Xbox One Likely Being Churned Out at a Loss

by Christopher Freeburn | November 27, 2013 10:10 am

xboxONE 300x200 Xbox One Likely Being Churned Out at a Loss[1]Microsoft (MSFT[2]) is likely selling its next-generation gaming console for less than the device’s total manufacturing costs[3].

IHS calculates that each Xbox One console contains hardware worth $457 and that MSFT spends another $14 in other assembly costs. While that would seem to leave the company a $28 profit per machine on its $499 retail price tag, analysts say that once research and development costs are factored in, the console sells at a loss, The Register notes.

That wouldn’t make the Xbox One unusual, however. An IHS official noted that both Microsoft and gaming machine rival Sony (SNE[4]) typically lose money on their consoles during their launch periods, but later recoup their losses through the sale of gaming titles and online subscription fees. Additionally, manufacturing costs normally decreased as production continues, allowing the companies to boost margins or reduce retail prices.

However, Microsoft may be looking to establish a foothold in the wider home entertainment market with the Xbox One, which is designed to function as a media hub as well as gaming platform[5], possibly positioning the company to launch other media-centered products in the future.

Microsoft says that it sold one million Xbox One units during the first 24 hours after the console launched last week[6].

Shares of MSFT gained about 1% in Wednesday morning trading.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/09/xboxONE.jpg
  2. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  3. for less than the device’s total manufacturing costs: http://www.theregister.co.uk/2013/11/27/xbox_one_price_brings_loss_to_microsoft/
  4. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  5. designed to function as a media hub as well as gaming platform: http://investorplace.com/2013/05/xbox-one-ultimate-entertainment-console-or-disaster/
  6. during the first 24 hours after the console launched last week: http://investorplace.com/2013/11/microsoft-matches-ps4-1m-first-day-xbox-one-sales/

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