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Microsoft’s holiday earnings show the Xbox 360 riding into the sunset

Microsoft’s Thursday earnings report was an event for tech industry pundits, industry figures, investors, and every person on the planet with a stake in the future of the console gaming and the PC market. The October through December quarter marked a major transition for Microsoft as it introduced Windows 8, rebranded its media businesses under the Xbox Music/Video banner, and released of the Surface tablet. All eyes were on Microsoft.

Would the giant see any change in its mediocre performance? Yes and no. Sales grew by 3-percent year-on-year to under $21.5 billion, but income dropped 3-percent to just under $6.4 billion.

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The Windows division posted decent revenue numbers of $5.88 billion, a 24-percent increase from the same quarter last year, thanks to the sale of over 60 million Windows 8 licenses to date. Server & Tool business also saw sales of $5.19 billion, a 9-percent increase this quarter compared to the same time frame last year, but the Business Division showed a 10-percent decrease, down to $5.69 billion. Overall, the picture is fair, but not good.

Typically, one of the highlights for Microsoft is its entertainment division, but Microsoft may have a problem: Xbox 360 sales are withering.

Microsoft’s Entertainment & Devices division, which recorded a decrease of 11-percent, was most damaged by the Xbox 360. “Xbox 360 platform revenue decreased $1.1 billion or 29-percent, due mainly to lower volumes of consoles sold and lower video game revenue, offset in part by higher Xbox Live revenue,” reads Microsoft’s statement. “ We shipped 5.9 million Xbox 360s during the second quarter of fiscal year 2013, compared with 8.2 million Xbox 360 consoles during the second quarter of fiscal year 2012.”

This isn’t totally unexpected. Microsoft is actively winding down the Xbox 360 business even as it increases the prominence of the Xbox name by rebranding services like Zune as Xbox Music. The company also spent 21-percent less on Xbox 360 marketing this year, while its R&D spending grew 25-percent as it develops the next Xbox. Toss in a year with less blockbuster releases than in 2011 (which, admittedly, was an exceptional year), and the sagging numbers aren’t surprising.

Microsoft is starting to see the same sort of swift decline that Nintendo did with the Wii in 2010. Like the Wii between 2008 and 2010, the Xbox 360 has enjoyed nearly uncontested success in the US since releasing the redesigned 360 in June 2010. It’s been the best-selling console every month in the country since, even though worldwide the PS3 has caught up. But also like the Wii, the precipitous decline from previous holiday sales highs seen this past quarter shows that Microsoft’s market’s been saturated. And with most developers looking towards the future and developing with an eye on next-gen consoles, it’s unlikely that upcoming software will make a significant difference. 

The new Xbox is coming, so Microsoft’s Entertainment Division has that to bank on. There is a worrisome trend inside these numbers, though: The Kinect did not keep Xbox 360 sales growing for very long. Microsoft’s 2010/11 surge for the Xbox was in part fueled by the motion control device, but it no longer appears to be selling hardware to new customers. The burden on the next Xbox then, is new novelty beyond high end graphics or even motion control.

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