Microsoft's goal: game unit in black

Microsoft's video-game business zoomed through the holiday season with its next-generation Xbox 360 console taking advantage of a head start on the market and outselling rivals from Sony and Nintendo.

The Microsoft division responsible for the Xbox reported a 76 percent jump in earnings during the holiday quarter this week, and the console exceeded the company's own sales target, with 10.4 million Xbox 360s out the door as of Dec. 31.

So why did the company lower its target for Xbox sales by 1 million to 3 million units in the coming six months?

Microsoft said it is trying to keep a commitment to investors, some of whom are impatient with the video-game business. Now entering its sixth year with a product on the market, the business has never shown a full-year profit and has gobbled up billions.

The company is pulling several levers inside the Xbox business to make sure it gets in the black during fiscal year 2008, which begins July 1. That's the schedule Entertainment and Devices Division President Robbie Bach committed to last summer.

The reduced sales target for the remainder of the current fiscal year reflects the Xbox business' focus on hitting that goal, said Xbox head Peter Moore.

"We're not going to try to buy install base at any cost," he said. "... We've made an external commitment to profitability and that is job one."

In the video-game business, most companies lose money or break even on console sales. The profit is in selling games. Xbox 360 has done well there, with the highest number of games sold per console of any next-generation system.

"It's kind of a Catch 22 for them," said Philip Durell, a senior analyst at The Motley Fool who owns Microsoft shares. "The more [consoles] they sell, the further out is their profit, but the more money they'll make in the long term."

Moore said Microsoft is contemplating 20 or 30 small tweaks to the business to be profitable in the near term. One example would be reducing the number of bundling deals in which consoles are sold in combination with games and accessories, he said.

"That's one example of many that we might look at differently," Moore said.

For 2007, Moore said he is confident that the Xbox 360 will hold its edge against the Nintendo Wii and Sony PlayStation 3, both of which were introduced in mid November -- a year after Microsoft's entry.

He highlighted new game titles due to come out in the coming year, including "Project Gotham Racing 4" and "Halo 3."

Moore said "Halo 3," the sequel to one of Microsoft's best-selling titles ever, was not intentionally held back to give the company another marquee game for the 2007 holiday season. (It's exclusive "Gears of War" release was the seventh-best-selling title in 2006.)

The ship date is based on when Microsoft and Bungie Studios determine the game is ready.

"There's such a high bar now for having an even better experience than 'Halo 2,' " Moore said. "But I can tell you I am very glad I still have that in my pocket coming out of the holiday."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Information in this article, originally published January 27, 2007, was corrected January 28, 2007. A previous version of this story incorrectly stated that Microsoft reported a 76 percent jump in earnings. In fact, it was the Microsoft Entertainment and Devices Division that had a 76 percent revenue increase. The company as a whole saw revenue increase 6 percent.