Xbox One VS PS4: Microsoft Corporation’s Epic Battle (NASDAQ:MSFT)Author: Paul SheaLast Updated: March 12, 2020 Microsoft Corporation released its earnings numbers for the three months through June on July 21. Most of Wall Street was looking at the firm’s number from the cloud, and drove shares down accordingly, but the report contained some numbers that give insight into the epic battle: Xbox One VS PS4.The problems for those trying to get a picture of how Microsoft is dealing with the market as the Xbox One VS PS sales gap widens is that the firm obfuscates everything about its console in its earnings report. Here’s a look at what we can learn about the market from the report, and why things still look bad for Microsoft.Dealing with Xbox One VS PS4 ConfusionMicrosoft divides up the Xbox division in its earnings report. Console sales are counted in the “Computing Gaming and Hardware” segment, while Xbox Live sales and sales of first part games are recorded in “D&C Other.”We’re going to take these on their own and try to reconcile the figures into a total look at the performance of the Xbox One VS PS4 battle.Looking at hardwareThe “Computing Gaming and Hardware” segment brought in revenue of $1.93B. Surface sales made up $880m of that meaning that sales of the Xbox One amounted to $1.05B in the three months through June.Microsoft says that its entire gross margin in the segment came to $435m or about 25 percent. Gross margin is the difference between the cost of making the goods and the cost at which they are sold. That means that costs like adverting, design and research aren’t taken into account.Microsoft doesn’t break down the gross margin for the segment for the fourth quarter, but it does tell us that the gross margin on Surface for the full year came in at $1.3B. Gross Margin for the entire segment for the full year came in at $1.788B.Gross margin on Xbox hardware sales for the full year came in at $458m. The three months through June is Microsoft’s fourth fiscal quarter. In the first three quarters of its fiscal year the firm sold 2.4m, 6.6m, and 1.6m units of the console respectively. In the fourth quarter it sold 1.4m bringing the total for the twelve months to 12m. Those numbers include sales of both the Xbox One and the Xbox 360.Given the total sales numbers and the gross margin one thing is clear. Microsoft makes a gross profit of $38 from each Xbox it sells. That includes sales of the Xbox 360 where the gross margin is higher, but the mix is in favor of the Xbox One.We won’t know exactly what those numbers mean for the Xbox One VS PS4 race until Sony releases its earnings numbers on July 30.Counting up softwareOn the software side of things, Microsoft is doing much better, but a clear picture is difficult to draw. In the fourth quarter the firm saw sales of $2.3B in its “D&C Other” segment. That segment is a mixed bag that includes Xbox Live subs, first party software sales and Office 365.Xbox Live sales hit $558.45m, but those are sales from sales on the store-front rather than sales of subscriptions. It’s not clear where Microsoft recognizes Xbox Live fees. It could be in this segment, or in the hardware segment.Microsoft said that sales from first party games were up 62 percent in the quarter, but said that those were driven by Minecraft, a game that appears on every platform possible. Total first party game sales, including Minecraft, hit around $164.6m.The total revenue attributable to the Xbox platform during the quarter from the “D&C Other” segment lands at $723.05m.What we don’t know about Xbox One VS PS4Margins in the software segment are hard to get a good picture of. Microsoft says that the margin across the “D&C Other” segment it 25 percent. We know that Xbox Live sales carry a low margin, because Microsoft claimed that growth in sales there lowered the gross margin in the second quarter of 2015.Microsoft doesn’t break the big costs of the Xbox One down. Research and development, advertising and marketing costs are unclear, because they’re folded in with spending for the firm as a whole.It’s also not clear where Microsoft records the license fees it takes in from third party software sales. For now it’s assumed that most of this goes through the Xbox Live sales figures, called Resale Revenue, but it’s simply not clear where that cash flow goes.We don’t know how much revenue Microsoft pulls from Xbox Live subs, or where it accounts for that cash in its earnings report.Here’s what we do knowWith sales of Xbox One hardware coming in at $1.05B during the period, that puts total Xbox revenue, as we’ve counted it, at $1.727B.We know that Microsoft makes a slim gross margin off of sales of the Xbox in general, and that margin is likely slimmer on the Xbox One than it is on the Xbox 360.In the third quarter margins on Xbox sales came in at an estimated $110m. If the margins of the “D&C Other” segment are assumed to be the same on Xbox Live and First Party sales, something that’s likely not true, gross margin there comes in at $180m.A very hopeful forecast of total Xbox gross margin for the quarter comes in at $390m.With Minecraft taken out of the mix, as the game doesn’t count as an Xbox One exclusive, software sales are likely to be much lower, and the margin is likely to suffer heavily. Minecraft costs nothing to make, and sells like a blockbuster every single week. When it joined Microsoft first party games sales jumped by $170m.Gross margin in total in the second quarter likely came in at less than $300m.Microsoft hides the Xbox One VS PS4 truthIn the Xbox One VS PS4 battle, Microsoft is doing its best to hide most of the figures from those with shares in the firm. It’s clear that most people with money in the firm hate the Xbox, and it’s clear why that it.If the home console market is making any money at all, which is not likely, margins are very low and the risks are very high. Microsoft doesn’t want its investors to see those losses, so the firm has divided the numbers from Xbox up and made them as hard as possible to put together.You can see from the attempt above that putting these figures into a coherent statement of financial health is close to impossible. Minecraft appears to be the only thing that makes gaming at Microsoft turn a profit overall.With a hopeful $300m gross margin, Microsoft’s operating margin for the Xbox segment is likely to be negative. That’s the real cost of the Xbox One VS PS4 battle.