It's been reported for years on how Microsoft (NASDAQ: MSFT) does not make a dime selling the Xbox 360 gaming console. Just like the original Xbox before it, the Xbox 360 takes more money and resources to produce than its starting asking price of $399. Although some will disagree, the Xbox 360 is a glorified and powerful personal computer, fitted to operate like a gaming machine. How many PCs do you know of that sell with all the accessories for under $400? Not too many, unless it's a year-old design that's been sitting on the shelf for a while.
Why, then, does Microsoft keep making Xbox 360 consoles? The standard thinking is that Microsoft will make money on the games it sells for the console. In fact, Microsoft purchased Bungie Studios, makers of the hit games Halo and Halo 2, just to be able to cash in on sales of a single game franchise (albeit a large one). Is Microsoft going to subsidize every single game console it sells just in hopes it can make enough money on the software side? That's part of the equation, but not near all.
Announced just this weekend, Sony (NYSE: SNE) will be dropping the price on its PlayStation 3 gaming console from $599 to $499 to try and spur sales. Microsoft, however, is standing firm at its $399 price and won't budge. It should not have to anyway, right? In addition to making profits to offset the loss it takes on each Xbox 360 console made, I believe Microsoft is slyly turning the Xbox 360 console into a home entertainment centerpiece that plays games, downloads television shows and movies, plays music collections and bridges the PC and living room environments.
All the while, Microsoft will try to move into Apple's (NASDAQ: AAPL) realm of selling content to further help squash the losses it takes on hardware. This is the opposite of Apple, which makes money on iPods and iPhones, but either breaks even or makes very little on content providing. Which method will work in the long term? Microsoft is betting its model will fair better. If not, then it will have learned a billion-dollar lesson.
[Disclosure: I own MSFT shares as of 7-9-2007]
Microsoft's real intention with the profitless Xbox 360
Posted Jul 9th 2007 11:40AM by Brian White
Filed under: Products and services, Competitive strategy, Microsoft (MSFT), Apple Inc (AAPL), Sony Corp ADR (SNE)
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Reader Comments (Page 1 of 1)
7-09-2007 @ 12:15PM
Bruce E Warnock said...
We are shareholders of MSFT and are dismayed at this whole XB mess. To make matters worse, they just announced a warranty reserve of $1 Billion to fix their hardware problems, in addition to the losses on just constructing them.
MSFT has lost their direction and needs to re-focus on what once made them so dominate.
7-09-2007 @ 8:50PM
itguy07 said...
Instead of focusing on what made MS dominate (Copying others stuff) they should just either:
1) Bite the bullet and design an OS from scratch
2) Close up and return the $$ to the shareholders.
Vista is a flop - people are fed up with the BS of Windows and are starting to look at alternatives. Which is good for others, bad for MS.
Looking at the history of IT, it's about time for a radical change....
7-09-2007 @ 4:18PM
Gumby said...
Billy G got to understand that software is what it iis ....SOFT!!! EASY TO HACK, REWRITTEN, ETC... HARDWARE IS WHAT IT IS ... HARDWIRED IMPOSSIBLE TO REWIRE OR WHATEVER... WHAT WE NEED IS PROGRAMMABLE CHIPS MADE BY ALTERA AND XY?? THAT IS BOTH HARDWARE AND SOFTWARE BUILT IN. MORE ROBUST.
7-13-2007 @ 4:44PM
Angel Gleed said...
Xbox have been experiencing shite with their sales.For the past 13 months,they have only made 6% of their target.
Too bad!
8-14-2007 @ 12:23AM
jaime said...
Microsoft was clear when enter the video console game market...
"We will sell millions of xbox, NO MATTER AT WHAT COST"
microsoft have millions of dollars that can spend (lets get real they dont invest much in windows development)
they know the only thing prevent people for massive migrate from windows to another SO were the GAMES
today you have firefox, openoffice, etc really you dont need windows beside for playing games, thats why they enter the video game market when sony refused to use DirectX for the playstation... they were hoping that if the video game market lider (sony) used directx then every game could be ported efortless to the PC.
but whe sony say, thanks, but no thanks, microsoft plan the xbox, and they say since the begining, no matter if we loss millions of dollars to stay in the market, our main source of money (windows) depend of that we can secure some games exclusive to windows.
they were worried, very worried when huge pc franchises start releasing to multi OS, like Unreal, Warcraft, Doom, Sims, etc
They prefer kill the video game console industry, that give it to sony and nintendo... they have done very bad things that only hurt the video console industry, they dont care if they dont make a dime or if they lose tens of billions of dollars, if only they can disapear the video console industry.
They cut by half the console lifespan.
They release faulty hardware.
They release every xbox game they make in windows.
They charge you for play online.
They release multi SKU, making obsolet early versions.
All this things just hurt the video console industry.