A post on GamesIndustry today reports that Microsoft’s VP Yusuf Medhi believes that the Xbox One console will be a “break even transaction” for each unit sold at launch, leading to speculation that the $500 system won’t be sold at a loss.
“The strategy will continue which is that we’re looking to be break even or low margin at worst on [Xbox One],” Medhi said at the Citi Global Technology Conference earlier this week, “and then make money selling additional games, the Xbox Live service and other capabilities on top. And as we can cost-reduce our box as we’ve done with 360, we’ll do that to continue to price reduce and get even more competitive with our offering.”
That’s an impressive boast, and helps to show why Microsoft is so inflexible on the higher price point of the Xbox One console when compared to Sony’s PlayStation 4, which will be about a hundred dollars less (or the local currency equivalent) around the world when they both launch this fall. It’s not clear whether or not Sony will be selling the PlayStation 4 at a loss, but without evidence to prove the contrary, I think it’s safe to assume that they will.
As longtime game fans may know, it’s a fairly understood fact of life for console makers that they’re probably going to lose money when the hottest new video game system launches. For years and years, that’s how it’s been: you launch a console and sell each unit at a loss, making up the money through game sales.
Eventually, as the cost of manufacturing goes down but the overall retail price stays the same, the consoles start to turn a profit. That’s how it’s been for Microsoft and Sony through the last three console generations, while Nintendo has finally resorted to this model for the Wii U (and it’s not selling, necessitating a price cut, and, presumably, more loss on each unit).
That the Xbox One is being sold for above the cost of manufacturing is super good news for Microsoft. Even if the company fails to match the PS4 in terms of launch sales (and there isn’t much data that shows that’ll be the case), it’ll still probably pull in more pure profit from the thing.