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XBox (Games)

Microsoft Loses $126 Per Unit on XBox 360 725

Posted by CmdrTaco
from the so-we-should-buy-more-right dept.
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."
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Microsoft Loses $126 Per Unit on XBox 360

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  • And? (Score:2, Interesting)

    by MSFanBoi2 (930319) on Wednesday November 23, 2005 @12:23PM (#14101448)
    When the PS2 was first released it was a loss leader for Sony too..

    You really think the PS3 won't do the same?

    Oh yeah wait, I forgot this is Slashdot, home of supposed Linux fanatics, yet more than 70% of the visitors to the site are still Windows users... imagine that.
  • by Anonymous Coward on Wednesday November 23, 2005 @12:23PM (#14101449)
    ...if it even sponsors their new line of machines to the tune of $126 per unit? ;-)
  • Loss leader... (Score:3, Interesting)

    by fak3r (917687) on Wednesday November 23, 2005 @12:23PM (#14101450) Homepage
    I always thought this was amazing when they did this with the original Xbox, but I never heard of if it paid off or not. Perhaps it did by providing this kind of market share, but I've never heard any hard numbers of it the games made up the difference in the end. Regardless, with the crashing reports it seems like this is another rush to market item trying to be everything for everybody (iPod phone I'm looking at you).
  • Re:Selling The Hook (Score:5, Interesting)

    by gormanly (134067) on Wednesday November 23, 2005 @12:23PM (#14101462)
    The whole Xbox division of MS loses money - $391m last financial year, on sales of $3.2b.

    They're not selling a hook, they're burning money in an attempt to beat everyone else out of the market and pwnz0r your home entertainment forever...
  • by bakreule (95098) <bkreulen@@@yahoo...com> on Wednesday November 23, 2005 @12:25PM (#14101477) Homepage
    I have so many friends who bought the first XBox, who are also not fans of M$. They say: "Hahaha! Microsoft loses money! Everybody buy an xbox!" MS doesn't give a **** about making money on the xbox, or the games. They just want an xbox in every household, and they're willing to put a lot of money into acheiving that. Once they have an xbox in every household, and Sony and Nintendo are has-beens, they can start making the Xbox into the household entertainment center that controls everything. This isn't a conspiracy theory, it's their stated plan. In fact, the only thing preventing them from giving the damn things away is the howls of conspiracy theorists, anti-trust lawyers and people's distrust of things that are free.

    Don't like Microsoft? Just don't buy the damn thing....

  • Too Low? (Score:2, Interesting)

    by jrallison (857135) on Wednesday November 23, 2005 @12:25PM (#14101486) Homepage
    Seeing that they are selling for over $800 on ebay, they seem to be losing a bit of money ... not that they need it or anything.
  • Only $72 loss in UK (Score:2, Interesting)

    by WarwickRyan (780794) on Wednesday November 23, 2005 @12:26PM (#14101497)
    Heh, looks like they're not subsidising the price anything like as much in UK:

    UK price: £280 inc tax / $482
    Sales Tax: £49 / $84
    Net price: £231 / $398

    Build price: £273 / $470

    Net loss: £42 / $72

    Ironic really, especially considering the historically high console sales in UK / population, and relatively efficient distribution available.

    Maybe the difference is retail margin? I'd expect it is, given that Game Group has a near monopoly on videogame sales here.
  • by mpapet (761907) on Wednesday November 23, 2005 @12:34PM (#14101591) Homepage
    I hate articles like this.

    They may give the reader a rough idea of the current BOM costs, but utterly fail to include many other sources of revenue.

    1. Developer Fees. I'm thinking you can't develop a commercial product for free. I know you can't with a Sony console, I would be surprised to find out MS is giving that away.

    2. Royalty Fees. I'm sure there's royalties per game sold back to MS. I bet it's the same for aftermarket controllers too. It's the "razor blade" market strategy.

    3. Manufacturing Costs. They will chop about a third off the manufacturing costs as components become cheaper and manufacturing becomes more efficient.

    4. I'm guessing their BOM costs are very well-negotiated and rock-bottom low, so I'm thinking the numbers they use are too high.
  • by rjune (123157) on Wednesday November 23, 2005 @12:35PM (#14101607)
    You need to take out the expense for beta testing. The end users are doing that for free.
  • by Bram Stolk (24781) on Wednesday November 23, 2005 @12:36PM (#14101608) Homepage
    Don't underestimate m$ pricing. E.g. see what a
    ethernet cable [xbox.com]
    costs in Europe. That is 30 euros, mister!
    And for the Americans: that is 35 US dollar, for an ethernet cable.
    Damn! That is a profit margin of at least 10000 percent.

        Bram

  • Re:Current Prices (Score:5, Interesting)

    by Libby Liberal (928336) * on Wednesday November 23, 2005 @12:36PM (#14101616) Journal
    Except you can buy an Xbox for $140 new now because the prices on the hardware have to naturally fall to stay competetive as well.

    All game machines start out at several hundreds of dollars until the sucker market is exhausted and you have to start targetting people who are only willing to pay $200, then the ones who will only pay $150, then the ones who will only pay $100.

    The machine's price will fall at a faster rate than the cost will.
  • Re:Current Prices (Score:3, Interesting)

    by gormanly (134067) on Wednesday November 23, 2005 @12:38PM (#14101629)

    this is precisely what didn't happen with the Xbox - in fact, the Intel CPUs actually went up in price, as they became obsolete and unlike anything else Intel were producing...

  • Re:Selling The Hook (Score:2, Interesting)

    by Apreche (239272) on Wednesday November 23, 2005 @12:39PM (#14101644) Homepage Journal
    I'll be there playing network m.u.l.e with you.
  • by Animats (122034) on Wednesday November 23, 2005 @12:40PM (#14101657) Homepage
    Sony and Nintendo make at least a small profit on each unit. [actsofgord.com] While it's the conventional wisdom that Sony loses money on each PS2, their financial statements indicate they don't. Only Microsoft seems to lose money on every unit.

    That's not too surprising. The original xBox is, after all, an x86 PC, but sells for less than one. The PS2 is a low-end MIPS processor and some wierd vector units, hard to program but cheap to make. The xBox 360 is a new architecture, but not, apparently, a cheaper one.

    In the end, Microsoft stockholders would be better off [yahoo.com] if Microsoft got out of the game console business. It's a money drain.

  • Re:Profit!! (Score:2, Interesting)

    by Anonymous Coward on Wednesday November 23, 2005 @12:48PM (#14101744)
    Since I'm at work at the moment I'll pull up our wholesaler's (D&H) website (and post anonymously)

    XBOX360CORE Xbox 360 Core System 294.00 [Not In Stock, Click for ETA or Email Alert]
    XBOX360PLAT Xbox 360 Platinum System 387.95 [Not In Stock, Click for ETA or Email Alert]

    That's the wholesale price to stores. No shipping cost on orders over 1000$, so basically the profit at a retial store like this one would be 299.99 - 294 on a core system and 399.99 - 387.95 on a platinum one. So technically there's some markup but barely anything unless a store tries to sell over MSRP. By the same token, I doubt D&H [dandh.com] is making more than a buck or two per system over what they buy them at from MS.
  • But... (Score:3, Interesting)

    by truthsearch (249536) on Wednesday November 23, 2005 @12:51PM (#14101768) Homepage Journal
    For those that hate MS and buy and xbox to put Linux on it, these aren't customers who will later have an MS-centric media center. If you're only buying the hardware and using it for your own software you're hurting Microsoft. It doesn't get Microsoft any closer to controlling your living room.
  • Re:Selling The Hook (Score:3, Interesting)

    by Paul Slocum (598127) on Wednesday November 23, 2005 @12:52PM (#14101773) Homepage Journal
    I wonder if they write it off as marketing, trying to build a "cooler" image for Microsoft. Partly for when young XBox gamer nerds get out of college and start their IT job.
  • Two problems. (Score:3, Interesting)

    by Some Random Username (873177) on Wednesday November 23, 2005 @12:52PM (#14101777) Journal
    First of all, did you read the article yourself? Sega sold the saturn at a loss, that was before the xbox.

    Second, he pretends that sega lost money on the dreamcast. They may have sold the console at a loss at first (I'm not sure), but the dreamcast and its games made sega millions. They didn't leave the business because of the dreamcast, they left the business cause they were already screwed, the dreamcast just couldn't save them.
  • Re:Selling The Hook (Score:2, Interesting)

    by GigsVT (208848) on Wednesday November 23, 2005 @12:56PM (#14101822) Journal
    It's illegal though.

    At least in theory. The predatory pricing laws have been pretty well neutered by the supreme court.

    And you are right, predatory pricing is a huge gamble that doesn't often pay off.
  • Re:Selling The Hook (Score:3, Interesting)

    by h4rm0ny (722443) on Wednesday November 23, 2005 @01:07PM (#14101933) Journal

    I had a friend who was a dealer and absolutely she used weed as a lead in to other drugs. She was against legalisation for that reason.

    And contrary to the GP poster's experience, it's not at all uncommon for a dealer to offer cheap introductions to harder drugs to hook someone, and then jack up the prices later.
  • by mrgreen4242 (759594) on Wednesday November 23, 2005 @01:24PM (#14102092)
    I'm not sure that the statement "they are damaging Nintendo" is accurate. As you point out, MS's XBox division lost BILLIONS. Nintendo still makes billions. Sure, they are a close 3rd in the overall units sold count, but they started losing ground WAY before MS got into the market, when Sony released the PS1. Sure the Xbox might be canabalizing some GC sales, but it's tough to say wether or not the Xbox's 'success' is taking away more from Nintendo or Sony. (IMO, XBox and PS2 demographics seem to overlap MUCH more than the XBox and GC).
  • Re:Selling The Hook (Score:4, Interesting)

    by Mr_Huber (160160) on Wednesday November 23, 2005 @01:29PM (#14102135) Homepage
    The difficulty is, being a game console, they have to keep the price point down. $300 to $400 seems to be the most that can be extracted for a console. But if they can do it, so can Sony and Nintendo. The games, of course, are not portable, but to truly lock the home entertainment customers in, they'll need something else.

    As for XBox Live, it is still too easy to switch ISPs. And I'm guessing it will be just as easy to switch multiplayer game services. Again, those addicted to a particular game will be easy to hold, but other households will bolt if MS begins anything monopolistic.

    So, how do you lock people down as thoroughly as the OS does? It can't be downloaded data (movies, etc), as the hard drive is small and the optical drive can't burn. It can't be contracts, as make it too hard to jump and people won't bite. It can't be content, because Sony has deep enough pockets to fight back with its own content. Not to mention their own movie studios.

    Honestly, I don't see any way to lock the customers in at this point. Worse, since they are competing at the same price point, they're not going to drive out Sony with low pricing. Currently, they seem to be genuinely competing on merit. And that is quite an interesting thing to see.
  • numbers suspect (Score:5, Interesting)

    by portscan (140282) on Wednesday November 23, 2005 @01:38PM (#14102205)
    I was skeptical of this report before reading the article in depth, but now I am assuming they are just flat out wrong on some points. Namely:

    20GB hard drive for $53 and DVD-ROM drive for $21. I can get better prices than this. Me. On one unit. Microsoft is talking about millions of units. I know that these are thin margin markets, but the exclusive contract from Microsoft is a huge win for any supplier.

    So the per-unit loss on each console is probably between 50% and 70% of what they reported. At the very least, you can probably remove $20-$30 for those two drive components alone.

    don't forget that if they succeed in knocking sony out, then they will be a monopoly in video game consoles, too, and can jack up the prices even more on the next round (like windows--$200-$300 retail--and office--$400-$500 retail). that way, they can profit on hardware and software.
  • Re:numbers suspect (Score:3, Interesting)

    by robertjw (728654) on Wednesday November 23, 2005 @01:51PM (#14102316) Homepage
    20GB hard drive for $53 and DVD-ROM drive for $21. I can get better prices than this. Me. On one unit. Microsoft is talking about millions of units. I know that these are thin margin markets, but the exclusive contract from Microsoft is a huge win for any supplier.

    You may be correct, but I've had some of those $10 DVD-ROM drives. They aren't worth bringing home. Xbox is a consumer level product, so Microsoft needs high quality components. If that $20 hard drive conks out in 2 or 3 years or quits working the first time the dog knocks the machine over, Microsoft is going to have a ton of angry customers. Keep in mind that the discount products that you and I buy to stick in our personal computers and upgrade every year or two are not the same level of quality componenets that need to be installed on a consumer device that's intended for use by the masses for at least several years.
  • by Rogue Pat (749565) on Wednesday November 23, 2005 @02:21PM (#14102594)
    well at least this time Microsoft managed to convert currencies correctly. I guess they've stopped using Excel? ;)

    While Xbox 1 sold in the US for USD 299, in europe it went initially for EUR 480. A big big blunder and MS already had to slash its prices by 1/3 a mere six weeks after the launch and instate a bonus program for those silly fools that paid EUR 480 [including myself]

    BTW: if you look at Macromedia's Dreamweaver: an upgrade download in the US will cost you USD 199. The same package in Europe will cost you EUR 235.....[purely based on exchange rates it should've been only EUR 167. A 40% increase in price for Europeans!!]
  • by aichpvee (631243) on Wednesday November 23, 2005 @02:55PM (#14102861) Journal
    The difference is that Nintendo had huge numbers of great games. Microsoft has what, two? And no, neither of them are Halo.
  • by houghi (78078) on Wednesday November 23, 2005 @03:04PM (#14102945)
    In Belgium it is forbidden to sell stuff at a loss.
  • Cheap hardware (Score:2, Interesting)

    by Aqws (932918) on Wednesday November 23, 2005 @03:12PM (#14102988) Journal
    Wow, this is probably the best value you can get for a P.C. Just put Linux on it, yes I know this will not be that easy. You get the hardware for the price that Microsoft negotiated, minus the amount that they are losing per sale. You'll probably need to find a way to get it too cool faster, though. Considering this, I might just get into it's hype.
  • Re:numbers suspect (Score:3, Interesting)

    by AKAImBatman (238306) <akaimbatman@gma i l . c om> on Wednesday November 23, 2005 @04:16PM (#14103500) Homepage Journal
    Just checked newegg and the cheapest drive out there is $44.

    Exactly. And I can get a Western Digital 80GB SATA from MWAVE for $55. Someone else pointed out a $41 drive from TigerDirect. The point is that these are retail prices. Even if you assume that only the markup is removed, $51 is still rather high to be paying for a 20GB drive. In quantities of a million units or more, I'd have a hard time believing that the manufacturer wouldn't knock a few more bucks off the price. $40 I might believe. But $51? Considering the number of units we're talking, that's just insane.

    My guess would be there are inherent costs involved where manufacture of the drive itself starts to dictate a minimum price.

    To throw your own response back at you, "No! Really?"

    I understand your point about minimum costs quite well. My only complaint is that $51 is just too darn high for a wholesale price. Especially since we've been arguing over very normal prices for drives. I haven't even pointed out places like PriceWatch, where you can get a 20GB drive for less than $40 [pricewatch.com] easily. (I'll get to why I haven't in a moment.)

    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.

    This is true. Sometimes consumer goods are "loss leaders". Sometimes a company is attempting to liquidate stock on old items. There are a few different reasons why retail goods might be cheaper. That's why I avoided pointing out PriceWatch until just now, because their goods may very well be underpriced. But when you look across a large number of major retailers and consistently come up with lower results than the supposed wholesale cost, then something fishy is going on.

    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.

    Not a large company, no. However, I have gotten direct quotes from various manufacturers for electronic parts for a to-be-commericialized item I've been working on. One thing I've learned in doing this is that the lower the cost of a part, the more you have to work to find it. Sure, it's easy to pay Digikey $80 a unit for that 300MHz PowerPC core. But a better core can be had for far less if you're willing to work a little harder to get it.

    The same has held true for the electromechanical parts I've needed. Digikey tells me that an ejectable smartcard reader is going to cost $10-$15 a unit (no enclosure!), but I later find that I can get the part for $2.50 from elsewhere. Things get even better when I can get the precise part I actually need (I didn't actually need the ejector, a half-insert reader was fine by me) as opposed to the 3,000,000 feature part they're trying to sell me. :-)
  • by GodfatherofSoul (174979) on Wednesday November 23, 2005 @05:59PM (#14104210)
    Oh? ML? The same big financial institution that helped propagate the Enron pyramid scheme?

    http://news.bbc.co.uk/2/hi/business/2786925.stm [bbc.co.uk]
    http://www.globalpolicy.org/socecon/tncs/2002/merr ill.htm [globalpolicy.org]
    http://www.stockbroker-fraud.com/enron-nigerian.ht m [stockbroker-fraud.com]

    Being a big company doesn't imply honesty or integrity.
  • Re:Selling The Hook (Score:3, Interesting)

    by Keeper (56691) on Wednesday November 23, 2005 @07:10PM (#14104709)
    They're profitable NOW. The PS1 lost money for 3 years before Sony started putting it on their financial statements. And even then they were still losing about $20m a quarter. But you go right ahead and keep crying in your corner about how life isn't fair.
  • Re:Current Prices (Score:4, Interesting)

    by thatguywhoiam (524290) on Wednesday November 23, 2005 @08:18PM (#14105113)
    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.

    Why do you say that? It seems pretty clear to me that IBM owns the PowerPC (in conjunction with Apple and Motorola although I am unsure as to the state of that alliance at the moment). MS did not develop, design, or have anything whatsoever to do with that chip. On the other hand, Sony designed the Cell with IBM in partnership. That will make a difference down the line.

    Also as an aside I don't think Sony ever lost money on a PS2.

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