Nomura analyst Rich Sherlund claims that Microsoft has been losing $2 billion annually in the games industry, according to GamesIndustry.biz.

Sherlund sent a note to investors November 6 detailing how to fix current issues within the company, including filling the shoes of former CEO Steve Ballmer. One such issue was the apparent financial failure of the Xbox brand as measured by his own estimates. He stated:

“If we start with the overall traditional [Entertainment and Devices Division] business that actually loses money before corporate allocations and back out the nearly $2 billion 95 percent gross margin Android phone royalties, we conclude that Xbox platform plus Windows phone and Skype lose about $2.5 billion per year, and we estimate that the Xbox platform may account for roughly $2 billion of this”

Sherlund goes on to claim that the reason this was not picked up on sooner were that the patent royalties for Android obfuscated the loss. These royalties come from the companies that produce any Android operated product, which includes HTC, LG and Samsung.

In a more worrying claim he says:

“it [the Xbox] also loses a lot of money and we think is a distraction to the more enterprise strengths of Microsoft.”

This is worrying because a recent Bloomberg report claims that among one of the four possible new CEO’s for the company has taken this advice to heart. Sources close to Stephen Elop, one of the four candidates, claim that he would sell or possibly shut down both Xbox and Bing if he took charge. This would be to “refocus” the company in the long run.

What do you think? Is it worrying times ahead, or is the analyst wrong? Let us know in the comments.