Microsoft losing $126 on every sold Xbox 360?
by Blake Snow 
{ Nov 23rd 2005 at 6:00AM }
According to Business Week calculations, Microsoft could be losing up to $126 per Xbox 360 unit
sold, considering component discounts. An up-close look found that the system selling for $399 was valued at $525
before assembly, including accessories. No word on how much the core system is valued at.
Granted, that's a small price to pay for the intended high market share, but you gotta believe the software giant
doesn't want another $4 billion in losses this go
around.
[Thanks, bandersnatch]
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Reader Comments (Page 1 of 1)
Osiris @ Dec 18th 2005 9:02PM
No wonder theres so few at launch, they cant afford to lose that much...
rico @ Dec 18th 2005 9:02PM
big deal when the ps3 comes out sony will be making an even bigger loss than that lol
Iceduck @ Dec 18th 2005 9:02PM
How much are they making per title in license fees? The casual gamers that they're targeting is probably only buying 5-10 games per year...
Nico @ Dec 18th 2005 9:02PM
"big deal when the ps3 comes out sony will be making an even bigger loss than that lol"
Shut up and stop talking out of your ignorant ass please. Sony will sell at a bigger loss but if Bluray succeeds Sony will earn royalties on ANY Blueray product sold including movies, software, anything. You obviously do not have any buisness training.
Its a big deal for MS because they only earn money on games, hence they need to cut their losses. Do you understand?
xbox360-forums.com @ Dec 18th 2005 9:02PM
Anyone got any information as to how it compares to previous console launches, i.e. the ps2 and the xbox? That would make an interesting comparison.
Jeremy Wright @ Dec 18th 2005 9:02PM
Nico: Sorry, but if Sony's losing 300$+/console, and they try and sell 10M consoles, that is simply a loss Sony Corp can't take right now (seen their latest financials?).
I'm not bashing the PS3, but the reality is that 125$ loss on a console isn't much, especially as the cost of parts will drop through the floor.
They were losing similar amounts on the original Xbox, and they now make a profit on it.
Zach @ Dec 18th 2005 9:02PM
The big question will be how much of a loss can Sony feasibly handle given their recent string of failed product initiatives. If the PS3 is gonna cost $600 a piece to produce, can they afford to sell 10 million by Holiday 2006 at a $200 loss per console? That's a $2bn loss, and that level would just catch them up to the 360's anticipated level of market penetration.
Sure Sony is a huge company, but they've got a lot of divisions and the Playstation division is their most reliable profit source. They can handle the losses, but they're going to be hurting themselves substantially. Especially now that they're not market leaders in the television or audio markets anymore.
This is going to be a very rough year for Sony. I'd recommend selling your Sony stock and rebuying it when it bottoms out in Jan. 2007. The PS3 is going to do very well, but Sony's gonna be hemorrhaging money for a long time to get it where it needs to be.
Competition is good. Especially for us, the gamers. We essentially come out of this with over $300 worth of free high-end electronics.
Steve @ Dec 18th 2005 9:02PM
Hmm, not so sure I believe some of the figures reported in this story, in particular the cost for the CPU and GPU's. I just don't see how iSuppli know for certain how much MS is being charged by IBM and Ati respectivley for these parts.
As an estimate its useful, but I wouldn't take it as gospel truth. Just as an example, they quote a Seagate 20Gb 2.5" Hard drive at $53. Now if I head on-line I can pick up a 40gb drive for $75 for a single unit. 20gb units, while a bit harder to find, come in around $55 - $65. While I'm sure that $53 is the trade price I just don't believe that, even including the plastic shell and interface, MS is paying this sort of money per drive considering just how many units they must be buying.
I don't know, maybe I'm just being cynical, but there's something about this analysis that doesn't feel right somehow...
Monmin @ Dec 18th 2005 9:02PM
If 360 costs $525 then I wonder how much the ps3 will cost. It's got bluray, extra usb ports, built-in wireless, 2 hdmi ports, cell processor, and whatever else I'm forgetting.
All that stuff adds up. My wild guess is maybe $650. They can sell it for 500 maybe next year. However MS may reduce the price of the 360 at that time.
Also, x360 will have many more games available, and Sony may have an initial shortage of units similar to 360 right now.
If 360 gets a good handful of killer games in the next year, there is a possibility PS3 might lose some of its marketshare this time around.
I am really curious to see how all this will play out.
Nico @ Dec 18th 2005 9:02PM
#6 Jeremy Wright
"Sorry, but if Sony's losing 300$+/console, and they try and sell 10M consoles, that is simply a loss Sony Corp can't take right now (seen their latest financials?)."
Yes i know Sony is in hard times. Also 300$+ loss on the PS3 is not likely, i would estimate around 200$ loss(guessing).
But your missing the big picture here. The PS3 is in Sonys eyes a Blueray trojan horse. That means that the PS3 is a way to force Blueray into the livingrooms. Blueray is a much more lukerative deal for Sony than the PS3.
Therefore if Blueray succeeds Sony gets payd, alot more than sales of successfull games and consoles would pay.
This is the reason MS would not put Blueray into the 360, even though it needs a next-gen disc drive.
b @ Dec 18th 2005 9:02PM
What I find very amusing about some of these comments is the fact that up until very recently many of you were using the price of $494 some analyst came up with as the manufacturing cost of the PS3 as why it would never be in the $300-$400 range. Now all of the sudden you are coming up with Sony will lose $300 per console.
eric @ Dec 18th 2005 9:02PM
Sony didn't really succeed with MiniDisc as the sucessor to the CD, they didn't succeed with ATRAC replacing MP3, nor with BETAMAX replacing VHS.
It'll take years to replace DVD.
Hank @ Dec 18th 2005 9:02PM
That's only the initial loss, and it does not take into account any of the significant discounts Microsoft would be getting for buying MILLIONS of each componet. Microsoft may very well be making money on the systems, at least taking a much smaller loss.
bsc @ Dec 18th 2005 9:02PM
so if they sell 3m consoles by February, they rack up a portly 400m deficit on hardware. good stuff
the_game_master @ Dec 18th 2005 9:02PM
Since when did it matter as to how much it cost a manufacture to produce a game system. Who gives a crap as long as when the system is completed that it is sold at a competive price. In history we know that videogame systems that sold over the magical price line of $400 dollars had tanked. Don't believe me then look up 3DO and SNK's Neo Geo, two companies that probably weren't trying to rip you off but maybe were trying to sell their game units at the actual price that it cost for them to make it. Only thing is that the average video gamer dont have that much cash to just blow away on a game system. I suspect the PlayStation 3 to be priced competively against the Xbox 360 and the Nintendo Revolution and hopefully they do it at a retail value of $299.99. I hope Sony does not adopt M$ dumb trend of releasign the system in two versions i.e. like a core unit and a premium, any person knows this is just a way for a company to pawn more money of you, and any PC user should know this is how Microsoft's strategy been for a decade with selling multiple products that do basically the same thing look at there operating systems Windows 95, Windows 98, Windows 98 SE, Windows Me, Windows 2000, Windows XP Home, Windows XP Pro, and soon Windows Vista Starter and Pro edition all do the same get you connected to the internet. It doesn't stop there look at their Office suite products, Office 97/2000/XP/2003/coming soon Office 12. you get the picture, Microsoft is banking on your pocket book and your stupidity.
Jeremy Wright @ Dec 18th 2005 9:02PM
Nico: And the Xbox is a loss-leader for Microsoft in commanding the living room. What's the difference?
For Microsoft, the 360 is pivotal. Every 360 is a media center extender. Every Vista box will be a media center. So, every home that has both will be getting a FREE DVR.
Sounds to me like MS's strategy is to grow Vista, grow hardware, grow services.
Which is a much larger winning proposition than the 10$/drive sony'll make off of their drive technology licensing (even if Sony sold a billion drives a year).
And, b: Considering most of MS's parts are pretty off she shel, and Sony's are almost all custom, I see now reason not to assume that the PS3 won't cost significantly more than the Xbox in terms of production costs.
That said, like other posts, I'm not entirely convinced of the numbers posted.
Either way, though, it's clear that both companies are making larger plays beyond the console (with their console). And, either way, as a user I don't really care how much each company loses. As long as the system I eventually buy (still not 100% convinced which one to get) works, has great games and has great online I'll be happy. Beyond that, leave it to the analysts ;-)
Jeremy Wright @ Dec 18th 2005 9:02PM
I'm not even going to comment on the stupidity at the end of #14. Oh, wait, damn it!!!
Special Edition @ Dec 18th 2005 9:02PM
"But your missing the big picture here. The PS3 is in Sonys eyes a Blueray trojan horse. That means that the PS3 is a way to force Blueray into the livingrooms. Blueray is a much more lukerative deal for Sony than the PS3."
There's a couple of factors to consider:
While the PS2 was a cheap DVD player at the time of release, there were also DVD titles on the market at the time, and DVD represented a HUGE improvement over VHS. DVD also offered additional content.
To date, there are no Blu-Ray titles on the market, the only real perceived improvement will be HD, and most people still do not have HD. So what is the benefit to those that do not have HD?
The cost of the PS3 is unknown. Anything above $399 and they're going to have trouble.
At the time the PS2 was introduced, there was no real competition- Sega was rapid losing market share. This time it's a little different. Not only do you have Nintendo with something a little more 'revolutionary' you also have Microsoft nipping at your heels. So PS3 sales may not necessarily be as strong this time around as they have in the past.
Chances are, most PS3 buyers will be gamers. So your initial Blu-Ray market is really going to be them.
If HD DVD is released, it's going to confuse the market. If there is any price difference in movies between HD DVD and Blu-Ray, that is going to be a factor.
DVD was perhaps the most sold movie format in history. A lot of people probably won't buy the same movies again, especially if the Blu-Ray player supports backwards compatibility. DVD won't disappear overnight.
You keep mention licensing fees to Sony. I have to believe the movie studios are consciously aware Sony owns Sony pictures (Colubmia), TriStar, and now MGM. They're not going to want to purposely enrich Sony. Sony needs the other movie studios if Blu-Ray is going to be successful. Most likely, Sony will have to make concessions.
If Blu-Ray doesn't take off, Sony is in a world of hurt.
elliothtz @ Dec 18th 2005 9:02PM
Don't forget that many of the parts have been commissioned by Microsoft from IBM and others so that they have the option to move component production from plant to plant freely. This will allow them to control costs down the road.
Previously they were just using off the shelf processors.
However there are currently only 2 factories that produce the IBM chips. If one of them should have any problems, production will most likely suffer.
Huge Cocks @ Dec 18th 2005 9:02PM
"Posted Nov 23, 2005, 7:43 AM ET by Nico
Therefore if Blueray succeeds Sony gets payd, alot more than sales of successfull games and consoles would pay.
This is the reason MS would not put Blueray into the 360, even though it needs a next-gen disc drive."
The reason MS didn't put Blu-ray drive in 360 was because they don't exist yet.
Don't you remember that quote from the IBM guy explaining why they went with HD-DVD?
At the moment HD-DVD has a larger capacity that Blu-ray. The figures of 60Gb storage are plain speculation, such a Blu-ray disc doesn't exist, not even in a laboratory. That's what he said.
Sure, you can make a four, maybe even five layered DVD too if you want, but it's expensive as hell and friggin hard to produce.
Blu-ray is expensive, it's still only a concept, and sony refudes to commit to allowing the users to copy their discs AT ALL, unlike HD-DVD. Not a surprise looking at their latest attempts at DRM.
Plus, unless your TV can read Blu-ray content protection code, the signal will be hampered.
The only discs that have a true next gen picture quality are the ones that have a sony stamp in the signal. That doesn't include your self burnt discs, such as homevideos.
Again, not a surprise seeing how sony's DRM made sure you couldn't burn cd's that didn't have DRM.
A Blu-ray disc with a larger capacity that HD-DVD is only a technical possibility. That kind of disc will be ridiculously expensive to make (estimates at 15-20$ per disc). Now add to that the price of the movie on the disc and you have the sole reason why Blu-ray will have just as big a capacity as HD-DVD, only with worse rights for the consumer.
Zo @ Dec 18th 2005 9:02PM
A few notes:
- PCMag and eWeek have reported that Sony has been in talks with Microsoft and Intel about changes to Blu-ray that would make them switch to the Blu-ray camp and the report says there was progress made so everyone may be Blu-ray by next year.
- The loss will mean nothing provided they sell enough units at the current price to hit a break even point and then they will make money for every unit after that.
- Nobody is figuring in promotion costs which factor into both company profits
- Games have to be higher in price and will continue to go up because if people want the "next-gen" experience than they will need more time/people for development and I am sure that Microsoft/Sony will ask more for licensing to keep up with the hardware -- nobody not even Microsoft can keep running a business that does not make money at some point.
- Just like eveything else, game development is going to start getting outsourced to India and China so can't wait to see how that all works
- Blu-ray movies may also cost more because they will require more work. Is everyone willing to pay 30-$35 bucks to see Ground Hog Day in Blu-ray?
Andrew Fong @ Dec 18th 2005 9:02PM
I think the 360 and PS3 will be quite comparable in costs actually. The Bluray player will add $50 to $100 more to the cost of a PS3 than if they suck with DVD, but at the same time, the PS3 may not come with a hard-drive, which also costs about $50. There are the additional costs of extra USB ports, more wireless, etc., but these costs are minimal. Maybe $50 more than the 360--but then again, can Sony afford that?
Personally, I think the Blu-Ray drive is out there to drive sales as much as increase profits for its Blu-ray related business. But In Japan, a $400 BluRay player would be huge. But then again no one really expects MS to have good penetration in that market anyway. The test is to see how Europe and and the U.S. react.
Nico @ Dec 18th 2005 9:02PM
#19 Huge Cocks
"The reason MS didn't put Blu-ray drive in 360 was because they don't exist yet."
Not true. You can buy them in Japan.
Source: http://www.blu-ray.com/faq/#1.11
"and sony refudes to commit to allowing the users to copy their discs AT ALL,"
Not true. Blu-ray includes MMC witch allows users to copy their discs.
"The Blu-ray Disc Association (BDA) today confirmed that Mandatory Managed Copy (MMC), which allows users to legally copy discs and transfer the digital files over a home network, will be supported by the Blu-ray Disc format."
Source:http://www.blu-ray.com/
"The figures of 60Gb storage are plain speculation, such a Blu-ray disc doesn't exist, not even in a laboratory."
Again not true.
A single-layer disc can fit 23.3GB, 25GB or 27GB.
A dual-layer disc can fit 46.6GB, 50GB or 54GB.
Source: http://www.blu-ray.com/faq/#1.5
With so many factual errors in your post and such a nice name how am i supposed to take you seriously?
#17 Special Edition
"Chances are, most PS3 buyers will be gamers. So your initial Blu-Ray market is really going to be them."
I disagree here. While most buyers will be gamers there will also be a expanding demand from HDTV owners who wants a HD player. IMO the PS3 will act alot as a Media Center as well as a game console.
"If Blu-Ray doesn't take off, Sony is in a world of hurt."
I agree.
Steve @ Dec 18th 2005 9:02PM
On the Blu-Ray debate, there's one other factor that needs to be taken into account. When the PS2 came out and acted as a cheap (the cheapest?) DVD player available virtually everyone already had a TV that could use it, whether via composite, S-video or Scart connections.
It's my understanding that Hi-Def movies, whether on Blu-Ray or HD-DVD, will not play over anything other than HDMI connections (at least, they won't play in Hi-Def). If that's true then the limiting factor in the acceptance of any high-def movie format will not be the availability of players but the availability of suitable screens. Certainly in the UK HDMI has yet to really take off and while most new LCD and Plasma sets do have the necessary socket the vast majority of the existing user base do not.
High-Def movies will almost certainly gain popularity over the coming years as TV's are replaced but I would be very surprised to see a rapid switch to any new format within the next few years purely for this reason. As such I'd be surprised if anyone outside of the geek / gadget-obsessed crowd would place a great deal of value on the PS3 as a Blu-Ray device for quite some time to come.
Nothing to support that opinion of course, just gut feeling ;-)
Nodnetni @ Dec 18th 2005 9:02PM
for you people compairning how much the two are going to lose http://www.next-gen.biz/index.php?option=com_content&task=view&id=1497&Itemid=2
as for that, you the story above isn't correct. Because you have to figure that M$ isn't getting all 299 and 399, The stores get a decent chunk of that, plus there is shipping. They will both be losing a lot.
Scott @ Dec 18th 2005 9:02PM
The difference between the 360 and the Xbox is that MS has better control over the costs of the 360 than they did over the original Xbox. We'll have to wait and see how this pays off for them down the road but I read somewhere else that they are already planning on going from .90nm to .65nm in the next year. That die shrink will be a big cost savings.
rico @ Dec 18th 2005 9:02PM
yes Nico i understand you do suck cock
MrP @ Dec 18th 2005 9:02PM
There's one thing that keeps being left out of the discussion here, which I think deserves mentioning... And that's X-box Live. Even if the consoles come with a pre-paid Live subscription for a certain time period (a year, was it?), once that subscription is up, they're going to have a pretty big cash cow on their hands. Live's so integrated into the system that being without it is, Microsoft probably hopes, going to be like giving up half of your 360. I don't know how much it costs to run that service, but I seriously doubt they're running it without a profit.
LaughingTarget @ Dec 18th 2005 9:02PM
Need to realize something, $4 billion loss for Microsoft really isn't very high. That is what they were making in profits DURING the Xbox run. Not a huge deal for them. Gotta remember, this is the same company that can fire off a $36 billion dividend payment and not feel the pinch at all. This is a good gamble for them. Safe and likely profitable in the long run. Microsoft isn't going to bail on this because they are a company that needs some diversification right now, and the 360 stands to do what they wanted with it.
Console marekets are very hard to penetrate, so the large loss is expected, and Microsoft is doing a fine job getting into the playing field.
PJ @ Dec 18th 2005 9:02PM
Zo,
Do you have links for the PCMag and eWeek stories?
tom @ Dec 18th 2005 9:02PM
Well if the figures are correct, then fair enough, but there's alot of things going unsaid, the numbers quoted are just the raw parts so doesn't factor in overheads involved, such as the cost of running the factories that make them, paying the workers, shipping, promotion etc. so overall loss per unit is alot more..
but ms will be buying in bulk and no doubt has negotiated substantial discounts on the parts it needs..
because the figures quoted are just for the parts involved then saying they make money for each console after a "break-even" number of sales is nonsense, if the parts involved cost $2 and you sell for $1 you lose money whatever your overheads are, ie. your gross profit is negative.. the only way to eventually make money is if the manufacturing cost is lower than your selling points. Basically you need a positive GP per unit, so eventually when you've sold enough you offset your overheads and start to make a net profit..
by the time either company has sold 10m the costs involved in manufacturing (both raw parts and overheads) will have declined, so its wrong to say the loss continues at the same rate it exists now..
I'd be interested if the bottleneck in ms speed of manufacture is parts availability or factory/worker availability..
Thryon @ Dec 18th 2005 9:02PM
Microsoft can take the loss. The money is not in games, even MS recognizes that. The games are just bait for you to buy the unit. The real money is in XBOX Live. Do you think that movie studios and record companies actualy get to post downloads for free. If MS spends $5 million doing Halo 3, but then only spends a few hundred thousand to create a new level, weapon, armour etc...then sell it for $1-5, multiply that by 1-2 million buyers, and you have a cash cow of pure profit. Now need I remind you that XBOX Live is free (silver) for all XBOX 360 users. Heck even I purchased a few MS Points to get Geometry Wars Retro. I would have never gotten this game if not for XBOX Live. Microsoft will make a killing this time.
Cyberblade @ Dec 18th 2005 9:02PM
It's microsoft. Need anymore be said about money? Bill Gates has money out the wazoo and other places. A small loss to gain market share is nothing for Microsoft seeing as they make a fortune on everything else they've got. Windows being their biggest draw in. Most home computers have Windows, and god knows the discs it comes on is cheap as heck to make.
JulioC @ Dec 18th 2005 9:02PM
Nope. Sony doesnt loose squat. And Sony has 30 billion while MS has 14 billion, so please all of you, Sony might suck, but its bigger.
The whole loosing money on consoles is nothing but marketing talk and myth, till the Xbox came along and really lost $
http://www.actsofgord.com/Proclamations/chapter02.html
Sony produces most of its intenal components, it owns all of the pieces and integrates them (PS1 and 2 had almost no non-Sony components outside the processor and emotion chip), and Nintendo has lots of experience in making some components and getting their consoles done cheaply (Gamcube is as powerfull as the Xbox, yet chep)
MS had to buy its parts. 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 (and a big slice of the market), 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.
Now the 360... 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. Lucky for them Sony's not playing its cards right and Nintendo is happy just making a profit and not having to put their conoles production into overtime, that allows them to concentrate on the handheld market where they sell more DS and gameboys monthly than any console/handheld comibined.
Key 5 @ Dec 18th 2005 9:02PM
>
I'm not sure where you got the numbers, but they're a little off.
According to Yahoo Finance (as of Nov 5, 2005):
Enterprise Value
Microsoft's value is $257.04 billion
Sony's value is $37.95 billion
Profit
Microsoft has 33.59 billion gross profit
on revenue of 40.34 billion
Sony has 15.60 billion gross profit
on revenue of 61.87 billion
Profit Margin
Microsoft's profit margin is 31.90%
Sony's profit margin is 1.88%
Total Cash
available to Microsoft is $40.06 billion.
available to Sony is $2.9 billion.
Sony is a large corporation, but Microsoft is larger.
nic @ Dec 18th 2005 9:02PM
I read the article and it got me thinking, if the parts in the 360 cost Microsoft an estimated $525 for a retail item sold for $399, or $126 difference, then the cost of the PS3 is easily over $525, as it includes a more expensive processor (Cell), drive (Blu-Ray), and components (such as 2 HDMI ports, Bluetooth, etc).
It's be interesting when Sony announces pricing of the unit and figure out how much of a loss they're willing to accept per console. It'll easily be years before they recoup any costs.
Sony is in an unfortunate position right now. They HAVE to be successful with the PS3. The game division is basically supporting the rest of the company. Without the game division, the other divisions are going to have to achieve some greater level of success.