Cost of Production
When we see a rise or increase in supply cost, we will often see the cost of manufacturing products increase as well. This can drastically change the company’s margins of cost and therefore must be carefully adjusted based on the product demand and based on the projected company sales.
The fluctuation of prices in the development of components and games for home gaming consoles has left Microsoft struggling “to develop as deep a stream of first-party exclusives” (venturebeat.com), which it’s long time competitor Sony has mastered. By depending on outside third parties, Microsoft has seen a 36% increase in their revenue for the first quarter for 2019. The company has also chosen to improve their ability to offer up exclusive content by simply acquiring new gaming studios. Followed by the redevelopment of the Xbox One by releasing a more advanced sister console known as the Xbox One X in December of 2017, the newer console proved to have “a massive 94% growth” (venturebeat) in their hardware. The new growth proved to be helpful in the revenue gain for Microsoft with an overall earning of $29.1 billion, proving to be a 19% increase from its previous year. Gaming has been at an all time high with a 44% growth which provided a successful gain for Microsoft.
With Microsoft’s overall cost of goods sold (COGS) over the last five years, showing an increase of 6.95% from 2017 to this year, there is hope in the industry with the decrease of cost in making consoles.
Overtime, the gaming industry will begin to see the cost of making consoles decrease, this has demonstrated to be a positive thing for the company as “Microsoft’s profit margin on each console will rise” (businessinsider). This will cause a significant boost in revenue in the new year to come.
With gaming on the rise of an “annual growth rate of +8.1%” (newzoon.com) as of 2017 and with the gaming industry consisting of 2.3 billion gamers globally, with an expectation of the industry hitting a “value of over $230 billion by 2022” (pcgamersn). This has left a huge market move for Microsoft to rethink a new design for their Xbox One system following low sales and demands on their Xbox One S series. The low demand left Microsoft trailing far behind Sony, as seen in the chart below.
With video game development being the number one boost for gaming consoles Microsoft is still falling short on the support from global developers. Not just in the area of developer interest but as well in the area of the developers that are already currently working for the company, with only 26% of the global game developers working for Microsoft.
In 1998, when the revolutionary Xbox was originally pitched by Kevin Bachus, Seamus Blackley, Otto Berkes and Ted Hase, its intent was to be ran on “Windows 2000, making it easy for traditional PC software developers to work within the console’s architecture” (digitialtrends), it wasn’t believed it would take off. Though it’s original release in November 2001 proved profitable, by February 2002 their release in Japan and Europe failed to make them a profit. Later in April of 2002, Microsoft mad the drastic decision to lower the price of their console “from $299 to $199. While the dramatic reduction in price made it nearly impossible for the company to earn any profit” (digitaltrends.com), it made it exceptionally easier for consumers to purchase the system, creating a small buzz about the new system. This certainly marked a new era for Microsoft, which gave them the head start to gain the consumers they needed to continue with future builds of consoles.
The undeniable rise in the gaming industry can prove to be fruitful for Microsoft Corp, especially with the new technology base of 4K for many televisions.