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Xbox Loses Money

The console, which retails for $399, cost Microsoft $525 to make, according to iSuppli.
November 25, 2005

Microsoft is subsidizing its Xbox 360 game console to the tune of $126 on each unit sold, according to an industry research report published Friday.

The cost of manufacturing the Xbox 360 Premium reached $525, according to iSuppli, an El Segundo, California-based microchip research firm, while the basic model of the device reached retail stores on Tuesday with a suggested price of $399.

Microsoft spokesperson Molly O'Donnell said the company does not comment or provide guidance on Xbox 360 cost information. Shares of Microsoft were down $0.23 to $27.69 in recent trading.

It is not unusual for game console manufacturers to sell their devices for less than they cost to manufacture because they can close the shortfall by collecting licensing fees from third-party game publishers and from selling games themselves. Xbox games can sell for as high as $65.
One of the most expensive sets of components in the Xbox 360 Premium video game console is the IBM silicon that drives it. In fact the IBM chip and other supporting electronics in the Xbox 360 Premium cost an estimated $340 per console, according to iSuppli.
“A lot of people ask me which company will win in the video-game console market: Microsoft or Sony? I reply, ‘IBM,’” said Chris Crotty, senior analyst for consumer electronics at iSuppli.
IBM’s new Cell processor, jointly developed with Sony and Toshiba, will drive Sony’s PlayStation 3, due for launch in early 2006. Nintendo’s Revolution platform will also feature a custom IBM chip as its centerpiece.

Breaking Down the Cost

The single most expensive item in the Xbox 360 is the GPU (graphics processing unit), followed by memory and a Southbridge I/O (input/output) controller. According to iSuppli, the groundbreaking GPU, designed by ATI Technologies, costs an estimated $141 and includes embedded DRAM (dynamic random access memory) from NEC.

The main memory, which constitutes 512 megabytes of GDDR (graphics double data rate) DRAM from Samsung Electronics, accounts for another $65 of the cost of materials. The SiS Southbridge chip costs an estimated $12. Other semiconductors and electronic components make up the remaining cost of the $370 motherboard, according to iSuppli.

Add in the costs for the hard disk, DVD drive, enclosures, the RF (radio frequency) receiver board, power supply, wireless controller, cables, literature, and packaging, and the console reaches $525.

“It’s really not surprising for the initial cost of the console to approach or even exceed the retail price,” said Andrew Rassweiler, manager of iSuppli’s Teardown Analysis Service.

According to the report, savings on production costs should reach at least $50 per unit during next year.

The research firm expects the game console market, which dipped 9.1 percent in 2005 to 28 million units, to boom in 2006. The introduction of next-generation consoles will cause the market to reach nearly 40 million units in 2006, not including handheld game players.

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