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The Xbox gaming console is the most notable hardware product developed to-date by Seattle software giant Microsoft, launched in 2001 as a direct rival to Nintendo and Sony. It proved a worthy challenger to its Japanese rivals, boosted by a number of popular exclusive titles, not least the Halo franchise. Microsoft has also dabbled in a number of other hardware sectors, but with somewhat less success. Among its failed products was the Zune music player, intended as a rival to Apple's iPod, but which sank almost without trace soon after launch. More recently, the group introduced the Surface tablet to compete with iPad and other tablets, and attempted to carve out a presence in the mobile phone market through the creation of a global alliance with handset developer Nokia. It subsequently acquired full control of Nokia's handset operations in 2013 for a total of around $7.2bn, but there was little improvement in sales of those devices under their new name Lumia, and Microsoft quietly exited the mobile market altogether in 2017.
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Following a full corporate restructure announced in summer 2013, one single business division now has responsibility for all Microsoft's hardware devices, from handsets to games consoles, at least for accounting purposes. This supersedes what was previously the Entertainment & Devices division, grouping together the company's various diversifications into alternative computing platforms.
Xbox: The most significant by far of these various projects is still the Xbox gaming console. Xbox was perhaps Microsoft's riskiest venture to-date, an attempt to steal a chunk of the gaming console sector previously dominated by Japanese companies. The console launched in the US at the end of 2001, backed by an 18-month, $500m marketing blitz. Microsoft set itself a target of selling up to 1.5m machines in the US by mid-January 2002 and 4m-6m worldwide by June. The US launch got off to a strong start - the 1.5m target was reached by the end of December 2001. (Sony, however, sold 2.5m of its Playstation 2 consoles in the same period). But the second launch, in Japan in February 2002, was beset with problems. Sales were lower than had been hoped and the company was later flooded with complaints that the console damaged game CDs and DVDs. Xbox launched in Europe in March 2002, and later that year Microsoft paid $375m to acquire British games developer Rare, previously affiliated with Nintendo, for whom it created Donkey Kong and other titles.
However despite a huge promotional push, including a dramatic price-cutting campaign in several markets, there were signs by early 2003 that Xbox was failing to make significant inroads into Playstation's share, although it had comfortably overtaken Nintendo and Sega. The console sold a total of around 6.1m units in 2002, while PS2 managed a remarkable 19.3m. Even before a round of price cuts during 2003 the group was expecting to make a loss of up to $150 on every single console sold. At the start of 2004 the division announced ambitious plans to move into other areas as well, with the launch of an internet-enabled wristwatch - the MSN Smart Watch - in partnership with manufacturers Fossil and Suunto, and technology to extend the concept of the computer as a home entertainment centre, broadcasting music and video to other home devices.
In 2005, the group unveiled its next generation gaming console, the Xbox 360, which launched in the US in November to unprecedented demand. The group stole a considerable launch on rivals Sony and Nintendo whose next-generation machines did not arrive until mid-2006. By the end of December 2009, the company had sold 39m units of the Xbox 360. It success was ensured by several hugely popular games releases, not least the Halo series. Another important development was the introduction Xbox Live, a subscription gaming service which offers online gaming, web browsing and more recently streaming services in partnership with Netflix and other suppliers. Increasingly, Microsoft has attempted to position Xbox Live as alternative to cable TV, and in 2009 even began commissioning its own entertainment content.
In late 2010, the group launched the Xbox Kinect, a motion-sensor accessory which plugs into the Xbox 360 console and allows players to control games with body and hand gestures, along similar lines to Nintendo's Wii system. It appears to have been a resounding success, with sales of 8m units in its first 60 days on-sale. That caused Xbox console sales to peak at 13.7m units sold in the year to June 2011. Since then, sales have steadily declined.
The decline for ye 2013 was exacerbated by expectations of the launch of a new console, the Xbox One, in time for the 2013/14 holiday season. In addition to gaming and Kinect-based personal recognition, it also incorporates a full broadcast entertainment offering as well as inbuilt Skype calling services. Microsoft announced its aim to establish the device as a complete home entertainment and communication system. However, it continued to lag behind Sony's equally high-powered PS4.
In calendar 2016, Xbox One sold 8.3m units, less than half the 17.1m units sold by PS4. The US market accounted for a little over half of all sales. Lifetime sales of Xbox One by the end of that year were 27.9m units (compared to 53.8m) for PS4. Cumulative sales of the Xbox One also continue to lag behind its predecessor Xbox 360, still selling a few hundred thousand units each year to a cumulative total of 85.7m units by Dec 2016. Xbox One S was a slightly enhanced version of the One console, introduced in summer 2016.
Microsoft has continued to invest heavily in gaming software, acquiring several other development studios in order to generate exclusive Xbox-only content. In 2014, the group spent $2.5bn to acquire Mojang, the Swedish developer of the wildly popular game Minecraft.
For the year to June 2017, Microsoft reported revenues of $9.26bn for the Xbox business, down a little over 1%. Hardware sales declined by 21% as a result of lower volumes and pricing, but that decline was mostly offset by an 11% lift in software and services sales.
Microsoft will launch its latest assault on the gaming console market in time for the 2017 holiday season with the introduction of Xbox One X, which it claims to be its smallest and most powerful device to-date. The new console is not so much a new iteration but an enhanced version of the current Xbox One, with greater support for untra-high-definition 4K monitors. It is aimed predominatly at hardcore gamers.
Zune: In November 2006, the group launched Zune, its first portable music and video player, designed to go head-to-head with Apple's iPod. The device boasted a wireless file-sharing technology which allowed users to make their music available to other Zune players in the vicinity. It launched to mixed reviews, with most commentators agreed that it was a good first effort, but no iPod-killer. Marketed only in the US, the Zune sold around 2.6m units in its first two years after launch, a fraction of the 76m units for Apple's iPod. It also suffered several technical problems. At the end of 2008, for example, thousands of Zune devices were affected by a glitch caused by the fact that 2008 was a leap year. This rendered them inoperable in January 2009. The errors were subsequently fixed by a downloadable correction, but it was clear that Zune would never come close to providing a real challenge to iPod, and the plug was pulled in 2011.
Windows Phone / Lumia: Microsoft has attempted repeatedly to break out of the more traditional desktop and console market with aggressive moves into operating systems and applications for mobile handheld devices. Past projects include the Pocket PC, the Mobile Explorer microbrowser, Media Center, Tablet PC and Windows Automotive telematics systems. Its biggest push was into mobile handset operating systems, but for years few manufacturers could be persuaded to adopt Windows Mobile software other than as a niche sideline to what was then the near-universal Symbian system controlled by Nokia. In 2005, the group announced plans to move into internet telephony, following the acquisition of VoIP company Teleo. It added the facility to make voice calls from PCs to fixed and wireless phones to the existing Messenger service from 2006. However that service had only minimal take-up. In 2006, the group another portable PC, an Ultra-Mobile Personal Computer (or UMPC) code-named Origami. Samsung and other manufacturers agreed to begin producing the device, but sales were minimal. In Spring 2009, Microsoft was said to be in talks with US wireless carrier Verizon to develop a touchscreen handset built around the Windows Mobile operating system, to compete with iPhone, available exclusively via AT&T. The Kin device launched in the US in May 2010, but reportedly sold just 500 units. The device was discontinued after just six weeks. Instead, in May 2011 the group mounted what was then its biggest-ever acquisition, agreeing to buy market leader Skype for a whopping $8.5bn.
Following positive reviews for the launch of its Windows Phone 7 mobile operating system in 2010, Microsoft secured a key platform for future development in a global alliance with troubled mobile giant Nokia. The Finnish company began phasing out its own Symbian mobile operating system in favour of Windows in a bid to fight off intense competition in the smart device segment from Apple and Google's Android. The launch of Windows 8 in 2012, and Nokia's new generation of Lumia smartphones, finally gave Microsoft hope that it could carve out a significant share of the global handset market. In a key development that mirrored Google's earlier (though short-lived) purchase of Motorola Mobility, Microsoft agreed to buy out Nokia's handset operations in Sept 2013 for a total of €5.44bn, or around $7.2bn. That comprised €3.79bn for the actual handset division, plus a further €1.65bn to license Nokia's patents. The deal closed in April 2014.
Though Microsoft retained a license to use the Nokia name, this was quickly abandoned for smartphones in favour of the Lumia brand, which became the badge for all group-produced smartphones. Microsoft continued to produce a selection of Nokia-branded non-smartphones. For ye 2015 the group claimed shipments of 36.8m smartphones and 126.8m non-Lumia devices. However in the final quarter of the financial year, new CEO Satya Nadella took the opportunity to write off virtually the entire value of the handset acquisition, signalling that its priority within the group, as well as predicted future prospects, had been significantly lowered. That reflected Microsoft's still declining share of the market. For 3Q 2015, researcher Gartner estimated that market share for the Windows smartphone operating system had almost halved year-on-year to just 1.7%. or fewer than 5.9m handsets. Its still-substantial non-smartphone shipments allowed it to retain the #3 position among all mobile phone producers, but overall market share had slumped from 9.4% in 3Q 2014 to just 6.3%.
Mobile operations were gradually scaled down after that. For ye 2016, smartphone shipments plunged to just 13.8m units and feature phone devices to 75.5m. Later that same year, the feature phone business was sold off to Foxconn for $350m. Microsoft stopped making Lumia phones in 2017, but a small number of handsets using Windows Phone software are still being made by third-party manufacturers.
Surface: In October 2012, the group launched its latest attempt to break into the PC sector, with the tablet device Microsoft Surface, designed as a direct rival to the iPad. Two versions were launched, the Surface RT, aimed at consumers, followed by a higher-spec Surface Pro. Sales appear to have been much lower than had been hoped: the group wrote off a charge of $900m against unsold inventory in June 2013, more than the $853m in revenues it disclosed from the device. Total unit sales were estimated by analysts at around 1.7m tablets. (By comparison, Apple sold 14.6m iPads in just the three months April to June). However, the Surface Pro 3 tablet launched in 2014 finally began to win over customers, with a sharp increase in sales during the year. Other launches have included the Surface Studio PC and the HoloLens VR headset. The group also sells or licenses a number of branded PC accessories such as keyboards, mice and other items.
For the year to June 2017, Microsoft's Devices unit reported sales of just $4.56bn, down by almost 40% on the year before and by over 60% in two years, reflecting the withdrawal from the phone business. Virtually all of that sum - around $4.1bn - was generated by Surface, though the company said that revenues from the Surface range had slipped 2% in the year as a result of lower sales.
Following the 2013 restructure, Xbox and Surface are now combined under the heading of Computing & Gaming Hardware. Revenues for the year to June 2015 rose 11% to $10.18bn, while operating profit more than doubled to $1.79bn. The group said that Surface hardware had alone contributed sales of $3.6bn to that total, an increase of 65% on the year before. Those figures don't include sales of software, which are reported as part of the group's general licensing income. In a separate analysis, the group identified total Xbox-related revenues of $9.12bn in ye 2015 (probably including software and Xbox Live income); and Surface-related revenues of $3.9bn.
Windows Phone software is included in the group's separate devices & consumer licensing division, but full-year sales from Phone Hardware almost quadrupled to $7.52bn. Operating income also rocketed to $701m (from just $54m the year before), but that didn't take into account that unit's share of the huge $10bn impairment and restucturing charge pushed through in expenses. Total Windows Phone-related revenues for ye 2015 were declared at $7.70bn.
See main Microsoft profile.
Last full revision 18th August 2017
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