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Is Microsoft making a loss on Xbox 360?

Research seems to suggest so

Despite promises from Microsoft executives that the retail price of the new Xbox 360 game console would cover production costs, two different market researchers have suggested that the company may be losing money on the machines.

On Thursday, researcher Portelligent conducted a tear-down analysis of the standard Xbox 360, which retails for $300 (about £175), and estimated its material costs at around $310 (£180), suggesting that a slight loss will be made on every machine sold.

Microsoft clearly tried to reduce costs as much as possible, the 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 and Marvell Semiconductor – the firm said.

The cost of making the Xbox 360 Premium Edition runs far higher than its retail price of $400 (£232), according to researcher iSuppli. The company's analysis of the cost of parts inside the game console resulted in an estimate of $525 (£305), 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 tear-downs 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 at Microsoft's Japan division, in September.

"It will get cheaper over time. As we produce more the price will go down."

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

As of Thursday, Xbox 360 Premium consoles could be found on offer at eBay.com for between $690 (£400) and $1,800 (£1,045), a sign that 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 (£197) in the Premium Edition, according to iSuppli. The Xbox 360 is powered by a triple-core PowerPC processor supplied by IBM, which runs at 3.2GHz and costs $106 (£61) per chip, or 20 percent of the total bill of materials of a box. ISuppli analysed the machines by opening them and 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, which costs an estimated $141 (£82) 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's PlayStation 3 and Nintendo's next console.


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