Microsoft loses at least $153 on each Xbox video-game console it sells, based on just the cost of components and assembly, iSuppli analysts...

Share story

Microsoft loses at least $153 on each Xbox video-game console it sells, based on just the cost of components and assembly, iSuppli analysts said Wednesday.

Parts such as processors and manufacturing cost $552.27 for every machine that retails at $399, said iSuppli, an El Segundo, Calif.-based technology and microchip-research company. Marketing and shipping costs aren’t included in the estimates.

Microsoft, which has spent more than $12 billion developing its games machines, released the Xbox 360 at midnight Monday, in time for the holidays and before Sony’s PlayStation 3. Microsoft is No. 2 behind Sony in the $28.5 billion game industry.

Chairman Bill Gates is betting the Xbox, the biggest loss-maker among Microsoft’s seven units, will help bolster sales of the company’s other products. The Xbox 360 also will be profitable over the life of the machine, he said.

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks

Analysts had predicted that the Xbox 360 would initially sell at a loss.

Console makers have historically subsidized manufacturing costs by creating and selling their own video games and by collecting fees from publishers who make titles for their systems. Several new Xbox 360 games are priced as high as $60.

Microsoft gets $7 to $8 hardware royalties for each game made by outside companies, said analyst Edward Williams of Harris Nesbitt in a Nov. 8 report.

The Xbox’s financials are expected to change.

“As we go through the cycle, the cost of the components goes down significantly,” said Evan Wilson, an analyst at Pacific Crest Securities in Portland. Royalty fees Microsoft receives from game publishers “will grow much more rapidly when the installed base of Xboxes increases,” he added.

The premium version of the games machine uses an IBM processor that costs $106, according to iSuppli. Other IBM chips bring the total cost of chips and integrated circuits to $340 per console, the researcher said.

Another $141 worth of components includes ATI Technologies semiconductors that provide graphics and NEC’s memory and linking devices, the report said.

Packaging, a wireless Internet link, power supply, cables and the instruction manuals make up the rest of the price, iSuppli said.

Microsoft’s basic system, which sells for $299, has components that cost about $310, according to Portelligent, a market-research company in Austin, Texas.

Microsoft is relying on sales of higher-margin Xbox packages and games to make a profit, Portelligent said Wednesday. The machine has also been designed to use parts from multiple vendors, something that will help allow quicker cost reduction, Portelligent said.

Information from Reuters is included in this report.