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GI.biz Editorial: Platform holder financial analysis. Come back!

Published as part of our sister-site GamesIndustry.biz' widely-read weekly newsletter, the GamesIndustry.biz Editorial offers analysis of one of the issues weighing on the minds of the people at the top of the games business. It appears on Eurogamer the weekend after it goes out to GI.biz newsletter subscribers.

According to a group of psychologists and researchers who presumably don't have very much else to do with their time, 24th January is the most depressing day of the year. Without getting too deeply into the methodology of pop-science (less to do with how accurate the facts are, more to do with how many lazy newspaper journalists will print the resulting nonsense verbatim), we beg to differ.

For those of you who rely partially or entirely on the games industry for your income, the end of January shouldn't be depressing at all - if anything, it should be a high point, at least in 2008. Why? Because in the past weeks, even though the skies may be overcast, the days short and the belt tightened in the wake of holiday overspend, we've seen confirmation that the great wheel of commerce is still turning for the games business.

This, after all, is the month when the next-gen (which is slowly but surely establishing itself as the current-gen) started writing its name in black ink, with all three of the major platform holders - Sony, Microsoft and Nintendo - reporting that their games businesses are now profitable.

For Nintendo, it's business as usual. The company, which has been in the toy and game business for over a century, has only ever once reported a quarterly loss - and that was down to currency market fluctuations wiping value off its overseas holdings. Admittedly, the scale of its present success is rather new and exciting for the Kyoto-based firm; on the back of a major increase in its sales projections for the year, analysts expect Nintendo's stock to continue to grow, further cementing its position as newfound darling of the Nikkei stock exchange.

For Sony, it's a partial exoneration of the firm's strategy. Despite the negative press which has surrounded the PS3 in the past year, and the deep losses incurred by Sony Computer Entertainment in launching the new console, the firm's games business has never really been in that much trouble. Cash has continued to roll in thanks to the PlayStation 2's ongoing success, while the PSP, despite playing second fiddle to Nintendo's DS to a large extent, has also enjoyed a healthy measure of success and profitability in the past year.

Sony needed a profit at this juncture, however - if only to prove that its games business is not set to nosedive as soon as the PS2's sales falter. The inevitable slow-down of PS2 hardware and software sales has begun, and after a very strong Christmas last year, it's likely that we'll see a steady drop-off this year. However, in the meanwhile, Sony has slashed the manufacture cost of the PS3, and built up the software library of the PSP to the point where its hardware sales are actually exceeding expectations.

The firm's critics, of course, have been quick to leap on the fact that full-year sales estimates for the PS3 have been dropped - falling off from 11 million to 9.5 million. I'm not convinced that figure is particularly significant, however. We already knew that PS3 wasn't selling as strongly as Sony might have hoped - this adjustment confirms that, but also indicates that the scale of the damage is quite limited. Moreover, it reveals that while sales early in the year were weak, Sony had a very strong Christmas, which lends some support to the contention that the PS3 is, if not quite out of the woods, at least emerging from the treeline.

It's for Microsoft, however, that the step into the black is most significant. The Home and Entertainment Division, whose primary occupant is its videogame efforts, has been leaking red ink all over Microsoft's financial results since the inception of the Xbox. A small respite occurred around the launch of Halo 2, when massive sales of the game pushed the firm into profit - and this was promptly repeated in the September quarter of last year, thanks to the launch of Halo 3.

Now Microsoft has proved that its ability to turn a profit from the Xbox isn't just a flash in the pan. A profit in the December quarter means that the Xbox has posted two consecutive profits for the first time in its history - and moreover, means that Microsoft has managed to turn around a profit on the back of games that aren't part of the Halo franchise. Cutting costs on the Xbox hardware will have helped, of course (although Microsoft's ability to rapidly slash costs is likely to fall behind Sony's), but the real driver for this profit is software sales - it's no wonder that Microsoft is so keen to trumpet the Xbox 360's attach ratio.

As with Sony, however, Microsoft's move into profit comes at a certain price - namely, that the company's roll-out of hardware simply isn't as fast as it might have liked. Former Xbox boss Peter Moore famously opined that the first company to sell ten million units of its next-gen console would be tough to beat in the race. As perceptive as that statement was, it didn't take into account just how tough Microsoft would find the next ten million to be. The fact that even with such strong software support, the 360 sold fewer units in the Holiday quarter of 2007 than it did in the same quarter of 2006 is a perturbing statistic.

Another factor, of course, links the two companies' figures - namely the fact that it's going to take more than a few quarterly profits to actually bring the divisions into the black, by repaying the investment that has been made in recent years. Sony, at least, paid for much of the development of the PS3 using funds generated by the PS2, and will be hoping that PS3 will similarly pay for PS4, or whatever its successor may be. Microsoft has a steeper hill to climb. Two quarters of profits won't even come close to covering the billion-dollar charge the company's accounts took over the hardware failures which dogged the 360, let alone the multi-billion dollar black hole that was the original Xbox.

For now, however, that doesn't matter greatly. The news is that land is in sight after another arduous journey across the oceans of transition for the games business. Quarterly figures are in the black, even if lifetime figures remain tinged magenta; the industry's fundamentals are working as they should, and the great wheel, which only a few months ago sounded like it was badly in need of oil, is turning smoothly.

Far from being the most depressing days of the year, then; for those whose livelihoods depend on the industry's profitability, January has brought with it many reasons to be cheerful.

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