Xbox 360 price cut vs. cost reduction
by Kevin Kelly 
{ Nov 27th 2006 at 3:30PM }
The San Jose Mercury News has posted an interview with Robbie Bach, President of Microsoft's Entertainment and Devices Division (a title alone that speaks volumes about the structural problems at MS), that has some interesting tidbits in it. Most notable is when Bach says, "Right now we are thinking about how to cost reduce the Xbox 360. That seems to be the first order of business."
It has been rumored for some time now that the Xbox 360 would see a price cut around the holidays, but now that Black Friday and the PlayStation 3 launch have come and gone, you can kiss that one goodbye. What Bach is talking about here is that Microsoft wants to drop the production cost of the 360, in an effort to make it profitable. There's a big difference between cost-reducing and price-cutting. When a manufacturer costs reduces, they're making it cheaper for them to produce something, usually by switching to different vendors or using cheaper materials.
Microsoft promised that they would cost-reduce the Xbox 360 every year, which they've already done this year. The console was rumored to cost Microsoft between $525 and $715 for each unit produced, vs. the current production price of around $329, giving MS a chance to make a small profit on each premium system sold. As they find more cost-reduction options over the next year, that gap should widen. The only time we'll see a price drop on the console itself is either when the PS3 drops theirs, or when the Xbox 720 II Virtual Gameulator comes out. Of course, you can always take Micro Center's deal and get $100 off, your choice.
Microsoft has repeatedly said that the Xbox division won't turn a profit until 2008, although Bach dances around that with statements like, "Xbox is on the trajectory we thought it would be on. We feel very good about that." There's a difference between a good feeling and black ink, though. It will be interesting to see how Microsoft not only plans to compete with Sony not only in numbers of consoles sold, but where the profits are coming from.
If Microsoft really wants to make a profit, they might think about buying stock in companies that sell red pens if they keep releasing things like the Zune.
Reader Comments (Page 1 of 1)
BlindsideDork @ Nov 27th 2006 3:40PM
People should be wary with this cost reduction and hoping it is just vendors and not cheap vendors (judging by the amount of system failures that have occurred in the past!).
But I won't forsee the 360 making a profit anytime soon. I mean they made ZERO profit and LOST money on the XBox, what makes them think that the more expensive 360 will be different?
John @ Nov 27th 2006 4:53PM
on one hand ive already got one lol!
but on the other hand the sooner the console itself becomes profitable the sooner we may see things like web browsers, more video and audio codecs and the ability to configure the keyboard and mouse as a controller for fps's (lots of hints at microsoft)! lol!
http://www.petitiononline.com/ps3/petition.html
redgopher @ Nov 27th 2006 3:44PM
Cost reducing the 360. How about fixing it? I'm sending in my second 360 for repair. Hopefully the third one they send me will actually work instead of freeze every five minutes and flash the 3 red lights of death. Assholes.
blamecanada @ Nov 27th 2006 3:48PM
They could very easily make money on the 360. A consoles lifespan is around 5-6 years, and if the console itself becomes profitable after the first year, the company stands to make a profit off it. The original xbox wasn't designed in a way that would make it cheaper over time, and that is why is lost so much money. The original xbox was not intended to make money (crazy as it sounds). Its sole purpose was to establish the brand in the VG market in order to allow a console like the 360 to come out and eventually make money. It might be awhile before the entire xbox division nets MS some cash (they'll need to make about 5 billion to cover losses)but the video game market is a large one and if Sony keeps dropping the ball with the PS3 MS stands to do quite well.
I also don't get your Zune reference. Its success cannot be measured a mere week after its launch.
Paul P. @ Nov 27th 2006 3:57PM
What's wrong with the Zune? I saw it in a store and it looks pretty cool.
Player1 @ Nov 27th 2006 3:59PM
I agree that they need to make a better console to cut costs. Mine died yesterday after having it for 10 months. They won't just be losing money on one console for me, it will be two. Stupid ring of death.
RHP @ Nov 27th 2006 4:04PM
I think the Xbox has managed to increase revenue and certainly game software sales. It's all really about the software. To achieve profitability on the hardware is a nice, but I'm sure it's not their primary focus to be a hardware vendor.
To futher reduce the cost of making the Xbox was inevitable. Most other companies pursue this practice over the lifetime of any product.
As far as the Zune is concerned, it's too early to tell. Unless it somehow better integrates with the 360, I don't see the Zune being that desirable.
John @ Nov 27th 2006 4:53PM
i also had the ring of death problem, and got mine replaced
hopefully this one lasts, im not sure coz i havnt been using it much recently
got a 13" sdtv atm and waiting til xmas wen i get my big fuck off monitor, the wifi adaptor and loads of games, then il get in2 the 360 lol!
http://www.petitiononline.com/ps3/petition.html
Emceay @ Nov 27th 2006 4:32PM
"they might think about buying stock in companies that sell red pens if they keep releasing things like the Zune."
The zing of the day~
AG @ Nov 27th 2006 4:39PM
It seems quite a lot of Xbox 360 owners have issues with it breaking after reading lots of comments here and a few other gaming sites. It appears they are sacrificing the quality to save a few bucks.
Just another reason why I won't get a Xbox 360 and will be buying a PS3 next year.
Jason @ Nov 28th 2006 11:45PM
"What's wrong with the Zune? I saw it in a store and it looks pretty cool."
Yes, but it doesn't have an Apple logo on it, so it won't sell well. MS will be competing with a lot of vendors over a relatively small market, so the chance of it turning a profit is small. The change of it toppling the iPod is even smaller.
Anyway, cost reduction is good for consumers anyway. The less it costs to make, the more likely MS is to reduce the price since it won't put them further into the red by doing so.
Joe Smith @ Nov 27th 2006 4:58PM
People said all the same things about Sony when they entered with the Playstation in the 90's. Microsoft learned all Sony's lessons form PS2 on 360 -- and Sony seems to have made all of Xbox's first generation mistakes with the PS3. IF I had to bet on one company or the other I would bet on the one with the deepest pockets -- and that sure as heck isn't Sony.
kam-RA @ Nov 27th 2006 6:10PM
my x360 has been repaired 3 times now due to the 3 red lights ring of doom... while on the phone with xbox360 support. they had the audacity to tell me that in order for my console to be repaired again, I'd have to spend $140, not including shipping, because the paltry 3-month warranty had run it's short course since the previous "repair." I don't understand... does MS know what the word "repair" means. I'm inclined to sell my games and buy a Wii. Either that or wait for a class-action lawsuit against MS.
Hank @ Nov 27th 2006 6:41PM
It would seem that Microsoft will not be going no where any time soon. That's the problem that Dreamcast (money woes) faced when going head on with PS2.
With the 360 being out for over a yr. now, and being worldwide, lowering the price of the console is feasible at this point.
SuicideNinja @ Nov 27th 2006 5:36PM
"It appears they are sacrificing the quality to save a few bucks.
Just another reason why I won't get a Xbox 360 and will be buying a PS3 next year."
That's a matter of point of view. Keep in mind that Sony used crappy DVD lasers for 12 revisions of the PS2 (v13 is the first good one, and that's the 2nd model slim). That's why they lost the DRE class-action lawsuit. I've been through 4 PS2's with that problem., and fixed a dozen or so for others. Even my current PS2 has that problem, and I have already replaced the laser once.
Because of that, I have little faith that the PS3 will be any higher quality than the PS2. The PSOne was great...so I don't know what happened. If you want quality, get a Nintendo product (well...the Wii is breaking their high-quality streak....but at least they will do something about it)
My launch 360 works fine. It just needs to be plugged into a battery-backed UPS to ensure steady power, and not suffocated (just like a PC, and both of these should be done for the PS3 as well). Gamecube is flawless, PSOne, PS1, and original Xbox is still going strong as well.
Dave H @ Nov 27th 2006 5:53PM
I have had a 360 since launch. Never had an issue. I keep it in my basement hooked up to a UPS/AVR. Never gets above 60 degrees ambient.
If you go buy a $400 item, aren't you gonna treat it right?? The people out there who stuff thier 360's in a stereo cabinet are abusing thier products.
I mean imagine someone back in the 3dfx days crying about overheating thier video cards... geez
Xavier Gill @ Nov 27th 2006 5:59PM
When they say they expect the Xbox division to start making a profit in 2008 does that incluse the $4bn loss the original Xbox made, or do they just mean the 360?
If its just the 360 i have no doubt they will reach they're target as we see more and more microtransactions, even for content thats ALREADY on the disk. Anything thats ~108KB is just an unlocker for content you've already paid for.
bladestar @ Nov 27th 2006 8:17PM
For those complaining about their 360 dying here is what you should do. Call microsoft ask them to fix it.
Ofcourse unless your console is stolen or you voided your warranty trying to mod it.
2 months ago I send mine for repairs and I had to pay for it. If recall correcly it was $140.00. This last saturday I go a check from the mother *&^@#*$ Microsoft saying that my xbox 360 qualified for a free repair and with a nice big fat check! So, I didn't pay nada for my repair. After that I called and renew the ensurance for 2 years. I feel bad for you bi****s but you have a better chance of getting your console fix for free from microsoft than from Sony or Nintendo.
My 2 cents.
jojo29 @ Nov 28th 2006 8:05PM
"They could very easily make money on the 360. A consoles lifespan is around 5-6 years"
doh! i guess means the 360 wont make any money, they dropped the original xbox at 4 years. Regardless if it was meant to make money or not, that just doesnt sit well with me at their 'loyalty' to their fanbase. Once they see they're losing this generation as well, its ok for them to abandon their system? yup that sure show me that ms 'caters' to the gamers.
makesevenupyours @ Nov 27th 2006 7:38PM
so the zune might not overtake the ipod, but i have already seen more zunes at my highschool than i have of any individual NON-ipod mp3 players.
i have seen a couple of irivers, zen creatives, and a few others, but i have seen more zunes already.
and even if the product fails to bring in a profit due to those bitches at apple, it doesnt really affect me because im still getting one and its still a really great MP3 player. it may not have the success of the ipd, but thats DOESNT mean it is not a good product.
but we ARE talking about money and profits so i guess thats all irrelevent...or not. if they can keep the zuen a good product they could probably make a profit. microsoft has a LOT of money, and can spend a lot to make a great product and EVENTUALLY make a profit.
Jeramy @ Nov 27th 2006 8:44PM
on the zune thing, i actually don't think they're in too terrible of a position. a classmate of mine was saying he might get one, stating "yeah, it's got that song sharing thing which is pretty cool. even though it's only the three plays thing but... it's still pretty cool." or something to that effect. he is not an xboxer or a nerd at all. someone from his demographic showing interest in the zune has to be good news for microsoft.
and i feel terrible for everyone having to send 360's in. mine works perfectly and i lament that someone else must suffer so.
epobirs @ Nov 27th 2006 9:23PM
Judging from Bach's statements, I wouldn't say Microsoft is necessarily waiting for a PS3 price drop before responding in kind. It seems the greater is when Sony can deliver enough units for the PS3 to encroach on the next-gen marketshare Microsoft currently holds. If Sony is plagued with delivery issues for many more months, it would be premature to drop the Xbox 360 price while it enjoys good sales at a price that isn't inflicting pain on the company.
At some point Sony is going to get their production issues under control. It may not be until their 65nm version of the Cell and RSX are in production but it will eventually happen, as will higher volume delivery of the requisite blue lasers for the drive.
When that day comes it will then be the time to fore-go any profits from the base Xbox 360 hardware and reduce the price to sweeten the value of the product to consumers. It may even be desirable to start discounting the units below cost if Sony shows signs of advancing too rapidly. Either way, there is nothing to be gained from reacting in advance of necessity.
Of course, Microsoft's foundry partner is also underway with a 65nm version of the Xbox 360 chipset. This will cut a big chunk of production cost from the machine after the power and cooling sections are reeengineered for the new chips' lesser needs. So once the cost of developing the new chip versions is paid off, that is when a serious price cut on the 360 should get some serious consideration aside from whatever damage Sony is inflicting.
Hellomoto @ Nov 27th 2006 8:57PM
One of my friends got a Zune. It's a cool piece of machinery, and I'll get the Zune or the Zen Vizion M
Anonymouse Rep @ Nov 28th 2006 2:05PM
I think epobirs hit it on the head - when Sony can produce the units in volume will be when the 360 price comes down. Until then - and only if the sales actually match it, as well - why reduce price?
Profit is NOT dirty word - it's how companies make money to develop new products. And with developement costs in the hundreds of millions of dollars for consoles and games, that's a chunk of profits.
As for the Zune comment - it's a new device in a field that has been strongly held by one company for years. Microsoft is trying to break into this area and has high hopes for it. There are a LOT of parallels to the Xbox launch from a few years ago, actually - so even if they lose some money now, getting into the public with the name and recognition is going to be big.
Plus with the sharing, the Zune is already turning into a big hit on colleges and in high schools.
hyperion @ Nov 28th 2006 4:51PM
I fail to see what wrong with the zune, if it had an apple logo people would be singing its praises. it's priced the same as an 30GB ipod, has a bigger screen, built in wifi, built in fm tuner, and it uses the same marketplace points that you have on your 360 account. so you can buy a song or two with the change you get from your live arcade purchase. the only bad thing about the device is limited video support. a problem it shares with the ipod.
Tim @ Nov 28th 2006 12:00AM
The 360 will drop in price, but not before next year. Why should MS lower their price on the 360 if they are already 200 bucks lower than the competition (I'm not counting out the Wii, it's just targeting a different demographic so there will be more competition between MS and Sony than with Nintendo). They could lower their price for the holidays, but why. Wii and PS3 are going to be so rare they will almost not even be an option, so the 360 is the only choice for a lot of parrents. Expect a price drop early to mid 07.
Lynsanity @ Nov 28th 2006 2:39PM
While I can appreciate Microsoft giving out rebates for console repairs after the warranty, I have never had a problem with Nintendo's one year warranty. It is after all, one year as opposed to the 90 days the other guys are giving out.
That being said, I am fearful of buying another Xbox 360. I have seen the Triplet Circle before, and I am not looking forward to seeing it again.
Controlled 72 degree climate... Check
Open ventilated area for the system... Check
Never playing beyond a couple hours without a system break... Check
Unplugging the thing when it is not in use for long periods of time... Check
Triplet Circle... CHECK
How much more careful can one be with a system? I treated this thing like a Ming Vase, yet, in the end, it still cracked.
In my opinion, 90 days is just enough time to break the system in before it, in turn, breaks your heart after the warranty expires.
Kris Senchantixay @ Nov 28th 2006 12:59PM
You know, I have the X360 launch system and I guess I have been lucky.
Maybe I have OCD or something, but all electronics that I have to plug in, I run it 24/7 for two weeks - and have never had a problem.
Lynsanity, why would you unplug the console?