11 ms·

150M at 5B revenue is not great: that's 3% margin! The bigger issue is that console manufacturer revenue is highly cyclical. This is hard to see in e.g. Xbox a

150M at 5B revenue is not great: that's 3% margin! The bigger issue is that console manufacturer revenue is highly cyclical. This is hard to see in e.g. Xbox and Sony since they are both part of a larger conglomerate, but really obvious for nintendo. You generally have a cycle of - "Launch": high marketing costs, low/negative HW margins - "Mid-cycle": lowering manufacturing costs, large game sales, high margin DLCs - "end-of-cycle": falling HW sales, fewer exclusives (-> preparation for next gen), fewer consumers (-> waiting for next gen). Here you usually have maximum profits since you don't subsidize HW and marketing is minimal (platforms are already locked in) Generally you have to establish a big userbase during the mid-cycle such that you can levarage it during the late-cycle to be able to afford next-gen. Xbox has the big issue that their mid-cycle was catastrophic, which means they now don't have the console base to get into the next generation: If they have 3% margin _right now_ in the end-of-cycle where marketing and development costs are at their lowest, this does not bode well for the overall health of the business.

ksec 2mo ago
It has been really really long since I read anything on HN with someone that has some basic understanding of business. May be all is not lost. Yes. 3% margin is lower than inflation of US treasury rate. As some business would even call it borderline charity. It is also not a commodity market, which means it is not healthy. And any headwind is going to be damaging.
Narishma 2mo ago
> "Mid-cycle": lowering manufacturing costs, That was true historically but is no longer the case. Even last gen manufacturing costs didn't go down as much as they used to. This current gen they actually increased multiple times.
- dcrazy 2mo ago
  And they have hiked the prices of the current gen very late in the cycle to reflect component costs.
  - genxy 2mo ago
    The cheapest xbox should cost 129. Instead it is $399. That is how consoles work. It gets cheaper, the back catalog grows and now you have a mass market item that ideally could source games from anywhere. Consoles losing physical media and not allowing 3rd party app stores, or gasp, the ability to run user programs is going to kill the consoles. Expensive and marginal future utility.
    - theturtletalks 2mo ago
      Exactly, it seems their only way to make money is charging for online play which used to be $5/m and now $10/m for Game Pass Essential. Now that their high console prices aren't getting new players, the only play is to squeeze the existing ones and increasing the cost to play online. They actually tried this a few months back when Game Pass Ultimate went from $20/m to $30/m. I cancelled my sub and went to essential. Then Asha backtracks and reduces it to $22/m and people are like wow, she will save Xbox. No, it just shows me they probably saw so much churn, especially from long-time subs, that they backtracked.
      - hparadiz 2mo ago
        I've always thought it was borderline crazy that Xbox charged a monthly fee and I never had an Xbox for that reason. It always made me wonder how many people they failed to bring into their ecosystem for that reason.
        trymas 2mo ago
        As far as I understand - that fee is not mandatory.
        theturtletalks 2mo ago
        To play online, you do need to pay them. But for local games, no fees after buying the game.
    - deleted 2mo ago
_verandaguy 2mo ago
> 150M at 5B revenue is not great Considered as a raw percentage in a vacuum, sure, I guess, but we're talking about... - A company which has undertaken a concerted, long-term effort to consolidate the industry under its umbrella (something they themselves call out as a problem in this post), reducing consumer choice - A company which has captured a significant chunk of the console market. They're one of the big three (alongside Sony and Nintendo), and have been since the early 2000s, arguably, for crying out loud. At a certain size (typically as measured by market capture) the expectation for growth needs to be reality checked. This is still $150M of pure gravy every single year. Sure, this is going to a corporation, but that's more money than most people could possibly dream of earning in ten lifetimes. Every year. For a company that's already putting money towards opex in the form of developing new games and new content for existing ones, for a ridiculously broad portfolio. To be clear: it is Microsoft's and Xbox's prerogative to pursue more profit, but I reserve the right to call this out as absurd under the circumstances. If you want to make the argument that Xbox has suffered from a lack of focus in the past decade (... or even longer), or that there's been mismanagement (I would say since around the time 343 got created), then those are fair arguments, though I don't think those are justifications, on their own, for cutting thousands in headcount. Allowing this org to balloon to fourteen levels of management on any vertical is a joke. Allowing the absorption of so much of the game dev industry and still being unhappy with $150M in annual profit after being such an active participant in the oligolpolization of console gaming is just a bit unserious.
- spenczar5 2mo ago
  > This is still $150M of pure gravy every single year. The issue is rate of return. They are evidently spending $4.85bn on Xbox per year. The US federal interest rate is 3.5% so if you just put that money in US bonds you would get about $175M per year of much purer simpler gravy.
  - hx8 2mo ago
    Exactly. The inflation rate is about 3%, so the people at Xbox worked very hard all year to have about the same value they put into it.
skeeter2020 2mo ago
>> 150M at 5B revenue is not great: that's 3% margin! and yet everybody - including Microsoft - is in a big rush to sell us AI services, which could look an awful lot like a historical utility business. 3% will be a dream return in that scenario!
- monocasa 2mo ago
  AWS is essentially a utility and gets way better than 3%.
  - risyachka 2mo ago
    Aws is closer to monopoly than to utility
    - monocasa 2mo ago
      Most utilities are monopolies.
      - bluGill 2mo ago
        most utilities are natural monopolies. The cost to run wires/pipes to my house are a significant portion of the cost to serving me, so you wouldn't run wires to my house in hopes that I buy from you later.
    - groundzeros2015 2mo ago
      A monopoly with at least 3 major competitors and which exists because it created a new thing, not because it controls a fixed shared resources.
  - mike_hearn 2mo ago
    AWS isn't a utility because utilities sell commodities for which you can switch to a competitor easily, as you're buying the same thing. There are companies selling similar products to AWS but none that sell AWS itself.
georgeecollins 2mo ago
Sure, 3% is terrible. But the point is you spent a fortune buying all these studios-- aka key strategic intellectual properties-- and then you manage them badly. Then you just sell or shut them down at their absolute bottom and you end up just destroying value. Older forms of media understand this. WB loses money and its still really valuable because people see the potential of Batman, Harry Potter etc. IP studios are really valuable because they can drive attention to your platforms. Try starting a premium streaming service or a console without IP. But you can't manage it like tech. It's not going to grow all the time and returns are uncertain. MSFT could be in the XBox as a platform business. They could have a few in house studios to prime the platform pump. Once it started being a content business they got lost.
- corimaith 2mo ago
  The mismanagement here was actually Microsoft giving studios free reign and they flopped with projects like Starfield. This needs to be understood really within the larger industry trend of quality decline of AAA, which I suspect has to do with changes in overall dev culture and discourse than corporate decisions. There hasn't been a time when developers have been more disconnected from their audience than now.
  - teachrdan 2mo ago
    > There hasn't been a time when developers have been more disconnected from their audience than now. I'm curious what you mean by this. It seems like gamers have never been more vocal and there have never been more avenues (social media, short form video platforms, etc.) for them to voice their opinions than we have now. How exactly do you know that developers have never been more disconnected from their audience? And how would that be relevant to declining AAA game quality when it's the responsibility of management and leadership to ensure the quality of the final product?
    - RedComet 2mo ago
      The squeaking [spare] wheel got the grease.
mattfrommars 2mo ago
> The bigger issue is that console manufacturer revenue is highly cyclical. This is hard to see in e.g. Xbox and Sony since they are both part of a larger conglomerate, but really obvious for nintendo. There is absolutely no reason to be in sync with Sony on their console release date. They could have effectively released consoles bit more frequently. But they choose not to do so. Their acquisition has been questionable - Activision/Blizzard. At the end of the day, the employee pay the price for bad management decision which they keep on making.
- jonhohle 2mo ago
  As a Blizzard and Overwatch fan, the acquisition has not been ideal. Activision nearly ended competitive professional Overwatch and significantly scaled back their big esports events to look more profitable. Lately, they seem to be chasing Marvel Rivals for no good reason, but at least in the younger competitive leagues, Rivals is picking up steam and Overwatch no longer looks like a contender, despite being significantly more balanced competitive play. It’s possible stadium sized esports wasn’t directly profitable or was break-even, but seems like it could have had the potential to catapult the idea into the mainstream when there are 7 figure prize pots, and the games are accurate to anyone with equipment.
  - tonyhart7 2mo ago
    nah, overwatch current situation is stemming from horrendous blizzard decision of OW2 release sure Rivals is strong competition but remember time where Marvel Rivals didn't exist, OW is already dying by then
    - worthless-trash 2mo ago
      > nah, overwatch current situation is stemming > from horrendous blizzard decision of OW2 release If you played enough overwatch, you'd know that it was messed up from when Jeff started doing his silent fireplace streaming. This was a silent protest by Jeff.
  - beart 2mo ago
Drupon 2mo ago
>150M at 5B revenue is not great: that's 3% margin! Oy vey maybe this kind of money grubbery is not good for our society.
- Daz912 2mo ago
  [dead]
- 7thpower 2mo ago
  The awareness of a poor return on investment is a good thing for society. We want to do more with fewer resources. Making terrible decisions, such as investing in distractions for your company and consumers, and then letting your workforce pay the tab.. is the thing that is not great for society.
  - slg 2mo ago
    >We want to do more with fewer resources. Who is the "we" here? Because the profit margin not being high enough is certainly not a problem for consumers. The only people who should care about that are the company's shareholders and "shareholders" certainly isn't synonymous with "society".
    - dd8601fn 2mo ago
      It absolutely became a problem for consumers.
      - slg 2mo ago
        Is a low profit margin a problem for consumers or is it the company's "money grubbery" of not being satisfied with that profit margin that is causing the problem?
        Gareth321 2mo ago
        When XBOX fires a bunch of people and shutters studios leading to fewer games with worse support, that's a problem for consumers. I think people often forget that in a society we rely on companies making and serving things. They make our food and our medicine and build our homes and make our games. It's a good thing when their finances are healthy. It's a bad thing when they form monopolies and rent-seek.
ralferoo 2mo ago
Development costs are far from their lowest at end-of-cycle. That's exactly when the prototype development kits come out of small scale testing (maybe tens of units, all incredibly expensive bespoke units, probably hand soldered and assembled), production ramped up a little and the evaluation kits are produced and distributed to first party studios and large third party studios, with thousands of consoles produced with the expectation that their lifespan is likely only going to be 3-6 months. These are then extensively tested by developers, both to see what needs to be done to get their launch titles actually working on the machine, but often very serious hardware bugs are found in this period that may require fixes to the chips themselves or software workarounds that affect performance. For some of the recent console launches there have been 2 or 3 rounds of evaluation kits in a year, and the previous evaluation kits are effectively bricked. After the evaluation kits seem to have converged on a final product, the development kits are produced to ideally match the final version of the evaluation kits, but again these are tested before production is ramped up because some things do change (most trivially the case, even if the board is fine). At this point tens of thousands of dev kits are produced, each different enough to retail kits (more memory, maybe extra ports, etc), usually at least 6 months to a year before console launch so studios can make a final push on the launch day or first quarter titles, and in the background the same evaluation process for retail kits (usually just stripped down from the development kits, but usually different cases etc) starts, and eventually a final design for the retail product is produced that's good enough for manufacture. This time is definitely not just when the console manufacturers kick back and rake in their profits, this is when they're already spending big on the final push to get to the point where they even have a new console to start a new cycle with. Separate to the console manufacturing side, the years before release are when big money is spent getting studios on board to produce launch titles, because without those, the console will be dead on arrival. TLDR: revenues at the end of the console cycle aren't funding the next generation, because it's probably already been in development since the launch of the current console, rather those end-of-cycle revenues are hopefully paying off the gamble they took funding development for the current generation.
glitchc 2mo ago
Reads to me like multiplayer and server-side games incur a hefty infrastructure cost that eats into their profits, subscriptions notwithstanding. Maybe XBox should focus more on single-player exclusives. They certainly have enough studios to do it.

ksec 2mo ago

It has been really really long since I read anything on HN with someone that has some basic understanding of business. May be all is not lost. Yes. 3% margin is lower than inflation of US treasury rate. As some business would even call it borderline charity. It is also not a commodity market, which means it is not healthy. And any headwind is going to be damaging.

Narishma 2mo ago

> "Mid-cycle": lowering manufacturing costs, That was true historically but is no longer the case. Even last gen manufacturing costs didn't go down as much as they used to. This current gen they actually increased multiple times.

dcrazy 2mo ago
And they have hiked the prices of the current gen very late in the cycle to reflect component costs.
- genxy 2mo ago
  The cheapest xbox should cost 129. Instead it is $399. That is how consoles work. It gets cheaper, the back catalog grows and now you have a mass market item that ideally could source games from anywhere. Consoles losing physical media and not allowing 3rd party app stores, or gasp, the ability to run user programs is going to kill the consoles. Expensive and marginal future utility.
  - theturtletalks 2mo ago
    Exactly, it seems their only way to make money is charging for online play which used to be $5/m and now $10/m for Game Pass Essential. Now that their high console prices aren't getting new players, the only play is to squeeze the existing ones and increasing the cost to play online. They actually tried this a few months back when Game Pass Ultimate went from $20/m to $30/m. I cancelled my sub and went to essential. Then Asha backtracks and reduces it to $22/m and people are like wow, she will save Xbox. No, it just shows me they probably saw so much churn, especially from long-time subs, that they backtracked.
    - hparadiz 2mo ago
      I've always thought it was borderline crazy that Xbox charged a monthly fee and I never had an Xbox for that reason. It always made me wonder how many people they failed to bring into their ecosystem for that reason.
      - trymas 2mo ago
        As far as I understand - that fee is not mandatory.
        theturtletalks 2mo ago
        To play online, you do need to pay them. But for local games, no fees after buying the game.
  - deleted 2mo ago

_verandaguy 2mo ago

> 150M at 5B revenue is not great Considered as a raw percentage in a vacuum, sure, I guess, but we're talking about... - A company which has undertaken a concerted, long-term effort to consolidate the industry under its umbrella (something they themselves call out as a problem in this post), reducing consumer choice - A company which has captured a significant chunk of the console market. They're one of the big three (alongside Sony and Nintendo), and have been since the early 2000s, arguably, for crying out loud. At a certain size (typically as measured by market capture) the expectation for growth needs to be reality checked. This is still $150M of pure gravy every single year. Sure, this is going to a corporation, but that's more money than most people could possibly dream of earning in ten lifetimes. Every year. For a company that's already putting money towards opex in the form of developing new games and new content for existing ones, for a ridiculously broad portfolio. To be clear: it is Microsoft's and Xbox's prerogative to pursue more profit, but I reserve the right to call this out as absurd under the circumstances. If you want to make the argument that Xbox has suffered from a lack of focus in the past decade (... or even longer), or that there's been mismanagement (I would say since around the time 343 got created), then those are fair arguments, though I don't think those are justifications, on their own, for cutting thousands in headcount. Allowing this org to balloon to fourteen levels of management on any vertical is a joke. Allowing the absorption of so much of the game dev industry and still being unhappy with $150M in annual profit after being such an active participant in the oligolpolization of console gaming is just a bit unserious.

spenczar5 2mo ago
> This is still $150M of pure gravy every single year. The issue is rate of return. They are evidently spending $4.85bn on Xbox per year. The US federal interest rate is 3.5% so if you just put that money in US bonds you would get about $175M per year of much purer simpler gravy.
- hx8 2mo ago
  Exactly. The inflation rate is about 3%, so the people at Xbox worked very hard all year to have about the same value they put into it.

skeeter2020 2mo ago

>> 150M at 5B revenue is not great: that's 3% margin! and yet everybody - including Microsoft - is in a big rush to sell us AI services, which could look an awful lot like a historical utility business. 3% will be a dream return in that scenario!

monocasa 2mo ago
AWS is essentially a utility and gets way better than 3%.
- risyachka 2mo ago
  Aws is closer to monopoly than to utility
  - monocasa 2mo ago
    Most utilities are monopolies.
    - bluGill 2mo ago
      most utilities are natural monopolies. The cost to run wires/pipes to my house are a significant portion of the cost to serving me, so you wouldn't run wires to my house in hopes that I buy from you later.
  - groundzeros2015 2mo ago
    A monopoly with at least 3 major competitors and which exists because it created a new thing, not because it controls a fixed shared resources.
- mike_hearn 2mo ago
  AWS isn't a utility because utilities sell commodities for which you can switch to a competitor easily, as you're buying the same thing. There are companies selling similar products to AWS but none that sell AWS itself.

georgeecollins 2mo ago

Sure, 3% is terrible. But the point is you spent a fortune buying all these studios-- aka key strategic intellectual properties-- and then you manage them badly. Then you just sell or shut them down at their absolute bottom and you end up just destroying value. Older forms of media understand this. WB loses money and its still really valuable because people see the potential of Batman, Harry Potter etc. IP studios are really valuable because they can drive attention to your platforms. Try starting a premium streaming service or a console without IP. But you can't manage it like tech. It's not going to grow all the time and returns are uncertain. MSFT could be in the XBox as a platform business. They could have a few in house studios to prime the platform pump. Once it started being a content business they got lost.

corimaith 2mo ago
The mismanagement here was actually Microsoft giving studios free reign and they flopped with projects like Starfield. This needs to be understood really within the larger industry trend of quality decline of AAA, which I suspect has to do with changes in overall dev culture and discourse than corporate decisions. There hasn't been a time when developers have been more disconnected from their audience than now.
- teachrdan 2mo ago
  > There hasn't been a time when developers have been more disconnected from their audience than now. I'm curious what you mean by this. It seems like gamers have never been more vocal and there have never been more avenues (social media, short form video platforms, etc.) for them to voice their opinions than we have now. How exactly do you know that developers have never been more disconnected from their audience? And how would that be relevant to declining AAA game quality when it's the responsibility of management and leadership to ensure the quality of the final product?
  - RedComet 2mo ago
    The squeaking [spare] wheel got the grease.

mattfrommars 2mo ago

> The bigger issue is that console manufacturer revenue is highly cyclical. This is hard to see in e.g. Xbox and Sony since they are both part of a larger conglomerate, but really obvious for nintendo. There is absolutely no reason to be in sync with Sony on their console release date. They could have effectively released consoles bit more frequently. But they choose not to do so. Their acquisition has been questionable - Activision/Blizzard. At the end of the day, the employee pay the price for bad management decision which they keep on making.

jonhohle 2mo ago
As a Blizzard and Overwatch fan, the acquisition has not been ideal. Activision nearly ended competitive professional Overwatch and significantly scaled back their big esports events to look more profitable. Lately, they seem to be chasing Marvel Rivals for no good reason, but at least in the younger competitive leagues, Rivals is picking up steam and Overwatch no longer looks like a contender, despite being significantly more balanced competitive play. It’s possible stadium sized esports wasn’t directly profitable or was break-even, but seems like it could have had the potential to catapult the idea into the mainstream when there are 7 figure prize pots, and the games are accurate to anyone with equipment.
- tonyhart7 2mo ago
  nah, overwatch current situation is stemming from horrendous blizzard decision of OW2 release sure Rivals is strong competition but remember time where Marvel Rivals didn't exist, OW is already dying by then
  - worthless-trash 2mo ago
    > nah, overwatch current situation is stemming > from horrendous blizzard decision of OW2 release If you played enough overwatch, you'd know that it was messed up from when Jeff started doing his silent fireplace streaming. This was a silent protest by Jeff.
- beart 2mo ago

Drupon 2mo ago

>150M at 5B revenue is not great: that's 3% margin! Oy vey maybe this kind of money grubbery is not good for our society.

Daz912 2mo ago
[dead]
7thpower 2mo ago
The awareness of a poor return on investment is a good thing for society. We want to do more with fewer resources. Making terrible decisions, such as investing in distractions for your company and consumers, and then letting your workforce pay the tab.. is the thing that is not great for society.
- slg 2mo ago
  >We want to do more with fewer resources. Who is the "we" here? Because the profit margin not being high enough is certainly not a problem for consumers. The only people who should care about that are the company's shareholders and "shareholders" certainly isn't synonymous with "society".
  - dd8601fn 2mo ago
    It absolutely became a problem for consumers.
    - slg 2mo ago
      Is a low profit margin a problem for consumers or is it the company's "money grubbery" of not being satisfied with that profit margin that is causing the problem?
      - Gareth321 2mo ago
        When XBOX fires a bunch of people and shutters studios leading to fewer games with worse support, that's a problem for consumers. I think people often forget that in a society we rely on companies making and serving things. They make our food and our medicine and build our homes and make our games. It's a good thing when their finances are healthy. It's a bad thing when they form monopolies and rent-seek.

ralferoo 2mo ago

Development costs are far from their lowest at end-of-cycle. That's exactly when the prototype development kits come out of small scale testing (maybe tens of units, all incredibly expensive bespoke units, probably hand soldered and assembled), production ramped up a little and the evaluation kits are produced and distributed to first party studios and large third party studios, with thousands of consoles produced with the expectation that their lifespan is likely only going to be 3-6 months. These are then extensively tested by developers, both to see what needs to be done to get their launch titles actually working on the machine, but often very serious hardware bugs are found in this period that may require fixes to the chips themselves or software workarounds that affect performance. For some of the recent console launches there have been 2 or 3 rounds of evaluation kits in a year, and the previous evaluation kits are effectively bricked. After the evaluation kits seem to have converged on a final product, the development kits are produced to ideally match the final version of the evaluation kits, but again these are tested before production is ramped up because some things do change (most trivially the case, even if the board is fine). At this point tens of thousands of dev kits are produced, each different enough to retail kits (more memory, maybe extra ports, etc), usually at least 6 months to a year before console launch so studios can make a final push on the launch day or first quarter titles, and in the background the same evaluation process for retail kits (usually just stripped down from the development kits, but usually different cases etc) starts, and eventually a final design for the retail product is produced that's good enough for manufacture. This time is definitely not just when the console manufacturers kick back and rake in their profits, this is when they're already spending big on the final push to get to the point where they even have a new console to start a new cycle with. Separate to the console manufacturing side, the years before release are when big money is spent getting studios on board to produce launch titles, because without those, the console will be dead on arrival. TLDR: revenues at the end of the console cycle aren't funding the next generation, because it's probably already been in development since the launch of the current console, rather those end-of-cycle revenues are hopefully paying off the gamble they took funding development for the current generation.

glitchc 2mo ago

Reads to me like multiplayer and server-side games incur a hefty infrastructure cost that eats into their profits, subscriptions notwithstanding. Maybe XBox should focus more on single-player exclusives. They certainly have enough studios to do it.