Microsoft's game division takes $1.89bn hit

Last July, Robbie Bach, president of Microsoft's Entertainment and Devices division, promised that his department would be profitable during the company's 2008 fiscal year. He also warned, however, that, like the years before it, the EDD -- as the department is referred to in Microsoft's financial documentation -- would suffer a loss during the software giant's 2007 fiscal year, which ended on 30 June.

Given Bach's warning, last Friday's announcement that the EDD is still in the red didn't surprise anyone. For the year, the division suffered a $1.89bn operating loss, a 47 per cent increase from the $1.28bn hit the division took the prior year. The shortfall came despite $6.08bn in annual revenue, 28 per cent above the $4.76bn it took in the year prior.

Microsoft shipped -- not sold -- 6.6 million Xbox 360s during its fiscal 2007, up from 5 million in the 2006 financial year -- when it wasn't on sale for nearly half the year. Its current installed base stands 11.6 million strong, the most of any of the latest crop of consoles. The company only shipped 0.7 million units in the April-June quarter though, versus 1.8 million during the same period in 2006.

Besides decreased Xbox 360 console sales, the EDD's fourth quarter suffered a catastrophic blow when then-corporate vice president Peter Moore announced a three-year extension of the Xbox 360 manufacturer's warranty. The company on Friday confirmed it took a $1.06bn charge as a result of the unprecedented move, causing operating losses for the quarter to tally a massive $1.2bn -- a staggering 183 per cent year-on-year increase. The company said the loss was lessened somewhat by "decreased Xbox 360 console manufacturing costs" and "increased Xbox accessories and video game sales".

Among the grim financial figures were a few nuggets of interesting news. Apparently the EDD is beefing up its staff, since the company's report says that "headcount-related costs increased 15 percent [for the year], driven by a 9 percent increase in headcount and an increase in salaries and benefits for existing headcount, partially offset by a decrease in stock-based compensation expense". The company also said that for the year "Zune, consumer hardware and software, and TV platforms revenue increased $539 million, or 65 percent."

While Microsoft's game-industry efforts proved costly, they were more than made up for by the company's other businesses. Despite the $1.06bn 360 warranty charge, the company saw a $3.04bn net income on $13.37bn in revenue during its fourth fiscal quarter, 11 per cent higher than the same period in 2006. For the full fiscal year, the company saw $14.7bn of net income on revenues of $51.12bn, a 15 per cent increase over the prior fiscal year.