Microsoft Loses $126 for every XBox 360 they sell

By Davis Freeberg

According to Hardware analyst iSuppli, it costs Microsoft $525 for every XBox 360 that they build. I’ve seen a lot of criticism of Microsoft for taking a loss on their past Xbox sales, but I think Business Week does a good job of pointing out that it’s not about the hardware, but about the software. Software offers higher margins then hardware because of it’s cost structure. You have very high initial fixed costs to create a game, but after that it costs very little produce additional copies of each title. Because of this, it offers an unlimited upside to the profit margins on software, while hardware margins are constrained by the high variable costs associated with the production of the units. It’s a smart strategy and one that Sony will likely employ as well. Last summer Merril Lynch Japan suggested that it will cost Sony $494 to make their console. If they end up selling it for the analyst suggested retail price of $399, then they will be losing $95 on each of their consoles.