Disclaimer: I do not speak for Microsoft, I am simply an employee - these opinions are mine and mine alone.
As someone working in the online services division I have to say that this analysis is extremely simplistic. Would they be saying the same thing about Facebook? It was in the red for many years before it became profitable. That was the plan.
The comparison to Facebook is not fair. Facebook is now profitable and Microsoft online services are not. Facebook was never in the red to the tune of 2B a year. Microsoft online services had a multiple year head start on Facebook.
Is Facebook profitable? I heard they were cash flow positive but that doesn't mean they are profitable (see GoDaddy). Besides, all we can do is speculate about Facebook revenue at this point - they aren't public and don't publish legally binding financial reports.
Besides, the whole independent division comparison to a whole entity is a little ridiculous. Every company, including Facebook, spends a certain amount of cash flow on R&D, it's a competitive necessity. The fact that Microsoft structures a large part of their R&D into a division shouldn't necessarily be the fault of the division when they don't immediately turn a profit.
As long as they are meeting their internal (revenue/profit/growth) goals, I don't see the problem with giving out bonuses and rewarding the players involved.
But facebook is an independent entity - it's not quite the same comparison. Regardless, Microsoft's online strategy from day one hasn't been on par with the rest of the 600 pound gorillas.
If anything, I wish they had the same force behind online services as they have with the Xbox division. They really got Xbox Live right!
It also took them 10 years of hemorrhaging money to get Xbox/XBL right. Many people also thought they were stupid for doing so, but now it seems prescient.
I haven't been looking at the numbers recently. What is the overall ROI after ten years of sinking stupendous amounts of money into Xbox/XBL?
Or are we hand waving and saying that Microsoft has technically lost more money than grains of sand on the beach, but has executed a brilliant strategic plan to keep Sony from taking the lead in the market for set top boxes?
I don't follow the XBOX numbers closely either, but as I understand it, it is profitable and growing. [1]
Regardless, what's more interesting to me is that ten years ago I would have said "what the hell does MS want to make a game console for?" Now that things have shaken out, XBOX has given them a strong foothold not only in gaming, but in home media in general. That's the more compelling ROI to me.
I'm not arguing with you personally, but I have a question the general form of the explanation you cite. If the choice were between losing billions to have a foothold in home media or having no foothold in home media, their strategy would be expensive but interesting.
However, if you look over in Cupertino, you see a company with a foothold in home media that made money while grabbing their foothold. Therefore, I wonder if what we have is mediocre execution of a bad plan to grab a good market?
I wonder if what we have is mediocre execution of a bad plan to grab a good market?
That sounds spot on to me. But that's the game MS plays - they throw money at problems for years until they get it right. I'm not saying its the best strategy, and certainly not the most efficient, but in this case I think they're achieving what they set out to do.
Further, I'd question whether "option C" (the Apple strategy of making money while establishing the foothold) is available to Microsoft. They're not known for that kind of innovation and precision, they're more like a wrecking ball that sometimes gets aimed in the right direction.
Friendster and MySpace were hot once too. Microsoft is trying to do something different be the place where you search the world wide web for information.
The problem with this view is that yes, Facebook didn't have a strong monetization strategy for many years but they didn't need to when they were growing at such a breakneck pace. This is very different for MS which has lost share for many years until the launch of Bing.
As someone working in the online services division I have to say that this analysis is extremely simplistic. Would they be saying the same thing about Facebook? It was in the red for many years before it became profitable. That was the plan.