Operating losses continue for MS' Home and Entertainment division

Microsoft has posted a 22 per cent increase in revenue for its Home and Entertainment arm over the June quarter, but the division - which houses the Xbox project - continues to report operating losses.

Revenues for the division, which also handles PC gaming and various other consumer businesses, were up from USD 498 million for the same period last year to USD 610 million in 2005. Annual revenues rose from USD 2.88 billion to USD 3.24 billion.

However, operating income still resulted in a net loss of USD 179 million, bringing yearly operating loss to USD 391 million. But this is still an improvement over last year's figures, when the Home and Entertainment group lost USD 340 million for the same quarter and USD 1.2 billion over the course of the year.

Much of the money lost by the division over the past few years is believed to be down to Microsoft's losses on Xbox hardware sales, which some commentators believe are still being subsidised even four years after launch.

Unlike Sony, which has been able to reduce manufacturing costs on its PS2 hardware to the point where it is sold at a profit, Microsoft relies on off the shelf components from suppliers including Intel and NVIDIA - a strategy which prevents it from making major cost savings on the system.

However, the company hopes to avoid this trap with Xbox 360, and has signed a very different deal with ATI to its Xbox deal with NVIDIA, which will see ATI licensing a design to Microsoft rather than simply selling components directly.

Looking beyond the Home and Entertainment Division, Microsoft's overall revenues were up 9 per cent to USD 10.6 billion. Operating income stands at USD 2.99 billion, down from USD 3.13 billion - but USD 756 million of this was paid in charges for European Union anti-trust proceedings.

The company posted net income of USD 3.7 billion (up from USD 2.69 million last year) and year end totals of USD 39.79 billion in revenue and USD 12.25 billion in net income. Microsoft executed a number of stock repurchases and dividends to return USD 44 billion to investors over the course of the year.

Report by Ellie Gibson and Rob Fahey