Microsoft Xbox 360: Making It Up in Volume

There’s an old business joke about losing money on every unit but trying to make it up on volume. That came to mind when I read of Microsoft’s planned price cut on a popular Xbox 360 model to better compete with Sony:

As early as Sunday, Microsoft, of Redmond, Wash., will drop the price on its $349 Xbox 360 Pro, a midprice version of the game console that comes with a 20-gigabyte hard drive, to $299, these people said. The lower price for the console is expected to be widely advertised in Sunday circular advertisements for electronics stores. News of the price drop has been widely rumored on game blogs.

What the story doesn’t mention is the open secret that Microsoft has been subsidizing the price to consumers of the Xbox for years in an attempt to gain market share and, eventually, make money from game royalties.

If you have any doubt, look at the segment information in last year’s annual report. According to the numbers, the entertainment and devices division grossed $6.1 billion, but had an operating loss of just under $2.1 billion. Ouch. Lower prices in this case will probably mean bigger losses.

Ben Schachter, an analyst at UBS Securities, said the price cut for the Xbox 360 is part of a natural progression of price drops that occur the longer game consoles are in the market, though he said Sony’s strength was also likely a factor in the timing of the cut. “For the back half of this year, a lot of people, myself included, think Sony has a better lineup of exclusive titles,” Mr. Schachter said. “Sony clearly has more momentum.”

Is momentum another name for volume? Maybe Microsoft can look up the appropriate profit cheat code online.

Xbox graphic: Erik Sherman