12.30
There’s an article over at Joystiq about how someone leaked the actual manufacturing cost of the XBox 360. Apparently, it costs Microsoft $715 to make a single console. If that console is sold as a Premium bundle, that means Microsoft is losing $300 per system sold. Let’s do some math!
At $300 loss per system and a target of 400,000 systems to be sold at launch, they were expecting to take a hit of $120,000,000! Okay, so most companies take a loss on the system and make up for it in game, software, and accessories sales. So let’s see how much it would take Microsoft to make up for the expected loss.
If they 100% of people at launch (based on expected sales; remember they only sold 320,000) purchased a 1 year Gold membership to XBox Live, that would cost the consumer $50. In other words, Microsoft would net $20,000,000 for a single year; which means it would take approximately 6 years to compensate for the system losses! That’s longer than the average console lifespan; the original XBox only lived for 4 years!
Alternatively, if every gamer bought just under 1/3rd of the launch titles with their systems (that’s 5 games at $60 each), Microsoft could break even at the launch. I would estimate that the average gamer did not buy 5 launch titles, thats $300 in games! I own a rather large PS2 game library; I own and have played about 90% of my games. In the last 5 years, I’ve purchased 22 games, or spent roughly $880 in games alone (estimated $40 per game), which is roughly $176 dollars a year in games. Lets assume that the average gamer purchases approximately 2 games a year. This is probably a gross underestimate, but we’ll carry it out to the life of the average console, which makes about 10 games for any given system. This seems about average and is not too low. That means by roughly the 3rd year of buying games alone, Microsoft would finally break even.
Now to do some mix and matching. I will use the numbers as previously stated. Let’s assume 100% of XBox 360 launch consumers bought a Live membership and the average number of games and this trend continues for the life of the system (5 years). At this rate, it would take 2 years to break even!
I cannot fathom why anyone would invest in something like this. If you look at Microsoft’s trend, the only time that it would be profitable to invest would be around the launch. Don’t get me started on venture capitalism. Most of these calculations also assume that Microsoft makes 100% profit from every game and Live membership; this will most likely not be the case. I would estimate that they make at somewhere around 10% of those sales which makes it MUCH more difficult to make money.
I’m eager to see how much the other systems play out and if Nintendo can continue to profit.
Your point is valid and does warrent some concern on an investment level. However, I’d like to remind you that Sony didn’t actually make any profit on the PS2 until early 2005! Nintendo did the same with the Game Cube by deliberately selling the console for $100 or $150 cheaper than what it cost them to make it. They hoped that they would make up the money in the games that they released. My guess is that Microsoft is trying to do the same but they’re in for a long road.
You might have a point, but the competition wasn’t eating as much in debt as Microsoft is with the XBox 360. If I recall correctly, they technically lost money on the XBox because it was a very short lived console. Losing $150 per console and still posting profits is no where near as bad as losing $300 per console and posting losses.