Profits on sales of video game consoles - Microsoft vs. competitors

I read two articles on the Xbox 360 today at

Steve Ballmer Describes New Xbox 360 Warranty as “Painful” (Marcus Yam - July 30, 2007)


Retailers Estimate Xbox 360 Failure Rate High as 33 Percent (Marcus Yam - July 2, 2007)

The first article I mention (from 30 July 2007) says that Microsoft’s entertainment division is spending over US$ 1 billion for customer service issues resulting from defective Xbox 360 consoles, and that the division will lose US$ 1.89 billion this quarter (after having lost US$ 1.28 billion from a previous period.)

I was talking about this with some colleagues today, and my theory was that Microsoft had never made a profit selling game consoles, but that the company has such deep pockets that they can keep on pouring money into the Xbox or its successor until it becomes the dominant player in the market - Microsoft can afford many missteps, but smaller companies competing with it could only afford one or two mistakes before they are crushed by the giant from Redmond. I was told that I was wrong, Microsoft is actually making a profit on hardware sales of the Xbox.

So my questions are:
Including only hardware sales of the video game console

  1. Has Microsoft ever made a profit over a certain time period (e.g. a quarter)?
  2. If you add up the numbers for the whole length of time that Microsoft has been selling the Xbox, has the company made a profit overall?

Including hardware sales and software sales
How much does the answer to those two questions change if you include, along with hardware sales, the sales of software (Xbox games made and sold by Microsoft)?

What would the answers to the same questions be for Sony and Nintendo?

The money is not in selling the hardware, the money is in selling the rights to make software. Consoles are loss leaders for manufacturers.

Other companies could theoretically make unlicensed game software, but they would not be able to use any of the console’s official logos, slogans, or any other trademarked materials for ads or packaging.

1)IIRC, Microsoft’s “Home and Entertainment” Division, which is mostly the Xbox & games (though I think the Zune is in there too), has had one profitable quarter, back when Halo 2 was released.
2)Overall, Microsoft lost ~$4 billion over the time period when it was selling the original Xbox, and as your link mentioned, lost $1.28 billion last year.

As for Sony, they initially sold the PS2 at a loss, but it later turned profitable as manufacturing cost dropped, not to mention they made a bundle on the games. The PS3 is also being sold for a very large loss; time will tell if Sony can make money from it.

Nintendo always sold the Gamecube (except for a brief period when currency exchange rates were not in their favor) at a mild profit, and did pretty well with that console. The Wii is making a nice profit on the hardware & being sold as soon as they hit the sales floor.

The scuttlebut before Microsoft’s warranty extension said that the component cost of the 360 had finally matched the price MS was selling them for, so they were no longer losing money then. Then all this warranty stuff happened.

But the 33% number was never something that was believed by anyone but the most rabid Sony fanboy. It originally came from an unnamed ex-EB Games in a forum.

As for Microsoft bankrupting smaller companies and becoming the dominant console, it won’t happen anytime soon. Nintendo has made a profit nearly every quarter for years (with a misstep only once in recent memory when, as someone else mentioned, the exchange rate bit them). They have a ridiculous warchest of money that they’re using to put out tons of innovative stuff for the Wii and the DS and beyond Mario Kart Wii, no one really knows what they’ve got up their sleeve.

There’s an Internet meme that Nintendo executives regularly shout “It prints money!” (in reference to the Wii and DS) every time an earnings report comes out. It’s not a joke. It’s true, it’s so true.

I want to know who these “smaller companies” that sell consoles you speak of are. Sony? Nintendo?

I wouldn’t be surprised if the selling at a loss happened a lot. Its games where you make money, much like printers and cartridges.

While it is not cited, this is basically a wonderful, short sentence that describes the situation.

All the companies make a ton off permitting companies to make games for them. Nintendo is traditionally the only company that makes the best games for it’s systems.

It should also be noted in discussions of this kind, that for some time now, Nintendo’s real profit has been their dominance in the handheld market. Home consoles are practically a side business when the DS and DS Lite have a combined user base larger than every copy of the current generation of home consoles combined.

PS. I should be back later with a cite for that, but I’ve seen it quoted on a number of game news pages. Kotaku’s article about Dragon Quest IX (huuugely important home-console RPG series in Japan) being a DS exclusive, rather than being on a home console, or even the PSP (since Square-Enix has been known to favor Sony ever since the first Playstation) mentioned it, IIRC.

Here she is.
Thats Miyamoto (father of mario, link, et al.) on the left and Iwata (President of NCL) on the right.

Someone on the boards posted a link to a reasonably funny website run by a video and games rental store, who liked the games side of his business (world according to gord or some such thing, can’t find it though Google)

He explained in more detail how Nintendo makes a profit on every machine sold and how it needed to do this since it didn’t make life easy for third party developers of games.

Sony is somewhat friendly towards 3rd parties making unlicensed software for the PS3. There are limits however so if you want to do a game that uses all the hardware, you have to pay Sony money.

But MS not so open minded at all. The Hypervisor will not run any unsigned code. (There are ways to bypass it and there is a Linux for XBox 360 now.)

There is a Linux port for the Gamecube. Nothing yet for the Wii.

Note that each console maker provides SDKs for game production that of course requires entering into a license agreement. Without the SDK, rolling your own leading edge game is basically a nightmare. “Theoretically” is indeed the keyword here. But logos and such is not the limitation.

Ah, you speak of the Acts of Gord.

His ideas seem so quaint and old fashioned in today’s console landscape.

While the DS does have a higher use base than the current consoles, it was only Nintendo’s mainline business in the last year of the GameCube’s life, when nothing was coming out for the system and everyone was waiting for Zelda: Twilight Princess and the Revolution.

In all the months since then, the Wii has been the biggest game seller for Nintendo (except for the month when Pokemon was released for the DS, of course):


Indeed, with snippets like “UPDATE: 11/16/01” :smiley:

I know it was written almost six years ago now, I just mean his ideas about what would happen in the competition between the three consoles then didn’t correspond to reality at all and looking at it in today’s terms is just laughable.

For example…

[li]His belief that Sony is some unstoppable juggernaut[/li][li]His belief that Halo would be forgotten[/li][li]His adoration of the PS2 controller (and it’s description as an “add-on”, what the hell?)[/li][li]His belief that no one would buy two consoles[/li][li]His belief that the PS2 was more powerful than the GameCube[/li][li]His belief the GameCube had no developer in the beginning (which is a total joke, the Cube had more support than the Xbox in the first two years)[/li][li]His prediction the GameCube would be a “failure” from a money point of view. (The Cube ended up being almost as profitable as the PS2 even though it only sold a quarter of the systems)[/li][/ul]

And if you apply all of his thoughts to the console world of the PS3, Wii and Xbox 360 it looks less like the musings of a successful business owner and more like comments a Sony executive would be ridiculed for today.

In the first generations of game systems (like the Nintendo Entertainment System) the games were on cartridges and not CDs or DVDs. So the manufacturers like Nintendo charged a royalty fee for every cartridge sold by the publisher (and in fact I think Nintendo manufactured the cartridges for the publishers). I think the 3DO system was revolutionary because it was the first system where the games were on CD and the company charged only a small royalty per copy sold. But the royalty collected per cartridge was one reason that Nintendo could sell the game system at a loss if necessary.

Another thing is that I’ve heard from Microsoft employees on this board and elsewhere that while they can purchase many Microsoft products at cost from the company store, they can’t get a discount on the Xbox, because of its high manufacturing cost.

The key point about Microsoft’s strategy with the XBox is that they’re not really interested in dominating the videogame market. They have much bigger fish to fry. They’re interested in controlling mass-market access to the internet. The XBox was created to counter the threat to the standard Windows internet portal that was posed by consoles with online connectivity. While most people still interact with the internet through a PC running Microsoft software, it’s easy to imagine that ten or twenty years from now the primary portal will be a set-top box that combines TiVo-like features with videogame hardware and java mini-apps. Microsoft is positioning itself to be a player when that convergence occurs.

Sony and Nintendo both view videogames as a profit center. It’s Nintendo’s entire business and even for Sony it’s a big chunk of our yearly revenue. Microsoft is just interested in keeping losses to a minimum so they can stay in the game.

That convergence has been coming “any day now” for 12 years and counting now

I’ll believe it when I see it.