiscal Year
Why It’s Perfectly Fine If Microsoft Has Lost $400M On Xbox One [Updated]
Let’s get something out of the way right now, it is hard to tell exactly how much Xbox has made by looking at Microsoft financial statements. This is because Xbox reports under an umbrella division called Computing and Gaming Hardware, which also includes other products like the Surface. This division also suffered from a lot of the fallout from Microsoft’s recent acquisition of Nokia. In the image below, you can see that the Computing and Gaming Hardware division had revenues of 9,628 million and a margin of 893 billion (you can read the statement for yourself here). In other words, the division is profitable. It is worth mentioning that Gross Margin is NOT net income. This means it doesn’t include interest on money borrowed, taxes, R&D Etc… However, that would not be calculated by division most companies, including Microsoft, calculate that in the consolidate income statement once all of the income from all the divisions is reported (you can read Microsoft’s here)
So why is everyone rushing to report a loss that is not there? The confusion seems to come from a misreading of this write up.
Computing and Gaming Hardware revenue increased $3.2 billion or 49%, primarily due to higher revenue from the Xbox Platform and Surface. Xbox Platform revenue increased $1.7 billion or 34%, due mainly to sales of Xbox One, which was released in November 2013, offset in part by a decrease in sales of Xbox 360. We sold 11.7 million Xbox consoles during fiscal year 2014 compared with 9.8 million Xbox consoles during fiscal year 2013. Surface revenue increased $1.3 billion or 157%, due mainly to a higher number of devices and accessories sold.
Computing and Gaming Hardware gross margin decreased slightly, due to a $3.2 billion or 59% increase in cost of revenue, offset in part by higher revenue. Xbox Platform cost of revenue increased $2.1 billion or 72%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One. Surface cost of revenue increased $970 million or 51%, due mainly to a higher number of devices and accessories sold, offset in part by a charge for Surface RT inventory adjustments of approximately $900 million in fiscal year 2013.
The key parts here are “revenue increased $1.7 billion or 34%, due mainly to sales of Xbox One” and “Xbox Platform cost of revenue increased $2.1 billion or 72%” The confusion seems that people were assuming that this means that revenues increased TO 1.7 billion and expenses increased TO 2.1 billion, when in reality means that it increased BY the aforementioned amounts. An increase in cost of good sold is not good. It means that they are making less money per item they are selling, and the decline in the margins is evident in the figures. They went from a gross margin of 2.4 billion in 2012 to 893 million in 2014. That’s bad but this is not the catastrophic loss reported.
The way this misconception seems to have spread was through outlets seeing it from The Independent, which is sourced in some of the links. Further inspection shows that The Independent seems to have one source: This NeoGAF thread. I have made no secret in the past that Enemy Slime is not my pay job, and we are fortunate here that we do not have a quota of stories to fill, unlike many of the journalists who live or die by the clicks their stories attract. You can even give journalists who are not used to wading through financial statements a pass, and there is little transparency in the way Microsoft reports information on the Xbox division, but venues like Forbes should have known better. Granted, Forbes is correct when they say that the math doesn’t affect the point of their story, but it is still an elementary mistake they could have prevented by doing ten minutes of research.
The lesson here is to take these doomsday stories with a grain of salt. They attract attention, but financial information, especially from companies like Microsoft and Sony is always hard to decipher. As a last resort, you can always try to check the source of the information yourself. You can find Microsoft’s investor relations site here. And if you are ever curious about something like this and want me to put my incredibly boring skills to work to clear something up, e-mail me!
