Is Microsoft losing money on Xbox 360?

Despite promises from Microsoft Corp. executives that the retail price of the new Xbox 360 game console would cover production costs, product tear downs by two different market researchers suggest that the company is losing money on the machines.

On Thursday, researcher Portelligent Inc. conducted a tear down analysis of the standard Xbox 360, which retails for US$299.99, and estimated its actual material costs at around $310, suggesting a slight loss on every machine sold.

Microsoft clearly tried to reduce costs as much as possible, the Austin, Texas based researcher said, in particular by using multiple suppliers for different parts on the machines. For example, the devices that support the wireless link for the Xbox 360’s wireless game controllers were supplied by at least two different chip makers, National Semiconductor Corp. and Marvell Semiconductor Inc., the firm said.

The cost of making the Xbox 360 Premium edition run far higher than its retail price of $399.99, according to researcher iSuppli Corp. The company’s analysis of the cost of parts inside the game console resulted in an estimate of $525, far above the retail price.

The loss on the machines may not be swallowed wholly by Microsoft. Some of the parts suppliers may take a hit as well. And Microsoft could argue that it will make up a small loss on the hardware through game sales. But, if the teardowns are correct, it’s clearly not what the world’s largest software maker had intended for the Xbox 360. In an interview earlier this year, an executive said the consoles would be profit generators.

“We’re making money, not much money but we are making money,” said Yoshihiro Maruyama, executive officer and general manager of the Xbox division of Microsoft Co. Ltd., Microsoft’s Japan division, in an interview with IDG News Service in September this year.

“It will get cheaper over time. As we produce more the price will go down,” he added.

It’s also arguable the company could have priced the Xbox 360 game consoles higher, considering what they’re fetching on eBay Inc.’s popular auction site.

As of Thursday, Xbox 360 Premium consoles could be found on offer at eBay.com for between $690 and $1,800, a sign users are willing to pay a premium to get their hands on one.

The most expensive parts of the game machines are the chips inside, which total around $340 in the premium edition, according to iSuppli. The Xbox 360 is powered by a triple-core PowerPC processor supplied by IBM Corp., which runs at 3.2GHz and costs only $106 per chip, or 20 percent of the total bill of materials of a box. Isuppli analyzed the machines by opening them determining the make and model of individual parts to determine the cost.

The most expensive chips inside the Xbox 360 are the graphics processor from ATI Technologies Inc., which costs an estimated $141 per unit, including embedded DRAM (dynamic RAM).

Isuppli said the ability to supply such a complex processor at a low price should ensure IBM dominates next generation game consoles, the market researcher says, since the chips are a key factor behind the cost and functionality of the product. IBM’s PowerPC cores will also be part of the processors inside other major game consoles, including Sony Computer Entertainment Inc.’s PlayStation 3 and Nintendo Co. Ltd.’s next console.

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