Microsoft taking $126 hit per Xbox 360

<i> BusinessWeek</i> commissions study, which says the software giant is paying a premium on next-gen hardware.

by

When Microsoft got into the console game in 2001, much was made of the fact that it lost an estimated $125 per console on each Xbox. Four years later, that per-console-hit has tallied to $4 billion of red ink for the Redmond, Washington-based software colossus, whose current-fiscal-year forecast calls for $44.5 billion in revenue.

However, Microsoft seemed all too happy to fork out billions to become the number-two console maker in the world. The approximate 22 million Xboxes it has sold surpasses Nintendo's to-date sales of over 16 million GameCubes--but still lags far behind the 90-million-plus Sony PlayStation 2s in homes worldwide.

Now, it appears that history is repeating itself. According to a study commissioned by BusinessWeek, Microsoft is again losing around $125 per hard-drive-equipped unit of its brand-spanking-new console, the Xbox 360. To perform the study, tech researcher iSuppli took apart an Xbox 360 and examined the cost of all its components. It concluded that the hardware of each unit cost $470 disassembled. That means Microsoft loses $71 before each HDD-equipped 360 console goes to the factory, right around the $76-per-unit loss analysts predicted for the core Xbox 360, which has no hard drive, back in June. (Those same analysts also predicted shortages of the console, which then was believed to come in only one model.)

However, when iSuppli said the HDD-equipped 360 console cost $470, that's exactly when they meant--just the console itself. They didn't include the cost of the wireless controller, headset, Ethernet cable, universal media remote, combination high-definition component/standard A/V cable, and bricklike power supply that come in the box of the $399 Xbox 360 "Premium Pack." Factor those in, and Microsoft's per-unit-loss on each Premium pack comes to $126--just above the per-unit loss of the original Xbox--before one penny (or, more likely, yuan) is spent on labor.

Discussion

63 comments
soul_motor
soul_motor

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hush404
hush404

Microsoft need not worry about money, they make enough on their crappy software to give the 360's away! :P

dengue_metal
dengue_metal

[This message was deleted at the request of the original poster]

dengue_metal
dengue_metal

Nintendo always makes profit with hardware sales. They can't afford the microsoft's or sony's strategy

ericsp2081
ericsp2081

I think what some of you are forgetting is that Gamespot has become Sony's PR department, and anything they say, especially Tor Thorsen, should be taken with a big ass grain of salt. Trust their reviews, but do not trust the news stories on this site.

aramitz
aramitz

The online subscription content is where M$ & Sony are going to try and cut back their hardware losses this time around. Expect to see the hard sell once the two companies are convinced enough systems are in the houses to begin.

Mit_Man
Mit_Man

I don't know what makes some (keyword: some, not those of you who have thought out comments) of you think Microsoft cashes in big on game sales. What about the people who made them, and the people who sell them in stores? M$ most definitely is not cashing in on the Xbox/Xbox 360. Does M$ care? No. M$ has more than enough money to do anything it sets its mind to. And I know M$ isn't losing all of that cash on hardware and doesn't make any of it back through other means, but there's just no way those other means could ever make up for a $126 loss-per-system, not to mention as GameSpot mentioned, all that other loss on hardware (although maybe not a huge loss, with those wireless controllers going for $50 a pop). And I don't see why there's such a big deal on defending it >.> It's plain fact, M$ is and has been losing money in the Xbox division.

Glacial
Glacial

One thing I see people have failed to mention is that Nintendo is the only one this past generation that actually turned up a profit off of just the console itself.

doomed51
doomed51

Microsoft is a huge company, i yhink they can manage it ;)

Dirlin
Dirlin

A little lost won't hurt them at all.

xboxps2cube
xboxps2cube

man if you calculate that up per 100,000 consoles they losing like 13 million dolllars, if you add up the 3 launch titles (if they are not in house, MS makes less money) its still wont make up that much of a loss, and yes people will buy hard drives for core, and alot of people are looking for backwards compatibility cuz not everybody can afford high priced games after buying an expensive system.... but MS messed up on that part bad..... all in all they losing too much money... again and trying to make it up with high priced accessories... as I read the article more I see now why they use cheap china for manufacturing.... labor wont be high, but more defective systems on the way

hockeyex
hockeyex

People buy at least 3 games at launch date, so they make about $60 from tribute. Then people will buy more games, and people will buy overpriced harddrives. Then soon they meet the break-even point. Microsoft is losing more money when they are selling at wholesale prices to stores like Bestbuy and Circuit City. They don't look at the individual consumer, but the mass audience. I would wait untill the PS3 comes out, so Microsoft can fix any bugs and we can see how the two match up

kenjaminhoppe
kenjaminhoppe

no, the more they sell, the more they make. more xbox 360s in homes means more game sales, more xbox live members, more accessories bought, more micro transactions, more game makers that develop games.

DannyDumbass
DannyDumbass

soo the more they sell the more money they lose haha that really blows, but yeah they get there money from the games themselves

Digital-Devil
Digital-Devil

They make money just not at first most consoles it takes a year or two to show profit

Blazedspider420
Blazedspider420

ya'll saying the $60 games is where they will make there money are right and wrong. you are right they make there money in software. however M$ games are $50.

gamingfreak47
gamingfreak47

so basicly they are loosing money just so they could make a console. do they hate nintendo or somthing?

Digital-Devil
Digital-Devil

i think every console loses atleast SOME money when it first comes out

steeeeeeveperry
steeeeeeveperry

With mass manufacturing it is ridiculous to say they are losing that much, the parts are made of plastic. plastic is made of oil. oil is as common as muck. Tor Thorson always has to spread the bad word about the 360

scarface100
scarface100

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Homer2000
Homer2000

but you see... PS3 does HAVE to be cheaper than X360, they can just sell cheaper games than X360 games... and they'll be making profit upon sale, and also a bit through games... plus i'm willing to pay at least 500 for a PS3 or X360 because their graphic cards compared to a computer graphic card is like wow cheap if they are selling all that for around 400 to 500

ashaman771
ashaman771

Doesn't matter how much they lose per 360, it's how much they make per game. Same business model as disposable razors...

TrifoceisWithin
TrifoceisWithin

Since when is losing 4 billion dollars considered good? The more money a company makes, the best they do, sales numbers dont matter if your losing millions/billions. MAKING MORE MONEY IS BETTER THAN SELLING MORE...at least in my book!

SimuLord
SimuLord

Just about anyone who makes hardware finds ways to make up the difference. Got a cell phone? Your provider (Cingular, Verizon, T-Mobile, whoever) probably paid about $40-50 more for that phone than they sold it to you for (not to mention the cost of the commercial during that big sporting event you watched that put the brand name in your head). They make back the money not just on rate plans and services, but on accessories as well (that car charger you paid $30 for cost your provider about $2.50). It's the same way with gaming, just on a larger scale (higher price per add-on item compared to cell phones). Microsoft will find dozens of ways to make money off the X360. Every game sold, every faceplate, every extra controller, hard drive (for those who took a Core system just to say they have an X360 at launch), or whatever...that's all money in MS's pocket. You can also consider the price paid for XBox Live (not just subscriptions but micro-payments for content packs as well). Not only that, but every time some fanboy buys an X360 T-shirt or baseball cap to show his brand loyalty... I don't think Microsoft's "forcing Sony to cut its price"...such a Pyrrhic victory might have been good enough for the first XBox, but one does not build a corporate monolith out of constant self-defeating practices. They're an established brand now and have full confidence in what they're doing. (disclaimer: All this coming from a PC aficionado whose sole interest in Microsoft as a corporation is in the OS that powers his gaming rig. The wife's a Nintendo fangirl so we'll probably end up with a Revolution.)

homsuplo75
homsuplo75

This is part of the reason that Microsoft bought so many game studios. The money is in the software not the hardware. Plus they'll make money off the Live content which doesn't cost much to deliver since it's all online.

kenjaminhoppe
kenjaminhoppe

You all are also forgeting that there is software in the thing too. They had to pay for that to be made, and R&D cost, advertising, and the list goes on. They are dumping a ton of money into that 360, but they will make it back on the software. Microsoft doesn't make them because they love us gamers, they do it because they want our money. If you think for one minute that they will not turn a profit off of the 360, you're stupid. They make a big profit off of first party games, and they still do good off of third party games too. Xbox live will win them some cash, as well as live arcade. Microsoft knows what they are doing, so you just leave the number crunching to them.

Exaspenite
Exaspenite

They are factoring everything in, including wholesale discounting, when they calculate the price. Simply put, they are not the utter fools you take them for :P This doesn't mean to say iSuppli's figures are 100% accurate, but it should give you a decent ballpark figure of how much M$ is losing per 360 unit. It's a known fact that console makers always lose money on the core console hardware itself. Typically, it takes about three years before they manage to cut costs far enough before manufacturing a unit becomes a break-even proposition. In the fourth or fifth year of production, they may even manage to eke out a modest profit per unit -- but nowhere near enough to offset the losses already suffered in earlier years. Where the money flows in from is hardware accessory sales (controllers, memory cards, etc.), licensing fees, and software sales. If these combined sources of income are enough to turn a profit even after hardware losses, then great. If not, then the console bleeds money and the maker either pulls up the stakes and goes home (a la Sega after its dismal Dreamcast outing) or simply shrugs and writes off the loss as a "market entry" fee, a la Microsoft.

xaos
xaos

So, what kind of software attach rate does MS need to hit the breakeven point? Or, put a little more clearly, how much does MS pull down for each 360 game sold?

Animawarrior
Animawarrior

Yes but Sony has been lucky enough to sell massive amounts of software while Microsoft has not had the same luck. And I'm willing to bet it will stay like that.

rickykemp
rickykemp

what people are forgetting that individually, the components may be quite expensive and if all are added together on an individual sense then yeah, they will equal like $470. microsoft, being the clever chaps that they are, are easily able to buy/produce in bulk and therefore get the parts alot cheaper. ever tried getting a replacement part for a washig machine or something? ever noticed how one part can cost almost as much as the machine itself whn u buy it on its own?

HadesBurn
HadesBurn

umm.. you do know that no console makes money. The sell the hardware at a loss and make the money on all the games/liscensing fees and accessories. You think XBOX Live really costs $50 per console a year to maintain. Even if 500,000 of those 22 million units has a subscription, thats 25 Million a year. On top of that, profits really are not seem until the 2nd to 3rd year in the console market. This is due to development costs creating the software technology for the new hardware. You'll see the same thing here and with PS3.

shinchy
shinchy

"tech researcher iSuppli took apart an Xbox 360 and examined the cost of all its components. It concluded that the hardware of each unit cost $470 disassembled." Idividually yes, but in the kind of number Microsoft will be mass producing I doubt it'll be anywhere near as much.

Animawarrior
Animawarrior

Software sales didn't get they're money back last time.

sorata07
sorata07

Wow why am i not suprised at yet another of x boxes flaws

umbrae
umbrae

It more about profits. Microsoft wants in your living room. XBOX is their best chance to do it. In the end, MS can afford it...

timinator18
timinator18

thats alot of money, but software sales will definately get their money back

phoenix14
phoenix14

microsoft does get mone back on games but not as much as people think.... most games that ppl buy are third party games.... so the company that makes the game get's the bulk of that..... and it may not cost them a lot to manufacture a game but keep in mind they do have to pay for labor, packaging, and advertising.....if you add up $126 times the 3 million their expecting to sell....their in for a big loss,which is why the shippment quantity is so low...

zeroroach
zeroroach

Chinese worker: We want union NOW! Chinese Type 98 Tank: No you don't. :BOOM:

ericsp2081
ericsp2081

I hate Tor Thorsen. How does he still have a job?

Draggunof
Draggunof

If console market would be a place for loss money companies won't be in "war" for control it. They also loss cash making TV or radio spots and nobody cries because companies know they will get much more back.

Animawarrior
Animawarrior

Not true if you believe this article... $494 (IIRC) for everything is much less than $525

bdub20791
bdub20791

microsoft is forcing sony to sell cheaper than 300, where theyll lose tons of money. and i think everyone is forgetting that ps3s cost more to make.

magus704
magus704

Well, with the extra $10 premium on all 360 games in comparison to Xbox, PS2 and GC, I think they'll make their money just fine.

Beretta4228
Beretta4228

Unless Microsoft gains a hell of a lot of market share, their not gonna turn a profit this round. They lost an estimated $2 billion on Xbox and it ain't looking any different this time around.

Animawarrior
Animawarrior

And Sony is worth billions too. They CAN afford a loss in hardware as well.

Animawarrior
Animawarrior

Microsoft seems detirmined to keep in the console market no matter how much they lose.

deconai
deconai

It's not a matter of "can they cover it?" Every time Microsoft projects loss you're talking a major hit to the stock. According to some analysts, M$ won't see a profit from the XBox 360 during the entire life of the system. Sure the company can take the loss, but it dampers growth and hurts the confidence of the investors. You've got to be careful when you start taking losses like that.