Microsoft says Xbox not targeting 30% profit margin, refuting reports

Microsoft has denied reports about a steep profit goal for its Xbox games division, telling CNBC that the recent Bloomberg reports aren't factual.

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Microsoft has apparently delivered rare comments on the profitability of its Xbox business. The $3.61 trillion market cap company has denied rumors about profit target mandates within Xbox. Back in October, sources told Bloomberg's Jason Schreier and Dina Bass that Microsoft was pressuring Xbox to deliver a 30% accountability margin--Microsoft's own internal term for a profit margin. Now Microsoft tells CNBC that the profit margin reports are inaccurate.

Achieving that kind of margin would be a significantly high goal, especially considering Microsoft's now-inflated revenues. Buying Activision Blizzard King added several billions of dollars to Xbox's yearly earnings; Microsoft's gaming revenues went from $15.48 billion in FY23 to $21.52 billion a year later following the integration of Activision.

• Read more: Report: Xbox targeting 30% profit margin amid layoffs, restructuring, and AI adoption

Years prior to buying Activision, Xbox was delivering a 12% accountability margin for the first 9 months of FY22, as we've reported.

Xbox's primary hurdles to profitability include manufacturing and producing hardware at a total loss, having a firm 3rd place in the console market, and high software content production costs.

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Microsoft has attempted to remedy this by moving to so-called high-margin businesses like Xbox Game Pass in order to offset hardware losses--a move that has apparently paid off, as Xbox segment profitability was up +21% last quarter. Microsoft increased the price of its Game Pass subscription by 33% this year, moving Ultimate to $30 a month, a hefty +$10 increase over its previous price.

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Xbox consoles were also hiked in a bid to improve the margin losses, and it's unclear what those look like now, especially with the DRAM shortages affecting supply and surging costs. Microsoft also faced constricted supply in 2020 and 2021 during COVID-19 disruptions.

Other measures to boost profits include mass layoffs across various units, including project cancellations and entire studio closures. AI, both generative and otherwise, is also being used within the Xbox division in a bid to boost production and thereby get games out faster, and Microsoft has also developed its own in-house generative AI called MUSE that can render games in real time.

Even Microsoft's biggest competitor can't hit a 30% profit margin, however, it's worth noting that this accountability margin is something that Microsoft uses internally and is not directly interchangeable with Sony's definition of profit, which adheres to IFRS.

With that disclaimer out of the way, we can do an indirect comparison. PlayStation, the dominant force in gaming with $30 billion earned in FY24, hasn't had a profit margin above 13% in the past nine fiscal years.

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There's some context needed here.

First, we converted PlayStation's revenue and profit from yen to USD based on the conversion rates listed in Sony's data. Secondly, we have to stress that Sony's recognition is based on IFRS accounting measures, whereas Microsoft's own accountability margin is defined internally and its exact reconciliation remains unclear.

Big 3 Profits Compared

For further comparison, we can add Nintendo, while remaining mindful that Nintendo uses ASBJ, which is basically Japan's version of GAAP. These are more generalized accounting measures.

There are a few more disclosures that we have to make in order to give the data much-needed context.

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Nintendo's revenue is more profit-oriented than PlayStation's right from the start because the company does not include the full sum of third-party microtransactions or digital game sales in its net revenues figures.

Sony, on the other hand, does include 100% of these revenues in its figures. This means that PlayStation's revenues are less profit-oriented from the start because the company still has to pay the publishers/game developers their cut of the sales.

PlayStation's operating income margins are typically lower because its revenue is always larger due to how it recognizes sales.

These are the kinds of key distinctions that determine how the profit numbers will look, and how they are determined within Microsoft's internal accounting remains unclear.

Keeping all of these disclosures in mind, we can take a look at comparisons.

Below we have a side-by-side comparison of the Big 3's revenues and profit/profit equivalents for the period outlined in the FTC trial:

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