The old axiom "giving away razors to sell the blades" has long been applied to the launch of game consoles. During the PlayStation 2's first year on the market in 2000, Sony lost over $458 million, according to a recent Merrill Lynch report. Since then, it has made up for the losses via a hardware redesign, streamlined manufacturing processes, and commission on the hundreds of millions of software units sold.
By contrast, Microsoft has never made money on the Xbox. Since the console went on sale in 2001, the company's gaming division has burned through over $7 billion, according to its own financial statements. Some analysts estimate the company loses as much as $125 each time it sells an Xbox 360--although that number will likely shrink as manufacturing costs are perfected.
One company that has always prided itself on profitable gaming hardware is Nintendo. Being a game company first and foremost, it doesn't have other divisions to make up for losses the way Sony and Microsoft do. According to a Reuters report today, Nintendo won't be changing its approach to taking hardware losses with its forthcoming console, the Wii.
"We can't promise we won't have even a one-yen loss, but we are not expecting an enormous loss," Nintendo President Satoru Iwata told a news conference in Japan this morning. "It is a strange notion that a game console always leads to mounting losses in the beginning...We are working to make the Wii business a healthy one from the first year."
Iwata's statements may seem optimistic, given his previous proclamations that the Wii will not exceed $250 in price. However, the console also sports less powerful--and less expensive--hardware, which has roughly twice the graphical power as the GameCube. Also, given Nintendo's penchant for peripherals, there is some speculation that the company might sell many add-ons to the Wii separately.
For its part, Sony is hoping to lessen its losses via the PlayStation 3's steep $499 and $599 price points, which were set in part to cover the console's inclusion of an expensive Blu-ray drive. The aforementioned Merrill Lynch study--which erroneously forecast a single PS3 model priced at $399--forecast the $599 PS3 hardware spec would cost $494 to make before manufacturing. However, many analysts estimate the company has already spent over $1 billion to research and develop the PS3's Cell CPU and RSX GPU--meaning it faces a long road out of next-generation-console debt.