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Xbox is a prime example of a new product line which has become profitable for the company even though critics were out for the division's head when it was loosing money.

You're right that the Xbox is now profitable. (When I first googled this I came up with some links that suggested recent non-profitability, but I had misread the dates on them.) But at this point it still doesn't look to me like the kind of product line that can grow into something to sustain the Microsoft we are used to.

As for the critics, they missed what was obvious to me at the time. The main purpose of the Xbox was not initially to make money. Few remember now, but a decade ago Microsoft and Sony were butting heads in many different areas. (Particularly ones involving DRM, storage formats, and other things of interest for media providers.) In typical Microsoft fashion, they went after Sony's air supply. Competition from the Xbox forced Sony to slash prices on the playstation, which cut Sony's profits in half. This distracted Sony, which made them a less dangerous competitor in areas where Microsoft was going head to head with them.

(Of course in the end Apple did an end run about both by demonstrating with iTunes that you can deliver content without DRM and make everyone happy. Microsoft never sold the world on DRM everywhere, all the time. And Sony learned the hard way that people really don't like having a rootkit slipped on your computer without your permission...)

Take .Net for another instance, totally new thing, very few bet on it but is a good success for Microsoft.

Also consider S&T (server & Tools) in the last decade, MS has been able to grow huge profits from that division, Very few people in 2000 would use Windows as a server platform.

The xbox story strikes me as relatively similar to Bing (OSD) story... They are pouring a lot of resources there. Hopefully, the end result will be similar or better.

My memory of the popularity of Microsoft as a server platform is rather different than yours. For instance look at http://news.netcraft.com/archives/category/web-server-survey... and you'll find that Microsoft IIS has maintained a 25%-35% market share since 1998.

Now I grant you that Microsoft put a lot of energy into .Net, and it has achieved some success. But I look at that as more of a sustaining effort. Microsoft has always had programming tools aimed at certain sections of the business market. They have changed the tools, so what used to be done with VB and Access is now done with C# and SQL Server. But fundamentally it doesn't seem to me to be a radically new market, nor do I see much evidence that their market share has changed significantly.

As for Xbox and Bing, I absolutely agree with you that they are very similar stories. Just as Microsoft used the Xbox to try to neuter Sony, they are using Bing to try and undercut Google. It will be interesting to see how that goes. I think that Google's recent stock price is evidence that the market thinks there is a real threat.

However the bigger threat to Microsoft is coming from Apple. And Microsoft is nowhere to be seen in that space. Furthermore despite the threat to Google from Microsoft, there is more of a brain drain from Microsoft to Google than vice versa. And I see more entrepreneurs worrying about competing against Google's offerings than Microsoft.

Got a link proving that it's profitable?

Last time I looked into this there was much confusion about posting a small yearly profit (which they've done for the last few years) and actually having a positive return on the umpteen billion dollar investment they've made.

Various figures I looked at then (maybe 6 months ago) suggested they were still 1-10 Billion in the hole overall with some hope that they'd break even after this generation, though obviously the model they've followed means another giant investment at the beginning of the next round of the console war.

http://www.microsoft.com/msft/ic/segments_edd.aspx Look at Operating income chart on the right (set is as year to date). They made 0.2 Billion in FY 09 and have made 0.9 Billion USD in FY 10 till now (includes projected earning for Q3)

You've missed my point. If you gave me 20 Billion dollars and several years later I gave you 1 Billion back that's not a 'profitable' business proposition, even if you write that Billion up as a yearly profit.

Can you find anything to suggest that the XBox project as a whole is in the red or black for Microsoft?

Well, the thinking is that once the division is profitable with profit graph going up it will keep bringing more money... Isn't this one of the basic presumption behind P/E's and stock market.

With so many xbox 360 users out there who will keep paying for Xbox live and buying new games and further innovation (Natal) and more features (Hulu integration) I suspect Xbox division will be profitable for some time.

Also, the numbers include money "invested" in kin and windows phone 7 so Xbox alone is probably making more money than the numbers suggest

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