Microsoft never made money by selling Xbox
The trial between Epic Games and Apple continues to be an important source of information on the gaming industry. This time we find that Microsoft never made any money from selling Xbox: the hardware was always sold at a loss and never allowed a real profit. This is not particularly surprising news, but it is rare for a company to admit it.Lori Wright, vice president of Xbox, was called as a third party witness during the trial. She was asked "what margin" does Microsoft have on Xbox console sales. Wright then replied: "We don't have any. We sell consoles at a loss." She was then asked if Microsoft ever made any money from selling consoles and the answer was a sharp "no".
As mentioned, that's not strange. The console market follows this model: consoles are sold at a loss to guarantee the lowest possible price to the user and thus obtain the maximum user base. The profit then comes through the sales of games and subscriptions.
Daniel Ahmad, analyst at Niko Partners, also investigated the matter on Twitter, explaining that Xbox Series X | S and PS5 are also sold at a loss. Nintendo, on the other hand, seems to have chosen a different path with Nintendo Switch: the console "was created to be profitable as quickly as possible". Ahmad also explains that PS4 was probably the first console to aim for profit: unlike PS2 which was dropped to $ 99, PS4 remained fixed at $ 299 for many years, thus allowing for a profit.
Xbox hardware is always at a loss If you are wondering why Epic Games has brought into question the earnings of Xbox, the reason is simple: the intent of the company is to explain that the console market is different from that mobile; Maintaining a 70/30 (console developer / manufacturer) royalties system on PlayStation and Xbox is necessary for both companies to earn. Apple, on the other hand, does not sell its hardware at a loss, so its 70/30 is "monopolistic" and the lack of other stores makes it "anti-competitive", at least according to Epic Games. Instead, Apple claims to manage its platform exactly like Steam, Xbox and PlayStation do.
We also found that the judge doesn't see any difference between Netflix and Game Pass: why one yes and the other no? Also, Apple CEO Tim Cook didn't know who Epic Games boss Tim Sweeney was.
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Microsoft would like to remind you the Xbox definitely makes money
© Photo by Vjeran Pavic / The VergeA Microsoft executive has admitted that the company doesn’t earn any profit on sales of Xbox consoles alone. The admission came as part of the Epic v. Apple trial yesterday, confirming what we’ve known for years: Microsoft sells Xbox consoles at a loss. Asked how much margin Microsoft makes on Xbox consoles, the company’s head of Xbox business development, Lori Wright, said, “We don’t; we sell the consoles at a loss.”
An Epic Games lawyer asked a follow-up question: “Does Microsoft ever earn a profit on the sale of an Xbox console?” Wright replied, “No.” That doesn’t mean Xbox doesn’t make money, though. Microsoft was keen to point this out in a statement to The Verge just hours after Wright’s testimony yesterday.
“The gaming business is a profitable and high-growth business for Microsoft,” says a Microsoft spokesperson. “The console gaming business is traditionally a hardware subsidy model. Game companies sell consoles at a loss to attract new customers. Profits are generated in game sales and online service subscriptions.“
I asked Microsoft whether it never truly makes any margins on hardware alone, but the company didn’t respond in time for publication. Typically, Microsoft and Sony subsidize hardware at the beginning of a console’s lifecycle, but those early component costs tend to decrease over time. Those lower costs also translate to lower retail prices for consoles over time, though.
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A teardown analysis of the Xbox One S, for example, revealed an estimated bill of materials of $324, which is $75 less than the $399 launch price for the 2TB version of the console, back in 2016. Microsoft also launched a disc-less version of the Xbox One S two years ago, which was presumably also sold at a loss.
Sony and Microsoft have similar business models for PlayStation and Xbox consoles, but Nintendo is the exception. In court documents, Microsoft estimates that hardware is generating a loss for Sony, but a profit for Nintendo. That’s backed up by Nintendo’s impressive 84.59 million Switch sales this year, up to March 31st.
Why all these costs are being discussed right now is a big part of the ongoing Epic v. Apple trial. Epic isn’t happy about Apple’s 30 percent revenue cut on in-app purchases for Fortnite, but Apple is arguing that Epic should also take issue with Microsoft or Sony’s identical 30 percent cut. It has resulted in hours of testimony about whether the iPhone is more like a PC or an Xbox, and a debate around open platforms versus locked-down ones. Microsoft clearly sees a difference between Xbox and PC, and has only cut the amount it takes on the Windows side to 12 percent, while the Xbox remains at 30 percent.
Microsoft obviously wants to maintain its business model for Xbox, and has attempted to push the industry toward digital games for years. Microsoft has very much sided with Epic Games in the case against Apple, and Epic has admitted it has never even questioned Microsoft’s digital sales cut. But how long this harmony will exist between the pair will very much depend on the future of digital game sales and cloud gaming. Microsoft is increasingly focused on its Xbox Game Pass subscription, which spans across devices that aren’t even Xbox consoles.
Game Pass also includes xCloud, Microsoft’s cloud gaming technology. Fortnite isn’t part of xCloud, because Epic Games won’t allow it. That highlights the emerging battles that are starting to take place in the game industry over shares of revenue. It looks like Microsoft has been preparing for some of them, but Epic v. Apple feels like the beginning of a greater war over the digital future of game stores.