Report: Xbox will be a loser for Microsoft
Published: 07 Mar 2001 10:00 GMT
Microsoft could lose as much as $2bn(£1.36bn) on its Xbox console, potentially selling the game console at a loss for three years or more, before breaking even in fiscal 2005, according to a Merrill Lynch report released Tuesday.
"Ironically, the more units sold in the early years, the greater the losses," Merrill Lynch analyst Henry Blodget said in the report.
The expected losses represent a standard practice in the video game industry of relying on income from software sales and licensing to subsidise hardware costs. The practice helped drive Sega out of the hardware business earlier this year because the company could no longer come up with money to cover losses associated with production of its Dreamcast console.
Subsidies for the Xbox, set to launch this fall, are expected to be unusually large because of the huge investment required to move into a market with established players Sony and Nintendo. Microsoft already has committed itself to spending $500 million on Xbox marketing. And production costs are expected to be an unusually high $375 per machine because of the console's advanced features, Blodget said in the report.
Blodget estimates Microsoft will "lose $125 on every Xbox console--and that's before taking into account" sales, marketing and other administrative costs.
IDC analyst Schelley Olhava said Blodget's estimate is roughly in line with Sony's per-unit loss on its PlayStation 2 game console and may even be a bit conservative, with much depending on the final consumer price tag Microsoft settles on for the Xbox.
Microsoft has not set a price for the Xbox, but the price it can charge "will be capped by competition from (PlayStation 2) and Nintendo," Blodget said. Sony's PlayStation 2 sells for $300, and Nintendo's next-generation GameCube is expected to sell for around $199 when it goes on sale late this year.
"They're definitely not going to go above $300," Olhava said of the Xbox's price. "The worst-case scenario is it's going to $299. The best case is that Microsoft drops the price down to $279, to undercut Sony a little."
A Microsoft representative said he had not seen the Blodget report and couldn't comment on it. Blodget estimates Microsoft will sell 5 million Xbox units in fiscal 2002, peaking at 10 million in fiscal 2004. Microsoft's fiscal year runs July 1 to June 30.
The more units Microsoft sells in the early years, the more money it will lose, Blodget said.
But that's a typical pattern for video games, Olhava said. "If you look at the historical pattern, it's a peak-and-valley situation," she said. "The cost of the hardware goes down as the life cycle of the platform wears down. By the end of the life cycle, you're not selling much hardware but getting a lot of money from software."
For complete gaming news, see GameSpot UK.
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