We've gotten really wrangled in this discussion. Just to clear up where I'm coming from:
- The entire cost of a company like WB is a capital expenditure. If the cost was 4 billion, that 4 billion would not hit the Xbox division's balance sheet in 2020 or 2021 (whenever hypothetical deal was finalized). A depreciation expense would be assigned to it over it's useful life offset by whatever revenue it was bringing in.
- Taking losses on consoles would be completely different. Every console sold at a loss hits the balance sheet during the year it was sold.
So being super aggressive has nothing to do with being reckless or relying on prayers. They run big data predictive analytics. They have a business plan. Every variable can change the trend. Let's say for example, the following is what their predictive analytics say for the next 5 years for Xbox if they made no changes (using bulls*** easy numbers):
| Operating Expenses | Revenue | Expected Profit or Losses |
| 1 bil | 500K | - 500K |
| 1.2 bil | 800K | - 200K |
| 1.4 bil | 1 bil | -400K |
| 1.6 bil | 2 bil | +400K |
| 1.8 bil | 4 bil | 2.2 bil |
Any major variable (a strategic capital expenditure or taking high losses on consoles for a couple years) will change your predictive trend line. When you have a business plan like this, a loss in a given year is not automatically a bad thing. If the expected losses for 2020 were 500K but due subscription revenue out-pacing projections their actual losses were 400K, that's a good year for Spencer and Xbox. Yes a loss year is a good year. Conversely, if 5 years from now Xbox is generating 1 billion in profit when their original projections were 2.2 billion, that's a bad year. At a high level, if Microsoft missed projections, stock would fall even if the actual number was massive profits. Some people might lose jobs. If a start up company was projecting massive losses in a given year however the actual losses were lower than projected, the stock would go up and leadership praised even though the company is still losing money.
I believe Xbox is being treated like a start up company playing with a big boy trend line. That makes major billion dollar purchases viable. They will likely run losses for the next few years that are already baked into their business plan. As long as their growth and trendline looks like it's on track, then it's all good.
I could be wrong. Maybe Nadella sat Xbox at the big boy table and kept them around because he thinks they're cute. Maybe he likes what it does for Microsoft's image. I doubt that.
