This chart shows trailing 4 quarter profits for Microsoft’s Entertainment & Devices group, which includes smartphones and the Xbox. (Using T4 smooths the profit spikes that happen every holiday season, which is the second quarter of Microsoft’s fiscal year.)
After years of losses, the E&D group was consistently in the black. In the 2010 holiday season (Q2’11) Microsoft introduced Kinect, driving profits even higher.
But a year later, Microsoft began paying Nokia $250 million every quarter for carrying Windows Phone 8. In exchange, Nokia pays Microsoft a license fee (estimated at under $20) for every Windows Phone it sells. (The arrangement between the two has other elements as well, like technology sharing.)
Unfortunately, Nokia’s flagship Windows Phone, the Lumia 900, is selling poorly. So poorly, in fact, that the company just cut its price in half.
So Nokia helped send the E&D back into the red — it’s lost more than $200 million in each of the last two quarters. If Windows Phone sales don’t pick up, E&D will turn into a consistent money loser again.
Today Best Buy announced layoffs and store closures, as results continue to disappoint.
None of the businesses are too hot, but there’s one are that REALLY stands out as bad.
Entertainment (which is games, DVDs, etc.) is getting crushed. After falling 14% YOY last Q4, it then fell another 20% this Q4.
One bright spot is actually a very bright spot for the total economy and that’s appliances. This is a sign of more housing activity, and everyone should be happy about that.
As to the key point, anyone who has ever been into a Best Buy knows how much floor space was devoted to entertainment media, and area that seems to be on the permanent decline.
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As you can see in the chart below, digital streaming/sales only accounted for 19% of the home entertainment market in the third quarter. The rest of sales comes from DVD/Blu-ray discs.
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Traditionally, only the mammoth Hollywood studios could afford to work with 3D—it’s too expensive to build the necessary, air-conditioned 24 hours a day, server farms. The company behind Despicable Me decided to try something new, and cut the AC.
Illumination Entertainment, the company behind Despicable Me, decided to try something new. Instead of using air-conditioned server farms to render images, the company asked IBM to built a customized server farm using the iDataPlex system, a processing system that cuts down on energy use by 40% compared to traditional server farms.
The iDataPlex has two key advantages: a flexible configuration that doubles the amount of systems that can run in a single IBM rack and the ability to run an ambient temperature room (no costly air-conditioning required). The system has been on the market for over a year, but Illumination is the first studio to use it for animated film.
This doesn’t mean that any scrappy studio with a dream can now produce a high-end 3-D animated film. Illumination used a 330-person team of artists, producers, and support staff to produce 142 terabytes of data. And the rendering farm, which processed up to 500,000 frames per week, was built in conjunction with Mac Guff Ligne, a French digital production studio.
But the iDataPlex gives Illumination a leg up in the graphics rendering process. Illumination Entertainment’s server farm, for example, is the size of four parking spots. That’s half the amount of space the company initially allotted to the farm. “Oftentimes a small studio like Illumination really wants to put their energy behind creating as compelling of content as possible,” explains Steve Canepa, Vice President, Media & Entertainment Industry at IBM. “By minimizing the technological issues associated with building and managing the [rendering] environment, we allow studios to reduce the amount of time, energy, and resources necessary to create an underlying technological platform.”
It’s a compelling idea for studios—even major ones—that want to cut costs and look environmentally conscious at the same time. IBM is already working with a number of other studios to implement similar solutions. Canepa concedes that studios could build similar systems by purchasing off-the-shelf racks and processors, but the iDataPlex’s unique configuration of servers packs a lot of processing power into a small space—and that’s not easy to replicate. Don’t expect these rigs to be appearing in suburban garages anytime soon.
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Dr. Augustine Fou is Digital Consigliere to marketing executives, advising them on digital strategy and Unified Marketing(tm). Dr Fou has over 17 years of in-the-trenches, hands-on experience, which enables him to provide objective, in-depth assessments of their current marketing programs and recommendations for improving business impact and ROI using digital insights.
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