I’ve read many times that consoles usually cost more to produce than the price they are sold for…
Is it true? If yes, how can it be legal? Doesn’t it fall under dumping laws?
The PS3 was sold at a loss, the Xbox 360 made money
Not sure what type of console you are referring to, but loss leaders have been a part of marketing for a long time.
An example of when I was photo retail in the 1980s:
(Generic example since I can’t remember specifics) Camera sold regular retail for $350 with normal lens. Sale price during sales events was $249. Cost to store for that item was $272.37. So, each sale price camera sold was at a loss. We were commission and spiff compensated salesmen, tho, so we had an incentive to sell add ons.
We bought brand name camera cases and straps for very low prices. Filters, 3rd party lenses, flashes, extended warranty, film, batteries, tripods, etc… could easily add on $200 to $400 profit for the store.
So, Loss Leader camera at sale price we lost around $30 or so. Add up all of the extra stuff, tho, and we made it all back, even 10 fold.
As I said, a generic example, my experience is also a few decades old.
They often are sold at a loss, at least initially. For the manufacturer, selling the hardware at a loss means that they can price it competitively, which in turn means people will buy the thing, and after they’ve bought a console people will obviously want to buy games for the system. The manufacturer gets a taste of every game sold for their system, and that, not the console, is their big money maker.
There are some exceptions, for example the Nintendo GameCube and the Wii (which were mostly the same machine, except for the Wii’s motion controller gimmick). Nintendo earned money on both consoles from day 1. And of course, as the manufacturer begins to streamline their system’s design they often become cheaper to make. Sometimes radically so: the first edition of the PlayStation 3 included full PlayStation 2 backwards compatibility in the form of a miniature PS2 built into it, which was then first thing to get the axe when Sony desperately wanted to reduce the price of their system to be able to compete with the much cheaper Xbox 360.
I thought Sony left PS2 backwards compatibility out because the PS2 was still a high selling console, and if the PS3 was backwards compatible then the market would be flooded with used PS2s (cutting demand for new PS2 consoles).
Nintendo, as I have heard it, always sells their hardware at a for-profit cost. But they’re less interested in competing on the best-hardware-for-sale strategy. They know that they have a lock-in on family friendly games, so they can design and build things with a wider pool of options than just the best of the newest. I’d venture to guess that, over the long term, they end up with more stable and well-engineered products so to some extent the people who are buying the “bestest” are only ahead of the game for 6 months before they’re behind the curve just as much, with a less well-engineered product.
Initially they sell consoles at a loss. But they’re going to be selling the same device, with only minor variations, for 5+ years. That gives them plenty of time to optimize their design and supply chain, take advantage of deflating hardware costs, and use volume purchasing to make the hardware profitable for the bulk of its lifespan.
It’s not really a razor blade model. They do take a cut of software sales in licensing fees etc, but it’s only a small fraction of their revenue.
No, it was all about the cost. Console manufacturers want people to move onto their newer, more expensive system, and having the PS2 backwards compatibility was a big boon in PS3’s favor. “Oh wow, I get to play all these awesome new games, AND all my old games?” However, various factors made the PS3 significantly more expensive than the Xbox 360, and the PS3’s sales were lagging well behind. Yhe PS2 architecture was the easiest thing to cut that would significantly lower the PS3’s manufacturing costs.
The PS2 had already been through its hottest selling period, and the point of a new console is to reinvigorate the consumers. The same thing happened with the most recent generational shift: the PS3 was selling well enough, but the PlayStation 4 whipped people into a buying frenzy.
Still the same, which is why you can’t get out of Best Buy with, say, a TV, without the salesman all but choke-holding you into buying extended warranties and $100 worth of HDMI cables. $200 if you’re especially gullible.
Anti-dumping laws don’t apply generally to the practice of using a loss-leader.
Dumping is a very specific practice involving selling at a loss in a foreign country when you sell for a profit in your home country, causing material injury to an entire industry in the other country.
It’s not about individual corporate competitors but rather about entire countries competing with each other.
Well, possibly on the electrical components, but the craftsmanship in the cabinetry surely accounts for something.
Why would it be illegal?
See Acsenray’s post about dumping. 
But that’s not what is done here.
Generally, the gist is that if you sold a console at non-loss price immediately, wouldn’t sell enough to reach the necessary installed base to sell enough games to encourage people to make more games to encourage more people to buy your console.
Also, Sony and MS get a cut of the sales price of every (new) game sold, so they can recoup the losses that way.
Note that just because a console is sold at a loss when it is first sold, it may not be later on. Consoles are generally sold for 5 years or so, and during that time, the price of the components may drop faster than the average sale price.
Which is an explanation of why it wouldn’t be illegal, since the law in question doesn’t apply to the situation.
In my country, selling something at a loss to prevent other companies from entering a market (or making it harder) is considered illegal practice, always though other countries had similar laws…
Selling something at a loss and selling something at such a low price that it harms the market are two different things.
What you’re describing is called “predatory pricing” under U.S. antitrust law.
Selling below cost or using a loss-leader is not by itself enough to establish predatory pricing.
Not just gaming systems.
Currently, Amazon is selling things like Kindles, Amazon FireTV Stick (and during sales the original Amazon FireTV) at a loss. The goal is to get you to buy content from Amazon.
TiVo sells DVRs at a loss to get you to subscribe to the schedule service. (And it’s consumer DVR business still loses money on its own. Most of TiVo’s income comes from patent lawsuits.)
One of the most famous business models of this type is therazor-and-blade model. Sell the razor cheaply, make money on the blades. (While King Camp Gillette is usually credited with this idea, he was just imitating others.)
Note that MS did get into trouble with giving away IE in order to kill Netscape and many similar practices.