Xbox not a money-maker yet
SAN FRANCISCO -- Microsoft Corp., the world's largest software maker, loses at least $153 on each Xbox video game console it sells, based on just the cost of components and assembly, iSuppli Corp. analysts said.
Parts such as processors and manufacturing cost $552.27 for every machine that retails at $399, El Segundo, Calif.-based iSuppli said in a statement. Marketing and shipping costs aren't included in the estimates.
Microsoft, which has spent more than $12 billion developing its game machines, released the Xbox 360 this week, in time for the holidays and before Sony Corp.'s PlayStation 3.
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 to consumers. The Xbox 360 will also be profitable over the life of the machine, he said.
''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, Ore., who does not rate Microsoft stock. Royalty fees Microsoft receives from game publishers ''will grow much more rapidly when the installed base of Xboxes increases," he said.
Microsoft replaced Intel Corp. as its processor supplier and, like Sony, is relying on Armonk, N.Y.-based International Business Machines Corp., which makes 60 percent of the Xbox components, iSuppli said.
The premium version of the gaming system 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.
Microsoft's basic system, which sells for $299, has components that cost about $310, according to Portelligent Inc., an Austin-based market research company.
Microsoft is relying on sales of higher-margin Xbox packages, accessories, and games to make a profit, Portelligent said.
The machine has also been designed to use parts from multiple vendors, something that will help allow quicker cost reduction, Portelligent said.
Console makers get $7 to $8 in royalty payments for each game sold, Harris Nesbitt analyst Edward Williams said in a Nov. 8 report.
Another $141 worth of components includes ATI Technologies Inc. semiconductors that provide graphics and NEC Corp.'s memory and linking devices, the iSuppli report said.
Assembly, packaging, a wireless Internet link, power supply, cables, and the manuals make up the rest, iSuppli said.
Shares of Redmond, Wash.-based Microsoft, number two behind Sony in the $28.5 billion game industry, have risen 4.5 percent this year.
The Xbox will go on sale in Europe on Dec. 2 and in Japan on Dec. 10.
Sony's PlayStation 3 is scheduled for release next year.
The Xbox is available in a basic model for $299 and a $399 version with a hard drive and a wireless controller.
The company has not disclosed the wholesale price of the Xbox. The devices connect to digital cameras, portable music players, and Windows PCs.
Flextronics International Ltd., Wistron Corp., and Celestica Inc. are building the machines.
