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."
Selling The Hook (Score:5, Insightful)
OK they lose money selling the hook. If buyers purchase enough games or buy into XBox Live, for a nominal monthly fee, they get it all back and then some. The business model pioneered by Atari, Sega, Nintendo, Sony and before that drug dealers all the way back to the days of the opium trade.
What's actually funny (ironic, maybe ha-ha, too) is these sales [ebay.com], assuming the sales actually go through, will enable people to profit at Microsoft's expense. When was the last time you did that?
Oh, and beyond the cost of parts and assembly, don't forget packaging (a good box with packing material is much more than you think, especially if boxes are damaged in transit and need to be replaced, small wonder HP ships expensive Athlon64 laptops in plain brown wrappers) plus the cost of transporation and logistics, and adverising, and development costs. The loss is a bit more than that $126. Why does the fascination with loss-per-unit only focus on parts?
I tend to think Sony still has significant advantage over Microsoft, thanks to economies of scale, they make many other consumer electronics items and can combine channels, where Microsoft will be selling this one thing.
let me know when they have a network version of m.u.l.e. or mail order monsters
Sell at a loss in a free market... (Score:3, Insightful)
Some with the "MS=monopoly" opinion may call this an anti-competitive move, yet I wonder about the loss-leader aspect of the console itself.
Could some of the suppliers actually buy 1M X360's, tear them down and resell the parts to Microsoft for a profit?
How much, per title sold, does MS receive in licensing fees? $5? $10?
Did MS ever recoup any money (or even profit at all) from the original X?
Do MS shareholders approve of the loss? If so, it is their money to lose.
If you look at MS' "monopoly" use of the loss leader and see that Nintendo and Sony were both still able to compete, why do people still complain about these tactics? It seems to me that it is not anti-competitive but it actually brings more gamers into the market.
This gives Sony and Nintendo a constantly fresh group to entice into their systems.
The hard cost in the article also doesn't take any net costs into account: R&D, technical support, marketing (x10) or updates. I bet the actual loss per unit is double the figure.
I'm surprised we don't see cell-phone-like sales tactics: Buy an X360 for $99 with a 2 year X-Box Live commitment. Maybe it is because the market is too young to sign a contract?
I own multiple X's, but only maybe 8 titles (6 were 2nd hand). The X is a great MCE extender. That is my sole reason for wanting an X360.
News? Really? (Score:5, Insightful)
Everyone knows you don't make money on the pipe...it's the stuff you put into it that provides the real cash. Cell phones and razors have been using this model for a while now.
Don't calculate the loss from the retail price (Score:4, Insightful)
It's actually worse (Score:5, Insightful)
Add in marketing, shipping, beta testing, opportunity cost and everything else, and I bet that the real loss per box is much higer.
You ever been to Wal-mart? (Score:2, Insightful)
A lot of companies do this sort of stuff deliberately. For example, Wal-mart will sell 2 liter pop bottles at a loss because they know if they can get people to buy the pop they are more likely to think, "Oh I think I should get X while I'm here." It's a business method that ironically works too well for these companies to just ignore. They obviously wouldn't do it if it didn't work since they are all in it for a profit -- but this can easily be a slippery slope. Since MS nets around $24 million/year at least I don't think they'll be too worried. The essential question is, who would buy the system if they weren't going to game with it?
Profit!! (Score:2, Insightful)
Re:Cmon Modders (Score:4, Insightful)
If Redmond is already losing Y dollars per sale, why not let them bleed more by not purchasing a unit in the first place?
Is the satisfaction of knowing that Grub is booting Gentoo on Billy's Baby worth that much?
Re:Selling The Hook (Score:5, Insightful)
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...
It's the cost of establishing a market. The problem for them is, as I said before, these are game machines and gamers are not loyal. Once a new, better, shinier game box comes out these will be retired. Sure a few will become illicit Linux boxen and some will be used in the manner Microsoft intends, but they're hardly pwn1ng the american home. Seems like they still don't get it.
Good thing Windows, Office and Server divisions make a pile of cash to underwrite these follies.
Dumping (Score:2, Insightful)
I guess as an official monopoly under absolutely no oversight, this is just business as usual.
must be nice not having to complete on QUALITY
Re:So why are they allowed to? (Score:3, Insightful)
MS had (and still has, though I believe it is eroding) monopoly power in the desktop OS market. It does not in the gaming-console market. They think they can make money this way: let them try. If it's a viable strategy, their competetors can use it as well. If it isn't, their competetors will laugh all the way to the bank.
(The reasoning behind why it isn't legal for a monopoly is that the monopoly power can use it to deny entry by a new competetor: Just run at a loss until the new company folds, then raise the prices again.)
The power of Marketing and Economics (Score:4, Insightful)
When the market is crowded and there isn't much room to butt in, you have to sell it at a loss to attract buyers. Nintendo and Sony are already household names and proved their worth decades ago. But this is something relatively new for Microsoft. So, in order to grab a peice of the market share pie and get their name around, they have to make it attractive to purchase.
Take for example the market of DVD players. How many brands are out there? Too many. Everyone wants a peice of that pie so they'll try to lower costs as much as possible and mark their price to get the lowest margins possible. The bet is to flood the market with enough units of your name so that when everyone else who makes DVD players has begun to die off, yours is the one people think of when they go to get a new DVD player.
No, there isn't a conspiracy here, folks, it's just a company willing to take it in the shorts for bit until the have a big enough market share. (It's just with Microsoft that they want 99% of it.)
Re:Current Prices (Score:3, Insightful)
Re:Yeah, but they make it up on volume. (Score:5, Insightful)
Re:It's actually worse (Score:2, Insightful)
Oh wait, the beta test program just began.
Suspect (Score:5, Insightful)
*Retail Price* *Maybe* - The estimates given for the raw materials cost sound suspect. I'm pretty sure that a contract to deliver parts for the XBox comes with a much lower price per unit than your average trip to the computer superstore.
Some common examples (Score:5, Insightful)
It paid off enormously. (Score:4, Insightful)
They may have lost billions doing it, but thats the cost of entry into a market that big. Especially when it gives you a prime position in the living room at a time that all home entertaiment is going digital, pipes are getting bigger and bigger, and people are starting to get used to shelling out hundreds a month on their various digital services.
Re:Dumping (Score:5, Insightful)
2. If this is "dumping" then you should jump up and down about gas stations (gas is often sold at or near cost), Coke and Pepsi (with a true monopoly, fountain drinks are sold at or below cost), all cell phone companies (my cell phones were all free), etc.
3. They're not competing on quality? I don't exactly have $400 burning a hole in my pocket that I have to spend on a game machine. Considering that the XBox 360 is the most expensive console out there right now, there is absolutely no dumping going on.
Idiot.
Re:Dumping (Score:2, Insightful)
Re:It's actually worse (Score:4, Insightful)
You can't calculate exactly how much MS is losing based on retail pricing of individual parts. If you think they are paying what some analyst asking for a quote would pay, you gotta be nuts. The reason those guys get such high salaries is because of how low they are able to negotiate the price.
Re:Selling The Hook (Score:2, Insightful)
Also, ink jet printers, very likely sold at a loss..
Re:Please don't say buy more.. (Score:3, Insightful)
You need to select better friends if that's the limits of their logic.
That's like overfeeding your enemy with your own supplies in the hope that they fatten up and die of a heart attack before your own troops starve to death.
Re:Selling The Hook (Score:5, Insightful)
Crazy, all of my cell phones have been sold to me at a loss so that I would buy the service.
Re:Don't calculate the loss from the retail price (Score:5, Insightful)
Same goes actually for things like low end laptops - their margins can also be as low as 5%, and the real deal is the extras - carry cases, mouses, external hard disks, headphones, additional software, blank CDs, extended warranties... whatever the salesdroid can manage to pile up on top of the actual computer sale.
The good salesdroids are the ones who can jedi mind trick you into spending few hundred bucks on top of the item you wanted, and that way drag up the total profit to the retailer from that 3-5% range to 20-30% (or more). Best ones can actually predict what your real needs are based on few probing questions, and actually make you want all that stuff he's peddling to bump up the profit margin.
Master salesdroids have mad l33t jedi mind trick skillz. Poor ones come off as rabid dogs who refuse to let go even when you spell out in gory detail why you don't want anything else.
Re:Current Prices (Score:5, Insightful)
Not really. Sony was able to drive down the cost of their console because it owned all of the pieces and could integrate them. However, with the original XBox the manufacturing costs basically stayed level over the entire life of the console. Microsoft still loses over a hundred bucks when it sells an original XBox today. Microsoft's problem with the original XBox was that it specced what were basically commodity parts when it launched. It chose the least expensive hard drive that it could find, a processor that was already in the sweet spot for price/performance, and a graphics chipset that was made by a competitor of its processor. No integration was possible, and the only component that hadn't had all of the profit squeezed out of it was the memory. While it is certainly true that these components get cheaper over time, there is a floor price below which the price doesn't drop. That's why newer XBoxes come with larger hard drives than the original run of XBoxes. Microsoft would happily purchase 8G hard drives if someone was offering them at a lower price than 20G hard drives, but no one is. Likewise Intel is still charging almost the same price for the XBox processors that it did when the XBox first came out. Microsoft's XBox bought Microsoft a spot at the table, but it did so because Microsoft was willing to give away billions in hardware. The XBox has lost nearly 3 billion dollars over its lifetime, and it is still losing money.
It appears that this time Microsoft has essentially made the same mistake with the 360. It's possible that IBM's Cell processors will drop dramatically in price over their lifetime, but both Sony and Nintendo will also be using variants of the same chip (and Sony owns enough of the technology that it will probably benefit most). You can guarantee that if Microsoft comes close to making a profit that Nintendo and Sony will simply undercut them. Microsoft has also tied a great deal of the functionality of the XBox to a hard drive, and the price on those is not likely to drop substantially over time.
Microsoft is giving away too much hardware yet again, and it is going to bite them.
Re:Current Prices (Score:2, Insightful)
Sony uses the Sony brand everywhere because of the brand recognition it provides, so when one part of Sony fucks up, all of Sony fucks up.
Re:Not Atari (Score:3, Insightful)
Re:Selling The Hook (Score:5, Insightful)
Speaking personally, and of several friends, bullshit. Weed, yes. Hallucinogens and E, possibly. H and coke, no way.
Re:Selling The Hook (Score:3, Insightful)
You can't measure the raw goods price (Score:5, Insightful)
When they are buying at volume from parts sellers, they could be getting quite a cut on the cost of components. I doubt that MS is about to reveal the actual cost of components too, though they might be happy to go along with the idea of "selling at high loss" to make the 360 look like more of a bargain.
Microsoft NEEDS to lose money....and here's why! (Score:4, Insightful)
In other words, Microsoft was basically told they needed to re-invest 50% of their cash hoard. So the Xbox gave them a strong "market" investment area. And allowed them to burn thru "investment capital" while at the same time building their portfolio. So when Microsoft loses $350 million a year on the Xbox. This is in fact not outside the scope. It is new market capitalization. And they can now point to such investment in order to avoid fines and legal lawsuits from the investment end.
While at the same time, they buttress their core division by ensuring that if home entertainment consoles become the new "home PCs" they have a strong footing in the game. So it was both a protective and expansive move in a multi-faceted levels.
I also imagine that the Xbox360 is going to do what many thought the original Xbox would (but never did). It's going to crossover. I expect in the third year you will see Microsoft offer a Keyboard, XIE browser, and Live accounts will include email and messenger compatibility with MSN Messenger. Oh...and possibly the following year if such is successful. Office lite....subscription service.
C'mon now... (Score:5, Insightful)
Developer costs have to be kept low so that people will produce for a given console in the first place- if you extract part of the costs of the console losses even slightly from the developers, they'll very probably skip the console in question and go to another one. It's as simple as that. As a developer, if I'm not going to see a return on a run that ends up producing at least a wash on sales, it's just not going to get done as I'm supposed to be in the business of making money. I have to pay per instance just to run on the damn thing so people can play my game. I have to pay for a developer station so I can test for deploy. I have to pay for a runtime engine or roll my own that'll run on it. And, so forth... All this adds up. The amount of money they "recoup" on developer fees alone is in the noise floor here. It doesn't do anything for their bottom line- it does, however, regulate who gets to provide games and the quality level though. It has to meet with Microsoft's final stamp of approval or it doesn't ship for X-Box/XB360 and you have to pony up some cash and pay a portion of your profits back to them to be able to run on it. That's a bar against any Joe Shmoe wannabe game developer from producing something for sale that makes their console(s) look bad.
Royalties is the only place they expect to really see a return on things at this point (No guarantees of production process improvements- and you'd better NOT be betting on that as that's counting chickens before they hatch...) so they need 13 titles to be sold per XB360 unit currently ever sold to begin see a profit. This means that in order to be profitable, they're going to have to stay the course for at least 2-3 years at minimum to start seeing profits on this mess.
Production process improvements come over time, typically somewhere between 1-3 years of production. Sometimes within 6 months, but usually it's 12-18 months into it that you start really seeing anything out of that. And that's if you've designed everything right. Sometimes you get a design that won't see benefits from production improvements for years. You can't bet on that sort of thing unless you've designed them in from the start and they're more due to volume than device improvements when you run that play. At $400+ per unit, any volume discounts will also be in the noise floor for some time to come as they're already seeing those discounts with what they're producing in the first place.
The numbers being high? Not really. These prices I'm seeing in the article are conservative, as in being close to what they're probably seeing in costs.
Re:Sony (Score:2, Insightful)
Sony are better at it. They also can tap into their own Consumer Electronics units and distribution channels to minimize development, manufacturing and distribution costs. Microsoft is a software company at the core trying to sell hardware. They never seem able to make any money at that, which brings to mind the phrase 'stick with your core competency'
They're trying to carve out the Home Entertainment market, but it's crystal clear they just don't understand it. Home Entertaiment electronics are disposable.
Re:gamers are not loyal (Score:3, Insightful)
All it takes is a newer, flashier game and gamers will drop expensive consoles like a handfull of molten lead and run to the console which it plays on.
This should be evident to anyone who has observed gamers, over the past decade, who would spend over $2,000 to have the ultimate PC to play Doom or something like it on. They don't care about the box, they care about the game. Many gamers have more than one console, which I think further underscores the point.
Re:Selling The Hook (Score:3, Insightful)
Re:Selling The Hook (Score:4, Insightful)
No. The market already exists. This is the cost of doing things the Microsoft way - push your way into an established market because you have billions of dollars to cover the losses.
Re:Selling The Hook (Score:2, Insightful)
This can be microsoft's only goal. Without fans willing to do your marketing for you, they would be doomed to the fate of sega, 3d0, atari, and the other companies that tried to break into the console market. Sega helped CREATE the market, but sony stole the fans with the playstation, and kept them even when the superior dreamcast came out. If sony stopped making consoles right now, games for the playstation 2 would continue to be released for years, simply because the sony fans out there would refuse to accept something made by anyone other than sony could be worth playing.
Loss is much higher than $126 (Score:4, Insightful)
There may be more to this, though. We can't tell yet if the reports of 360's having problems is a general issue, or if it is just the result of a few really vocal complainers. If there are actual design problems, the cost goes up yet again. If they're really bad, the console could falter in the marketplace (no one really wants to fight with overheating or random crashing.) If that happens, the opportunity to recoup costs with games is in trouble too.
Funny. A couple of days ago, I was musing to myself that Sony's DRM idiocy might actually affect the viability of the PS3 if Sony manages to reach the status of corporate pariah and the public holds them to it. Now I wonder if Microsoft has managed to give them back an opportunity by missing the reliability mark. Interesting times. :-)
Re:Selling The Hook (Score:5, Insightful)
All they have to do here is to eventually get enough developer mindshare (and not just for games, but for the general home uses as a 'digital entertainment hub') to squeeze Sony out of the market as a serious player. Then, they can do what they want at the price they want because they own the mainstream market, and they've got the same level of control over the home entertainment market as they have the desktop OS marktet. It's not like they even have to necessarily deliver, there's been enough cases of innovative companies being stopped by the word getting out that MS might come into the market eventually.
Look what they've done elsewhere. They'll work really hard to stop someone else getting a big market, then slow down hugely when the competition is gone. IE being a prime example.
The difference here is that I can't think of another occasion when they've been against an opponent as big as Sony. Question is, will Sony consider the PlayStation division important enough to underwrite the losses of the fight? If not, MS have got the market.
Re:Selling The Hook (Score:1, Insightful)
Gamers are almost as loyal as Linux geeks.
Re:numbers suspect (Score:5, Insightful)
Same thing with the DVD ROM drives. Microsoft is paying for the drives in bulk with no special enclosures (because they're using their own), no burning features, no packaging, no driver disks, and no manuals. They should be able to get quality components for $10 easy. $5 if they're cheap.
This entire "analysis" smacks of someone attempting to apply retail prices to bulk hardware.
Re:Selling The Hook (Score:3, Insightful)
For any game publisher, on any platform, there's only a few games that are truly profitable and those cover the costs of publishing all of the other games in their list. Are all game publishers evil because they lose money entering new niches in the game market?
Re:Sony (Score:3, Insightful)
Re:Actually (Score:4, Insightful)
The story's analysis seemed pretty good. There are companies out there who make their living estimating the cost of products. M-L isn't one of them.
Razors and blades model (Score:1, Insightful)
They need to establish a base. That's key. But, how many people are willing to buy a 400 dollar appliance in their living room? That's when microsoft marketing department comes in and surrounds it with 'hype'.
Selling hardware under the cost of manufacturering is a new concept. No, Nintendo did not do this ever. Sony did not either for the PS1 or PS2. Microsoft really wants to get in the market.
Consolidation of comments (Score:2, Insightful)
Re:Selling The Hook (Score:5, Insightful)
Speaking personally, and of several friends, bullshit. Weed, yes. Hallucinogens and E, possibly. H and coke, no way.
I kind of second this idea... I've learned that there are lots of different drugs, and it's silly to try and generalize about them in the "drugs are bad, mmmkay" style. I mean, look at the legal drugs caffeine, alcohol and nicotine. They have wildly different effects on people, and accordingly they are used in very different situations for very different reasons.
I sort of agree with the parent that hallucinogens are somewhat 'safer' and 'better' than the other kinds of illegal drugs, but even that kind of generalization can be badly misleading.
Not fact (Score:3, Insightful)
Re:Selling The Hook (Score:2, Insightful)
Not being successful in completing the crime does not absolve you from the conspiracy.
The ends does not justify the means.
Re:Loss is much higher than $126 (Score:3, Insightful)
are they daydreaming or just drunk over there ? microsoft doesnt pay anyone 21$ for a dvd-rom, the raw price for the item is under 10$ , microsoft will get it with around 10. the same logic applies for most of the components there. ati gives em a special deal and all the others.
power supply, cables, and controllers -- add another $55 the producer is lucky if he gets 10-15$ for these.
amounts count, being microsoft counts too
bill gates may be a hated man, but he is not a total moron (otherwise how would we classify the majority of the world who made the moron a billionaire ? army of utter morons ?). he won't sell anything with a financial loss, he may sell it to come out around zero profit for selling, but he won't let it cut his pockets. ofcourse most of it's profit will come later from the game licences.
imho xbox is overpriced from every angle. it's cheap appearance is just a mirage, once you realize what you could have for the same money it's probably too late
Re:Selling The Hook (Score:2, Insightful)
Re:gamers are not loyal (Score:2, Insightful)
Re:It paid off enormously. (Score:3, Insightful)
Well, to be fair, 'solid second' might be a little generous. They are a little ahead of Nintendo in shipped units, and several dozen million behind the PS2. IIRC the number of PS2s in the world is over 100 million; contrast with something like 30 mil Xboxen and 28 mil Gamecubes. So yes, they are 2nd, but they paid a pretty hefty price for it (Xbox division lost oodles of money). Nintendo did not lose money and they are just a hair behind.
Re:gamers are not loyal (Score:3, Insightful)
Firstly:
The reason consoles sell so well is that they appeal many people who are NOT hardcore gamers. Flats of students now consider a console in the living room a must, much like the TV they plug into.
Secondly:
Are you saying that the majority of consoles sold are to "hardcore" gamers as opposed to casual players? I would seriously doubt this.
Re:Selling The Hook (Score:4, Insightful)
Is Microsoft only allowed to sell Operating Systems and Office Suites? For every $1 they spend they have to immediately make it back two times over? They're "investing" in a new market. It doesn't matter where the money comes from -- it is their money to spend. If they lose it all or make it back, it doesn't matter. It is their money, not yours.
Other companies are free to spend their money on whatever they want. Or they can get VC to give them money to spend.