What Halo 3 Doesn't Mean for Microsoft's Bottom Line
September 25, 2007
By Chandler Lutz
On the first day of its release, analysts are predicting that the epic video game will rack up more than $200 million. This monumental amount dwarfs the largest Hollywood blockbusters like Spiderman 3 which grossed $151 million on its opening weekend. Additionally, analysts are predicting that Halo 3 sales for this year will reach $480 million.
However, Microsoft’s Entertainment & Devices Division, which includes Xbox console and video game sales, accounted for just 8.7 percent of the software giant’s $13 billion of revenue for the second quarter of 2007. Additionally, this unit has posted a $1.2 billion dollar loss over that period. Given this information, it’s no surprise that Microsoft’s p/e ratio has hovered around 20 since April.
With the Entertainment & Devices Division making up such a small percentage of revenue and dampening profits, investors care little about the building suspense of Halo 3 even though the video game may very well be the “must have” toy this Holiday Season. To evince this fact further, Microsoft’s share price saw little appreciation leading up to the Halo 3 release.
In comparison, Apple’s stock rose drastically with the release of the iphone. In this situation, analysts were expecting Apple to sell 1 million phones on the first weekend (it didn’t happen, but the iphone did eventually reach the 1 million mark). Given the computer maker’s $13 billion in revenue for fiscal year 2006, analysts were expecting the snappy little handheld to contribute significantly to profits. This caused the rapid price increase of Apple’s stock.
This brings us to a very important investment lesson that we all forget every once in a while: Make sure the product you’re interested in (from an investor’s standpoint) can dramatically affect a firm’s income. Halo 3 might be the greatest game in the world, but it would be silly to invest in Microsoft’s stock just because of this game’s potential. Halo can’t drastically affect Microsoft’s bottom line.
To add to that, even if Halo 3 is the mega-hit that Microsoft hopes, it is unlikely that the game alone will reverse the huge losses at the company’s Entertainment & Devices Division in the near term.
So, why is Microsoft expending so many resources on this unprofitable segment? Does Microsoft see something Wall Street analysts don’t; or is Microsoft spending its free cash flow wastefully as it feels pressure to grow into new areas?
As of right
now, Microsoft is using Halo 3 to buoy the rest of its gaming
division. Recently, Microsoft announced price cuts for its Xbox 360
console. Also, Microsoft is releasing various versions of the
console such as a
Halo 3 Special Edition 
There are many avenues of growth through this machine and I believe that Microsoft’s long run goal is create a complete entertainment center through the Xbox to exhaust every one of them. If Microsoft can gain an edge, the result could be huge profits down the road. However, the competition in this market is fierce. Not only does the Xbox fight with the Playstation 3 and the Wii, but it has to fend off other forms of media devices such as digital video recorders, and computers which perform many of the same (or more) functions as the 360.
Overall, the Xbox 360 is a powerful machine with huge potential, but its future is too ambiguous. The console market is too difficult to predict (two years ago, who saw the Wii coming?) and the competition is very fierce. Microsoft might be a great firm, but in all likelihood neither the Xbox 360 nor Halo 3 will lead shareholders to spectacular returns.