Microsoft sells Xbox hardware at a substantial loss

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Microsoft is unlikely to ever lower its royalty fees as long as it ships console hardware.

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A while back during the Epic vs Apple trial, Microsoft's Lori Wright said that a 30% commission was required in order to help subsidize console hardware losses. Unlike Nintendo, who has always sold the Switch at a profit, and Sony, who recent hit profitability on the PlayStation 5, Microsoft sells its Xbox Series consoles at a loss. "My justification is that the commission is required for us to even build the console," Wright said during the trial.

Now fast-forwarding to the present we hear Xbox gaming CEO Phil Spencer saying similar things. In a recent Wall Street Journal interview, Spencer said that the Xbox Series consoles are sold at a $100 - $200 loss. Microsoft sells hardware at a loss with the assumption of being able to recoup spending via games, monetization, subscriptions, and accessories.

Given the retail MSRP of these consoles, Spencer's figures indicate the Xbox Series S could cost as much as $399 to produce, and the Xbox Series X could cost $599 - $699 to produce, manufacture, and ship.

"Consoles as a business model, one, as I said, the overall scope of consoles is small relative to places where people play. Consoles evolved to a business model much different than phones where consoles are actually sold at a loss on the market.

"When somebody goes and they buy an Xbox at their local retailer, we're subsidizing that purchase somewhere between $100 and $200 dollars with the expectation that we will recoup that investment over time through accessories sales and storefront."

By charging third-party publishers and developer a 30% commission, Microsoft is able to create profitability from its hardware losses.

In the past, Microsoft has also said that it has never sold an Xbox console at a profit.

What's interesting is that Microsoft still makes billions from hardware every year. In FY2022, Microsoft made $3.7 billion from hardware...but this does not equal profitability. We have to wonder how much Microsoft paid in order to make that much revenue from hardware in the period.

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