Microsoft made $1 billion from Xbox Live last year

Xbox Live is widely credited for single-handedly reshaping the console gaming landscape from a primarily local experience to a global, connected, and live experience. From simply bringing a large mass of local gamers together in online multiplayer mayhem to resurrecting the shareware movement of DLC (downloadable content) and episodic content, Microsoft has made their console platform the paradigm of how to manage a connected console environment. Now, they’re reaping the benefits.

According to Bloomberg, Microsoft “probably” hit $1 billion revenue this past fiscal year in earnings from Xbox Live alone. In an email, Dennis Durkin, the COO of the Xbox portion of Microsoft, said that half of the 25 million users connected to Xbox Live have paid for a one-year subscription to become Xbox Live Gold members, which adds up to roughly $600 million in subscription fees. Add to that the revenue from downloadable content such as movies, games, and TV shows, as well as small micro-transactions like avatar costumes and interface themes, and you’ve got quite a big number on your hands. According to Durkin, “Sales of products like movie and TV show downloads topped subscription revenue for the first time,” bringing Bloomberg’s estimate towards the $1.2 billion dollar mark in revenue.

In a market where Microsoft is critically compared to Apple regarding its seemingly lackluster levels of innovation, Matt Rosoff, an analyst at Directions on Microsoft, is optimistic when it comes to the Xbox Live platform.

“Xbox Live has helped sell a lot of consoles and created a lot of loyalty. Everyone has been talking about Microsoft’s inability to innovate, but this is a pretty good example where they have innovated. They timed it just right with this one.”

It wasn’t always a smooth ride for Microsoft. They were criticized early on for charging a subscription fee for the service when other consoles were offering comparable functionality at no price to the user. Michael Pachter, an analyst at Wedbush Securities Inc., was pessimistic about the viability of the business model at the beginning. “I was skeptical in ’02 – I thought it was stupid.” He believes that Microsoft spent a billion dollars on Xbox Live when it first began, and only began to make money when the service was refreshed on the Xbox 360 in 2005. Now, while Sony and Nintendo struggle to produce an online community to rival that of Microsoft’s, Pachter has changed his mind. He estimates that Sony is still losing money with their free online offerings on the PS3, and only now have they started to throw around the idea of charging an annual fee for a premium subscription much like Xbox Live’s Gold membership.

The next step for Xbox Live will be to expand beyond the single console it inhabits now. While there is compatibility with the ‘Games for Windows’ service for PC gamers, Xbox Live has yet to branch out its brand to other venues. This is likely to change, as Microsoft has announced that there will be Xbox Live offerings on the upcoming Windows Phone 7 operating system, bringing the Xbox Live masses into the realm of the mobile device market.

(NW)