The following work is based on the original thread:

Microsoft FY End Jun 2007 and FY end Jun 2008 – A MORE THOROUGH ANALYSIS

http://www.vgchartz.com/forum/thread.php?id=35336&start=0

Please read it carefully to see how the numbers were derived.

Before starting, these are some of the main assumptions that I made that can be questioned, and possibly changed.

Original Analysis:

FY End Mar Jun 07

X360 console average revenue = $300(*)

X360 console cost = $255(*)

Gross Margin = $45(*)

FY End Mar Jun 08

X360 console average revenue = $300(*)

X360 console cost = $225(*)

Gross Margin = $75(*)

Are these numbers too high or about right?  I don’t know the answer to that.  You may have a different opinion.

However, do keep in mind, that if you have a different opinion in cost or gross margin, understand that if you do “change” those numbers, you also have to change all the other gross margin figures for: Games, Xbox Live, PC games, Zune+ and Windows Mobile.

I will be open to different margin figures.  Again, there is a multitude of possibilities.  However there are fewer possibilities for the numbers to make sense for every business segment.

Therefore, I did an alternative analysis that still somehow manages to fit in with the MSFT reported figures.

To summarize, please refer to the following tables:

Key Assumptions – Original Analysis

Key Assumptions – Alternative Analysis

Question:

Which set of assumptions are more reasonable?  The original analysis had gross margins increasing the last fiscal year.  While the gross margins in the alternative analysis is more consistent with the non-Xbox platform business segments.

The alternative analysis basically falls in line with the hardware assumptions by most of the vgchartz community.  However, I find that if those assumptions are more “correct”, the other parts of the EDD business are so much more “profitable” on a gross margin basis – which may not make too much sense.

Most likely, it is probably somewhere in the middle – but it would take a lot of time to calculate and derive the figures.

Which Assumption to Use?

I will use both to show the impact of the price cuts.

Revenue and New Assumptions:

For the FY End Jun 09, these are the assumptions we will be using for both analyses:

Average X360 revenue (with price cut) = $230(*)

With more weight on the $199 price point

Average X360 gross margin = $0(*)

That means, on average, xbox consoles will be sold on a break even basis, due to the dramatic price cut.

Though even with the price cut, I think the Elite and the Pro may actually still be making some positive gross margins.

Predicted console sales = 12 million(*)

(You can insert your own prediction here)

Games = 90 million x $30(*) = $2,700(*)

Based on the NPD attach rate and previous methodology

Live Revenue per unit = $18(*)

Live Revenue = $18(*) x 32.3 total consoles = $581(*) million

Total Consoles Sold x Live Revenue / Console

Live Revenue per console is approx. $18(*) for the past 2 years, based on the original analysis figures.

We will use the same methodology as per the previous analysis to derive games and accessories figures.

Using that, the numbers will be:

Games = 90(*) million units

Accessories = 43(*) million units

These numbers are all based on 12 million consoles sold, for a total of 32.3 million LTD at the end of FY end Jun 09.

Having all the Xbox Platform assumptions, we basically need to fill up all the other line items to complete the analysis.  Below is a table to compare from previous FY.

The 2 tables represent both the original and the alternative analysis assumptions.

Table 1: Original Analysis Assumptions

Table 2: Alternative Analysis Assumptions

ANALYSIS:

Using the Original Analysis Assumptions, the income from the price cut would be $213 million, while using the Alternative Analysis Assumptions result in a $601 million income.

In both scenarios, with the increase Games, Live and Accessories Revenue, the effect of price cut is positive as a whole.  In both scenarios, the division is still profitable.

If 12 million consoles sold is not achieved, then the price cut may be a bad move, considering MSFT already sold 8.7 million consoles, which is up 2.1 million or 32% from the previous year.

12 million consoles represents a 38% increase from the previous year.  If MSFT experiences the same growth, then there was no need to cut the prices. Since 38% is not that much from 32%, and by all accounts, the Xbox is selling more still compared to last year.

However, if they feel that a price cut will increase sales dramatically – 38% or more, then that may be the reason for the move.  Also, if MSFT is assuming that all attach rates will be the same, then it definitely makes sense for them.

Alternatively if they feel that sales would not increase as much, then a possible reason for the strategy is to HURT your competitor.  In this case, hurt Sony financially – to let them suffer more losses, while MSFT itself won’t be hurt as much as Sony.

SUMMARY:

Based on this analysis, MSFT’s price cuts on their console will not necessarily lead to more losses in their EDD division.

If they can relegate Sony to a distant 3^rd place, this price cut may be very effective in terms of their short to mid term strategy.

Though it still remains to be seen if Xbox can achieve significant sales growth that would rival the Wii or even the PS2.

IMPORTANT NOTE:

I have a template of the numbers you can use for your own assumptions.  Do note that if you make a suggestion, you can try to make suggestions for the other set of figures and follow the template.  This way, you can numerically back up any point or opinion that you may have.

Discuss.

If you have any questions, please let me know.

I have done this analysis in a rushed manner, so feel free to comment on any mistakes or inconsistencies. Thanks.

Bumidan if you want i'll find some costing analysis for you?