Peter Moore's parting pledge for Microsoft games an empty promise?

Stan Beer
Thursday, 19 July 2007 17:01

Opinion and Analysis

Just days before his departure from Microsoft, when we all thought he was in his job for the long haul, Peter Moore, Corporate Vice President, Interactive Entertainment Business, Entertainment and Devices  Division, promised that the software giant's games business would be profitable in 2008. He made this pledge out of one side of his mouth, while out of the other he admitted that Microsoft would have to take a charge of about US$1.15 billion to fix its defective Xbox 360 consoles.

Now that we know Mr Moore has departed for greener multi-million dollar pastures as the head of the powerful sports games division at Electronic Arts, the question is was his promise of a profitable games business at Microsoft simply the parting words of a man who knew he would not be around to be held accountable for them?

Looking at the facts, in its 2005 fiscal year Microsoft came about as close it has ever come to breaking even in its games business - it lost a bit less than half a billion dollars, US$485 million to be exact. Xbox was a mature product, the games were on shelves, Halo 2 was a hit and things were on the up and up.

Then in 2006 Xbox 360, the first nextgen console, was launched. Despite its lack of success in Japan, 5 million Xbox 360 consoles were sold worldwide. However, the development costs of the new consoles plus the loss that Microsoft made on sales of the hardware, plus slowing sales of Halo 2 and other Xbox games, pushed losses for 2006 out to US$1.262 billion, despite a 36% revenue increase to US$4.256 billion.

The figures aren't in for 2007 yet, but the chances are that the loss for the games division has narrowed significantly, while revenue has shot up. Thus, with a full complement of Xbox 360 games on shelves, more than 15 million Xbox 360 consoles in homes and Halo 3 set to burst on the scene in September 2007, 2008 looked set to be the pay dirt year for Microsoft's games business.

What chief executive would not want to be around to take credit for and preside over the first ever profitable year, the coming of age of Microsoft's games and entertainment business? Obviously not Peter Moore.

The problem of course is that instead of gloating over Microsoft's and his coming day of triumph in recent weeks, Peter Moore has been forced to publicly admit that the quality of the Xbox 360 hardware is not good enough. He has been forced to talk about unacceptably high failure rates. He has been forced to admit that Microsoft will have to spend about US$1.15 billion to compensate Xbox 360 customers for substandard consoles.

For Microsoft, US$1.15 billion is but a drop in its vast reservoir of cash. However, if it's true to its word, the company will have to book much of that charge in 2008. Even assuming that the recent negative publicity doesn't impact Xbox 360 and games sales, a US$1.15 billion charge is a hard hill to climb when you're a new business trying to get in the black. Some would say impossible.

Thus, Peter Moore's departure from Microsoft to EA may well be spun as the former soccer player moving over to head up a successful sports games software business for which he is particularly suited. However, it could also be viewed as a senior executive doing his utmost to disassociate himself from a business that could well be on a downward slippery slope.

We may wish Peter Moore well in his new role at EA. However, he may find that he has to mend some fences with one of his key customers Sony for some of the comments he dropped about PS3 recently.