Microsoft Loses $126 Per Unit on XBox 360

ahess247 writes "BusinessWeek has taken a look at the insides of the XBox 360 and with the a little help from market researcher iSuppli determined that Microsoft is continuing its tradition to taking a big loss on the console in hopes of making a profit on games. From the article: "An up-close look at the components and other materials used in the high-end version of the Xbox 360, which contains a hard drive, found that the materials inside the unit cost Microsoft $470 before assembly. The console sells at retail for $399, meaning a loss of $71 per unit -- and that is just the start. Other items packaged with the console -- including the power supply, cables, and controllers -- add another $55 to Microsoft's cost, pushing the loss per unit to $126."

So why are they allowed to?

[Jetekus]

So why is it that there was so much controversy about Microsoft killing Netscape by bundling IE with Windows, but everyone seems cool about them doing this (and indeed predicted it)? Is it just because Sony and Nintendo will inevitably do the same, so we don't have a true underdog to root for?

Bundles Are More Than $470

[Alien Venom]

It might be worth while to know that some of the bundles out there go for well over $470. Perhaps Microsoft was hoping more people would buy these instead, as some stores only offer these. http://www.ebgames.com/ebx/categories/systems/xbox 360/ [ebgames.com] The core bundle runs for $599.93 and the Ultimate bundle runs for $699.92.

Re:Selling The Hook

[mikael_j]

...and before that drug dealers all the way back to the days of the opium trade.

Actually, I've never met a drug dealer who did anything like that, I've only heard it referenced in "Think of teh CHILDRUN!!!111"-speeches and government pamphlets about the horrors of smoking pot even once (it leads, without exceptions, to heroin addiction and then death... Did I mention I live in Sweden?).

/Mikael

Re:Selling The Hook

[Godeke]

Actually, until Microsoft and the X-Box, the "lose money on the hardware" idea was a myth:

http://www.actsofgord.com/Proclamations/chapter02. html [actsofgord.com]

Re:Don't calculate the loss from the retail price

[Detritus]

Not on game consoles. The markup is almost zero.

Re:So why are they allowed to?

[Anonymous Coward]

As far as I know, Nintendo has never sold consoles at a loss. Since it doesn't have an hugely profitable os and office division, it can't afford to. Microsoft has been losing hundreds of millions year after year on the xbox to "break into the market" and it seems like they'll be doing the same with the 360. You can be sure that, as soon as the competition goes away, they'll stop selling those at a loss.

Re:Don't calculate the loss from the retail price

[hibiki_r]

That's the profit margin you'll see on furniture, but it's pretty far from the profit margins you get on consoles and games. The store's profit on a console is probably under $20 per console. %50 is what stores get when they sell a used console.

At launch, the profitable items are the accessories. Why do you think stores try to push accessories so much?

Re:Selling The Hook

[ackthpt]

Also forgot labor and overhead, which could add substantially.

Not really, that's pretty much encapsulated in 'assembly' Microsoft doesn't own the plants that make these, they contract it out.

Re:Sell at a loss in a free market...

[gormanly]

Did MS ever recoup any money (or even profit at all) from the original X?

No. They lost nearly $400,000,000 last year on the Xbox division, including games sales.

They're probably around $4,000,000,000 out on the whole Xbox venture, so far.

Their only profitable quarter was the one due to the release of Halo 2.

They're damaging Nintendo (a pure games company) - do you really think Nintendo were or are able to compete? If not, then how is this not anti-competitive? And is this behaviour good for gamers in any case?

Keep buying the Xboxes new and the games secondhand - together we can kill Microsoft!

Re:The Numbers Don't Add Up

[pdbogen]

Not $10 per disc bought.. $10 per disc pressed.

I very much doubt they do

[ninjojitsu]

See, I never buy these numbers. They're always based on "Average" costs, not the price of the inputs. Anyone who took Econ 101 knows that "Average" costs is a manufactured number; the real measure of cost is marginal costs, i.e. the actual cost of the inputs that go into making a single unit.

So it is possible to sell a unit under what the market perceives as your average cost and make money, because, by definition, if you raise the denominator (units), then your "costs" go down. Lots of people in other industries have done this (e.g. Lexus) - figure out what you think you can sell at a various price points and then price accordingly.

This is not to say that MSFT is not making a loss on its consoles, but I suspect it's significantly less than $124. Figuring that an average console owner buys 20 games over the life of the console, and MSFT gets $10/game in royalties (ignoring MSFT games and console licensing costs for now), MSFT stands to earn $200 from software over the life of the console, for a total gain of $76 over the life of the console. Given that that period could be 4-5 years, they wouldn't be selling at a loss of $124 per console - the ROI would not justify the investment (for a company that is MSFT's size, anything less than 15% ROI - maybe even higher - would be untenable).

You would think a business rag would get that, but apparently not.

Actually...

[Svartalf]

Sony tends to lose a little money on each console for the first 6 to 12 months of sales and then as production volumes and process improvements come into play, they start seeing a small profit on the consoles, even as the prices get cut through the lifespan of the console. They're willing to eat a little of their potential profits to get the box out into the market. Now, Microsoft's blowing money left and right by comparison.

Re:Selling The Hook

[Golias]

"Lose money on the razor, make it back on the blades" doesn't get re-defined as "predatory" just because it didn't work very well on the first attempt.

To be predatory, they would have to sell the X-Box cheaply enough that almost nobody would want to buy anything else. That's clearly not what they are doing here.

but do they have an accurate costing model?

[LOTHAR, of the Hill]

I really doubt these analysts have accurate information on the component costs of the XBox. You would be amazed at the discounts a large company can strongarm out of suppliers. It's likely that Microsoft has a cost+ model for some of the components or set it's own prices regardless of what price the supplier asks for or what the supplier price the sells the same product to other customers. Cost+ is where Microsoft would tell the supplier "It costs you $50 to make a hard drive so I will pay you $51 for your hard drive, you'll make your money on volume". Microsoft may even dictate the prices of the components they're buying. I've seen $300 processors turn into $75 because the customer was large enough to dictate terms "or else". The XBox is probably losing money per sale, but not as much as analysts estimate.

Re:Selling The Hook

[oGMo]

Crazy, all of my cell phones have been sold to me at a loss so that I would buy the service.

Wrong. The hardware manufacturer sells them at cost. The service provider may subsidize the phone for you, but the manufacturer isn't losing money. (With the price of phones, they're probably making ridiculous profits.) The service provider has just adjusted their prices so you pay the $200 back in the plan.

Not True. Just more FUD.

[CDPatten]

Its interesting, irritating, and I guess expected. When an op-ed for a newspaper puts out financial numbers the post subject is fact. But when Merrill Lynch, one of the countries biggest financial institution puts out a report, Slashdot has a "?" to it. Check it out here [slashdot.org].

What is the difference you ask? Well one doesn't say MS sucks and the other does. One compares both PS3/Xbox with numbers and the other doesn't give any. Anyone interested in more accurate PS3/Xbox 360 breakdown you can go here [macworld.com] (or here [next-gen.biz] to get the chart). Again these numbers are according to Merrill Lynch a leading investment firm, (not a newspaper or an op-ed).

Take a look at them before you flame me.

Re:Sony

[bluekanoodle]

From TFA:

"IBM also has designed chips at the heart of the competing video-game systems -- the Playstation 3 from Sony and Nintendo's forthcoming Revolution system, both of which are due next year. Crotty expects that Sony's loss on the Playstation 3 may be even wider, as the cell processor that IBM, Toshiba, and Sony designed for the system is more complex.

Estimates vary as to how much the cell processor will cost. Richard Doherty of Envisioneering Group in Seaford, N.Y., expects the cell chip to cost about 50% more than the Microsoft chip. "Based on what we've seen so far, the Playstation 3 could cost as much as $600 to make in today's pricing," Doherty says.

And Crotty says that since it's a more complex chip, its price will fall more slowly than the price on the Xbox chip."

Actually

[nmb3000]

I'm not sure this study is correct.

Merrill Lynch looked at both the 360 and the PS3 and found these results [next-gen.biz].

The short end of it is that the "full" version of the 360 costing $400 at launch is actually making money.

Re:gamers are not loyal

[jZnat]

I don't know where you're coming from, but Nintendo has generally been the leaders in game console hardware. Sure, when they broke up with Sony over the CD/SNES disputes, Sony went ahead and made massive gobs of money with the PS1 and PS2, but it is still Nintendo who defines what a game console and a portable console should play like. For instance, Nintendo has always been the company that revolutionised the controllers used. They introduced gamepads with the Famicon/NES; they introduced shoulder buttons on the SNES; they introduced the analog stick on the N64; they introduced the rumbling controller with the N64 Rumble Pack; they introduced a superb method of wireless controllers with the Wavebird, and if history continues to repeat itself, they have introduced the modular controller with gyroscopic usage and plenty of other gizmos it will have. With all that in mind, I don't see how you can say that Nintendo is not a hardware specialist...

Re:Selling The Hook

[Anonymous Coward]

have you ever heard of printers? these wonderous devices are often sold at or below cost to make money on consumables

Re:Actually

[Anonymous Coward]

Hmm, I don't think they know what they are talking about they list
PS3:
USB 6 ports$5
Ethernet 5$
360:
USB 6 ports$5
Ethernet 5$

It's probably going to cost them under 1.50$ for USB and Ethernet. You can buy a nVidia ATX Motherboard for 44$ retail with 6-channel audio, USB 2.0, 10/100 Ethernet LAN which probably cost's under 20$ to make and their selling well under 10million of them.

Re:numbers suspect

[robertjw]

He's referring to bulk prices, though. So a $60 hard drive in the store can be had for $20 in bulk.

No kidding? I figured Microsoft was buying everything piecemeal from their local Walmart. Seriously though, there is power in buying in bulk, but that doesn't mean things are free. There are still minimal costs and the hardware providers will want to make a profit. There is also a difference in costs between something that's built to sell directly to a consumer and a product that's built for resale.

If Microsoft is really paying $51 for a quality 20GB hard drive, then they need their heads checked.

Really? Why? Just checked newegg and the cheapest drive out there is $44. Come to think about it, I'm not sure I've ever seen hard drives much cheaper than that. When prices on a particular model drop much below $50 they generally dissappear. My guess would be there are inherent costs involved where manufacture of the drive itself starts to dictate a minimum price.

This entire "analysis" smacks of someone attempting to apply retail prices to bulk hardware.

OTOH, this thread sounds like someone attempting to apply prices of discount consumer goods from online stores to a the products used in a manufacturing facility. I haven't worked in manufacturing in a while, but when I did I was shocked at how prices on items bought in bulk were not always cheaper than what a 'retail' discount version was. Even if Microsoft is using low quality components, they have got to have some kind of warranty period. I'm not sure what the warranty period on a new xbox is, but if it's 30 days they want those components to last through the 30 days of hard use. I'm sure their deal with the component manufacturers includes some kind of defect reimbursement - so even if the components are low quality the manufacturer is going to sell at a price where they can absorb the defects.

I may be completely wrong in my thinking here, so if you are familar with the intimate workings of a large computer manufacturing business' purchasing department, please correct me.

Re:Current Prices

[aanantha]

It appears that this time Microsoft has essentially made the same mistake with the 360.

I don't think so. Microsoft has their stamp all over the hardware this time. Microsoft owns their variant of PowerPC and graphics card as much as Sony owns theirs. Looking at the initial hardware costs is deceiving. If you remember, the Playstation 2 sold for a huge loss in the beginning too. It was only later that they optimized production to the point that they were making profit off the system itself.

The Number is even more inaccurate

[Aguamala]

the figure of $-126 per x-box 360 is inaccurate. There's also marketing, R&D, Sales Team salary, Shipping, middlemen, etc. So the figure should be somewhere like 250-300.

18% rule of thumb per volume point

[jabelar]

IT depends on the component type, but on average an electronics systems' cost will go down by about 18% for each tenfold increase in volume of the order. So if the Xbox would cost $470 to put together with retail pricing (i.e. volume of one) the 100k unit pricing will be about $250. The reason this happens is that the vendors just need to make a certain amount of total profit, so shipping ten times the items at half (remember the margin on the retail item is about 50%) the total profit still increases.

Re:Sony

[CityZen]

You might recall that Sony said the same thing for the Emotion Engine (CPU for the PS2). Did it happen? No. Nobody wanted to program for it unless they had to. There's no reason to put a Cell chip into most embedded applications; current chips do the job just fine, are much easier to program, have a wide array of support tools, and are already commodities.

Re:Sony

[isolenz]

just like sony said that the "Emotion Engine" (The CPU of the PS2) would be used in many other products that they were making 5 years ago. The Cell is made for games, sure it can do a lot more, but it's main market is gaming. Another chip, more suitably designed to its application is bound to come out next year which will be mass produced, and cheaper for the specific equipment (maybe a onboard H.264 encoder for a PVR for example) and all of a sudden the Cell is a PS3 only product, just like the "Emotion Engine" is a PS2 only product. Trust me, go 5 years back on slashdot and you will see the same postings regarding the Emotion Engine as what you have posted about the Cell. Something kind of funny, I was reading a next generation magazine the other week from 1997 and sony was calling the processor of the PSX the "Emotion Engine", anyways, I guess it didn't catch on initally for the PSX and they needed a buzzword for the PS2 and just used it again.

just my 2 cents, I really hope they the cell will be cheap enough for other devices, but I find it unlikely given past history.