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Microsoft Loses $126 Per Unit on XBox 360
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."
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, 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
A feeling of having made the same mistake before: Deja Foobar
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.
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.
____
~ |rip/\/\aster /\/\onkey
MS isn't getting the retail price, they are getting a wholesale price. Isn't retail markup usually in the 100% range? So MS is losing more like $325 per unit.
It's actually worse for Microsoft. The $126 loss statement doesn't take take the fact that stores make a profit into account. Thus the full retail prices does not go back to Microsoft.
Add in marketing, shipping, beta testing, opportunity cost and everything else, and I bet that the real loss per box is much higer.
What are you eating? isItVeg?.
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.
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?
Don't forget to factor in the retail markup. I doubt the retailers are selling this with no markup, but I suppose it's possible.
I thought about buying some old XB0rxen to make a little compile farm, but then I thought: why?
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?
Get thee glass eyes, and, like a scurvy politician, seem to see things thou dost not.--King Lear
they can call it what they want, but I think, the proper term is "dumping".
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
It's a perfectly valid and legal business model, as long as you don't have monopoly power in the market.
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.)
'Sensible' is a curse word.
When you're a big player and can afford to loose money, doing this makes perfect sense. Sure you'll make money off of royalties and accessories and subscriptions, etcetera, but that's not the point. The object is not to make money at this point, what they're gunning for is market share.
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.)
We're all hypocrites. We all have hidden parts, it's the contrast between them that make us more a hypocrite than others
That only helps if the component prices drop faster than the console price does. Once the PS3 and the Revolution come out, expect to see the XBox360 drop in price.
*sigh* back to work...
No, that is not correct. Assuming that this study controlled for economies of scale, the per unit loss is fixed. It is $126 per unit. If you sell 100 units, you have lost $12,600. If you sell 1,000,000 units, you have lost $126,000,000.
power supply, cables, and controllers -- add another $55
*Retail Price* *Maybe* - The estimates given for the raw materials cost sound suspect. I'm pretty sure that a contract to deliver parts for the XBox comes with a much lower price per unit than your average trip to the computer superstore.
init 11 - for when you need that edge.
It cemented their place as a solid second in the video game market -- a market already quite a bit bigger than the film industry. It got them so recognized as a powerhouse that they have a real chance to gun for first in the next round.
They may have lost billions doing it, but thats the cost of entry into a market that big. Especially when it gives you a prime position in the living room at a time that all home entertaiment is going digital, pipes are getting bigger and bigger, and people are starting to get used to shelling out hundreds a month on their various digital services.
I have so many friends who bought the first XBox, who are also not fans of M$. They say: "Hahaha! Microsoft loses money! Everybody buy an xbox!"
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.
Dedicated Cthulhu Cultist since 4523 BC.
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.
Hey, thanks for making the assumption that everybody who was bothered by the rootkit is only going to boycott Sony publishing!
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.
"This is considered plagiarism."
Remember Atari did NOT actually charge to license games for the 2600, so they had to be making a profit on the hardware. However, that led to some REALLY bad games being produced, and people associated the bad games with Atari, thus abandoning the franchise. When the NES came on the scene, Nintendo really started the "pay us to make a game for our console" business.
Monstar L
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What you really have to look at is the price that microsoft is paying for components, etc. There are many products where the sum value of the individual parts may in fact exceed the item value (for example, car parts individually can be incredible expensive).
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.
One must remember that the FDIC approached Microsoft a while back with the comment that they were sitting on tens of billions of dollars. And that they needed to a) give out a dividend and b) re-invest said capital as a responsibility to their share-holders or be fined for violation.
;)
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.
I know better than this, and really, so do you if you thought about this just a little bit...
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.
I am not merely a "consumer" or a "taxpayer". I am a Citizen of the State of Texas
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.
A feeling of having made the same mistake before: Deja Foobar
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.
A feeling of having made the same mistake before: Deja Foobar
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. :-)
I've fallen off your lawn, and I can't get up.
He's referring to bulk prices, though. So a $60 hard drive in the store can be had for $20 in bulk. If Microsoft is really paying $51 for a quality 20GB hard drive, then they need their heads checked.
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.
Javascript + Nintendo DSi = DSiCade
But the Cell will be used in a lot more than just the PS3. They'll be putting it in PVRs, TVs, stereos, pretty much everything Sony makes, over time. In the long run, the volumes for the Cell could be superior to even x86-64 commodity chips. That amortizes a whole lot of production cost.
-I like my women like I like my tea: green-
Those numbers are clearly pulled out of some M-L analyst's ass. Don't you think it's funny how the ethernet costs exactly $5? Which is the same price as the USB? Those prices didn't come off any chipmaker's price list, or even attempt to make a guess at what Microsoft's discounts will be. Plus, the M-L numbers leave off things like the power adapter, etc. which the linked story specifically analyzes. And what about the cost of assembly? These parts don't just come in a mylar sack for the user to solder together.
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.
With great power comes great fan noise.
It's the old gilette model: sell the razors cheap, and make your money on the blades.
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.
There are a lot of comments that say the same things, but I'm going to summarize because there are still lots of people posting repeat questions... Most electronics equipment sells initially at a loss, but with the hope that over a couple years the volumes and cost reductions will make up for it. So it is true that the previous generation boxes are not likely sold at a loss today. However, these game console makers can not actually sell for any profit because the competition keeps squeezing it out. Microsoft probably does get some better component pricing than what is estimated, but the conclusion sounds about right. And that is just based on component costs, the holistic cost to Microsoft includes shipping, inventory warehouseing, support, trade shows and events, advertising, prize giveaways, etc. Some of you might wonder why the console makers let them sell out of the stores (why don't they make more for Christmas?). It is not, as some suggest, a promotional ploy to generate excitement, but rather because they need to limit their losses this quarter. They would actually like to sell less! The reason why Xbox news is important to all /. readers (not just gamers) is that it affects the semiconductor industry (for example, the reason why Apple had to switch to Intel is because PowerPC makers wanted to focus on gaming), computer graphics, memory pricing, etc. and ultimately is another step toward the mainstream convergence of computing with the home theatre.
Microsoft probably doesn't care about making a profit on XBox franchise, even with game licensing because their real goal is to dominate all computing OSs in the home.
So many people here are taking this analysis as fact. It's an educated guess at best. Unless MS releases the true cost, no one knows.
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I disagree and feel that this is not insightful at all.
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.