Xbox has proved an expensive game for Microsoft. Heavy investment in the console has generated a stream of losses since 2001. But the sheer scale and profitability of the core Windows and Office franchises - representing almost 60 per cent of revenues - has minimised the impact. The flip side is that, even if the new Xbox 360 performs strongly, it will take time to have a significant effect on the software group.
Near-term, the launches of Windows Vista and Office 12 are more important. But further out it will become ever harder to grow the core franchises. Microsoft will become more reliant on its newer businesses. Servers already generate about $10bn of revenue a year - almost as much as Office.
Meanwhile, Gartner estimates Xbox has a hardware and software market of $25bn-$30bn to pursue. Xbox 360 should be able to take advantage of its release ahead of Sony’s PlayStation 3 to gain market share in loss-making consoles. It should then become profitable as revenue from the sale of video games flows through. Xbox also lets Microsoft hedge its bet on the digital home of the future - giving it position in games consoles as well as PCs.
The Xbox will not become what the iPod is for Apple - not least because iPod hardware sales are profitable rather than relying on future music revenues. Within Microsoft, Xbox is unlikely to rival the importance of servers as a third leg. But moving into profit would boost investors faith that Microsoft can develop attractive new businesses beyond the PC.
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