Microsoft Loses $126 Per Unit on XBox 360 725
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? (Score:3, Informative)
Bundles Are More Than $470 (Score:2, Informative)
Re:Selling The Hook (Score:3, Informative)
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?).
Re:Selling The Hook (Score:5, Informative)
http://www.actsofgord.com/Proclamations/chapter02
Re:Don't calculate the loss from the retail price (Score:5, Informative)
Re:So why are they allowed to? (Score:1, Informative)
Re:Don't calculate the loss from the retail price (Score:2, Informative)
At launch, the profitable items are the accessories. Why do you think stores try to push accessories so much?
Re:Selling The Hook (Score:2, Informative)
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... (Score:4, Informative)
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 (Score:4, Informative)
I very much doubt they do (Score:2, Informative)
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... (Score:4, Informative)
Re:Selling The Hook (Score:4, Informative)
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? (Score:2, Informative)
Re:Selling The Hook (Score:4, Informative)
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. (Score:5, Informative)
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 (Score:3, Informative)
"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 (Score:5, Informative)
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 (Score:3, Informative)
Re:Selling The Hook (Score:1, Informative)
Re:Actually (Score:1, Informative)
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 (Score:3, Informative)
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 (Score:3, Informative)
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 (Score:1, Informative)
18% rule of thumb per volume point (Score:2, Informative)
Re:Sony (Score:2, Informative)
Re:Sony (Score:1, Informative)
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.