Microsoft sells Xbox hardware at a substantial loss

Microsoft probably will never lower its 30% royalty fee on Xbox as long as consoles exist, Microsoft takes a substantial loss from console production.

Microsoft sells Xbox hardware at a substantial loss
Published Oct 30, 2022 1:39 PM CDT   |   Updated Sat, Nov 19 2022 11:15 AM CST
1 minute & 42 seconds read time

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

Microsoft sells Xbox hardware at a substantial loss 30

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.

Microsoft sells Xbox hardware at a substantial loss 6
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Derek joined the TweakTown team in 2015 and has since reviewed and played 1000s of hours of new games. Derek is absorbed with the intersection of technology and gaming, and is always looking forward to new advancements. With over six years in games journalism under his belt, Derek aims to further engage the gaming sector while taking a peek under the tech that powers it. He hopes to one day explore the stars in No Man's Sky with the magic of VR.

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