Xbox 360 – The Real Cost

Report studies expected losses per unit.

Posted by Staff
Xbox 360 – The Real Cost
As you might be aware, the Xbox 360 has launched in the US. Read our detailed write up of reactions to this event here and see pictures from the Zero Hour launch event here

As the frenzy of interest in the launch continues to snowball, with new reports of robberies, frenzied queuing and auctions of epic proportions, Business Week carries a report looking at the cost to Microsoft of launching of a loss-leading console.

“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 report states. “The console sells at retail for $399, meaning a loss of $71 per unit -- and that is just the start.”

It continues: “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. These estimates include assumptions that Microsoft is getting a discount on many components. That was the case with the first Xbox console, which contained about $323 worth of parts and materials when released, but sold at retail for $299. It's certainly not going to help Microsoft reverse the trend of losses in its home-entertainment segment. In the fiscal year ended June 30, that unit lost $391 million on sales just shy of $3.25 billion. That's a little more than 8% of Microsoft's total sales of $39.8 billion. A Microsoft spokeswoman said that the company's plan calls for a "gross margin neutral" strategy through 2006, meaning that between the sales of consoles, game software, and accessories, it expects to essentially break even. Profits should follow in 2007.”

Which, compared to the first Xbox, is a day of lying around in the clover. Analysts queued up to mock the Xbox when it was launched, with some estimates claiming Microsoft would be running at a $900 manufacture cost. Of course, the brand is now built, the business of delivering a console, managing software relationships and the rest of the logistical nightmare that is releasing a piece of gaming hardware has been all but bottomed…

And although the Xbox 360 losses may seem significant, analysts expect Microsoft to show a smaller opening loss and more rapid climb to profit than Sony will list, with the complex nature of the Cell Processor to blame. Chris Crotty, with iSuppli in the same report, says, “The cell processor is a great chip with a lot of power, but we're hearing that it's a little more difficult to develop games that take advantage of that power.” He also mentions the fact that Microsoft has opted for traditional DVD use, as opposed to SCE’s Blu-Ray DVD format.


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