As you may recall, Xbox boss Phil Spencer made a noteworthy appearance at WSJ Tech Live 2022 last week, and now his full 30-minute interview is doing the rounds online, providing us with a few more interesting snippets of info.
We already suspected that Microsoft was taking a loss on Xbox Series X and Xbox Series S consoles in the market, but Spencer provided a few more specifics about this, revealing that Microsoft is subsidising each console by around $100 to $200 with the hope of recouping that investment in the future:
"Consoles as a business model... in the overall scope of gaming it's fairly small, relative to the places that people play. Consoles has evolved to a business model much different from phones, where consoles are actually sold at a loss in the market.
So, when somebody goes and they buy an Xbox at their local retailer, we're subsidising that purchase somewhere between $100 and $200, with the expectation that we will recoup that investment over time through accessory sales and storefront."
As Spencer noted, it's nothing unusual for consoles to be sold at a loss in the market (it's probably happening to the PS5 as well), but $100-$200 per-console still sounds like a big chunk of change to us!
Unfortunately, there may be price changes afoot for both the Xbox Series X and Xbox Series S next year, as Spencer revealed during the same interview that the brand "may have to raise prices on certain things" in the future:
What are your thoughts on this? Let us know down in the comments below.
[source techlive.wsj.com]
Comments 35
Wow so much of a subsidy going on there.
Does it make sense to become a software power house and let others make the console and take the risk and hit?
Is that Microsoft’s end game?
This is no surprise but $100 - $200 is a lot more than I thought!
Regardless we've seen their financials... they'll be fine. lol
@Dezzy70 No because so much of their Xbox income comes from their Xbox store. 30% on ALL third party games, DLC and MTX. Same as Sony. It's the golden goose. But they justify their 30%, unlike Apple, precisely because they take a hit on their hardware, unlike Apple etc.
I believe this is a standard since forever. Typically consoles become profitable by mid generation lifespan.
Probably casually mentioned in interview to justify incoming price hike.
It has always been that way for MS. I guess people forget that they are a software company first, always have been. That's why MS focus so big on stuff like Gamepass and why with the Activision deal PS owners have nothing to worry about. As long as their software is bought they profit.
They need to revise the design of the Series X, then. Switch consoles have never sold at a loss, and Sony has revised the design of the PS5 so that the disc-based $500 model isn't selling at a loss now, either.
@themightyant
True they have had loads of money from me Xbox, Xbox360, Xbox one and series x with GPU.
@themightyant Do you know what the cost is for physical games? If a dev/publisher has to give Microsoft 30% on digital sales, what would it cost them to put it on a big box store shelf?
sorry Microsoft youve made hardly anything off me Microsoft rewards paid for my series x and my gamepass
sorry
@trev666 They have made a ton of money off selling your search data through Microsoft rewards. No company gives you stuff for free.
So they are losing a lot on consoles, losing a lot of digital/physical sales for their own first party games as they are on gamepass, and paying a lot of money to other devs to put their games onto gamepass. This paired with gamepass growth slowing down could mean they will have to raise prices on a few things, mainly hardware and gamepass. Or create more live service games with a lot of MTX to make a lot of money.
@InfamousOrange I don't have any up to date figures on physical licensing fees, so take ALL these with a heavy pinch of salt.
Generally it's accepted that the licensing fee varies by publisher and what deals they had negotiated. Estimates of this range from:
But remember there are other costs like retail store cuts, manufacturing and distribution with physical. Hence why platform holders like Digital so much and publishers/devs mostly don't balk at that 30% much, they get more than they used to. Literally cutting out several middle men.
uptownsoul wrote:
Don't fall into that trap. This isn't really true. The specific metric Sony used in their investor briefing was Cost of Goods vs Avg wholesale price. They said this, to investors, to look good. (nothing wrong with that)
But don't be deceived, that doesn't mean they make a profit on the sale of the console when ALL costs are taken into account. They will also be subsidising every system just like Microsoft.
I'd say Xbox is gonna take the plunge on 70$ games. I think they'll raise the price of gamepass a small amount to.. I can't see them raising the price of the console..
@Dezzy70 But you are locking someone into that 'ecosystem' and ALL games sold for it, regardless of whether its exclusive, published and/or developed by Xbox, generate income.
If you buy Physical, the amount the Platform holder gets maybe small - but the Publisher is using Xbox trademarks and Xbox will get some money. If you buy Digitally, Xbox gets 30% 'retailer' money. Buying an ALL-Digital console like the Series S will mean that ALL digital transactions are giving Xbox money. The more time and money you spend in their ecosystem, the more its offsetting that 'loss' on Hardware.
The 'worst' customer from this 'business' model perspective is the one that buys the hardware for buying used games, not interested in Gold/Game Pass subs so not really contributing to reducing that 'subsidised' price. The best are those that buy a lot of new games - especially digitally as that will quickly offset that $100-200 subsidy. Add on Gold and/or Game Pass, and that's a 'consistent' stable income that can be relied upon, more than the sporadic nature of Game purchases. The more games we buy, the more services we subscribe to, the quicker that $100-200 'deficit' can be recuperated and then its all 'profit'.
If you are selling hardware, but not enough games/services, then you lose money. If Xbox are losing say $150 per console and selling 1m a month, that's $150m 'loss' so need at least $150m revenue across games, services and accessories to recuperate that loss.
You don't think it costs Sony £45 for a set of plastic Faceplates - no doubt making a hefty profit to subsidise their losses on Hardware - same with £70 games too of course...
@Bmartin001
I guess as I have GPU baked in until May 2025 my subs can’t go up all until then.
@BAMozzy
I think in my business it is called a loss leader to get you on board. Then you get the customer in my case with life items sales and spares etc.
I've said this on a number of occasions, but this is precisely why Sony priced their PS5 as they did. The price of the Xbox was announced first, and Sony followed suit. Anyone who believes that Sony were intending to sell at the price they launched at is deluding themselves. Microsoft's clever pricing policy forced Sony's hand, and that was to the benefit of all of us that then bought a PS5. I would strongly suspect that even now, with the price increase, Sony is still selling the console at a loss. Their pockets are not as deep as those of Microsoft, and imagine that they're hurting to some extent as a consequence, and I doubt very much that the recent price hike will be last that Sony will do...
@Dezzy70 this is how consoles have always been sold... they make the money up on licensing fees and subscriptions...its normally not until the redisign or the smaller newer version of the chips come out that the systems start to break even at sale but the pandemic might have totally fubar'd the "normal" way things are done
@Fiendish-Beaver you can make a decent assumption that if MS is losing 150-200 per console that Sony was losing about as much... the two systems are nearly identical as far as components go, not sure if the double mobo in the series x would cost more or not though....but still i doubt they were losing less then 100 before their price increase
I’m starting to see why Nintendo stay out of this super power race and try to break even or profit on each console sale, especially being a smaller company overall.
Don’t get me wrong would be great if they had a more powerful Switch but I guess they play it safe.
I highly doubt they will raise the price of their consoles. More likely we will start see them adopt the $70 price tag for games. Even back at launch I recall listening to some interviews and one thing Xbox reps danced around was ever making fun or throwing shade at the game prides. They did say they got caught off guard (or something like that) but never closed the door on potentially increasing the prices themselves. So that’s, I think, the first thing we will see. Motorsport, Starfield and Red Fall will all be $70 games, mark my words!
@Dezzy70 yeah - which is why I maintain that gaming will move to cloud based services because the 'cost' of R&D, Raw materials, manufacturing, distributing etc is all increasing and the size, scope and scale of games is growing, so you need increasingly higher performing Chips, more RAM, more storage and faster storage too to meet the demands - with some 'storage' extremely limiting (blurays) so selling physical is impossible without online downloads to install the rest - compression and decompression can only do so much to reduce storage but that's limited too..
If you only have the Cloud and say high end PC's to cater too, Games can be any size, scale, no loss on hardware - you invest that R&D and Console manufacturing costs into building super fast game servers and able to run ANY game at 4k/120 ULTRA settings, and streamed at 60fps 'minimum' and whatever resolution your bandwidth can handle, playable on ANY connected device with any suitable controller - you are out of the public Hardware business, relying on 3rd Parties to make whatever connected device you as a consumer prefer to use - whether that's your mobile, a dedicated handheld gaming device, a TV, on your Tablet/Laptop, on your in car entertainment system as it drives you to work... where ever they can get Game Pass App on, you can play their software...
All games can be stored in one big digital 'database' and 'loaded' up to any local server if someone who owned an 'old' game wants to play - not just the 1000 games in Game Pass - so your 'digital' library remains accessible. You only need one version of the game on the Database - because that 'loads' to the server and your digital licence gives you access. If someone else plays, it loads to their server access point and plays there...
That's the Future, when it comes... People aren't going to pay more than $500 -600 for a console and if their TV can play games 'better' than the $500+ console does, and feel better because the game is running much faster, thus significantly reducing the input lag which more than compensates for the lag by playing on Cloud. That is the way its going and why MS say that if Sony release a Playstation console, they will release Call of Duty knowing that as far as Cloud based gaming is concerned, its exclusively Xbox. Whatever device you access Cloud gaming on, the ONLY one with CoD will be Xbox - so Sony have to keep making Hardware at a LOSS or be very expensive, to even expect to offer their customers, who may well be playing mostly on Cloud because that's where the biggest, most complex games are, Built for the cloud and not limited on cpu, gpu, RAM or data transfer speeds - the AI, the ML etc that can be utilised, the scale, the scope - its almost limitless once you remove what holds gaming back - which is the 'weakest' hardware you are hoping to get it to work on....
@BAMozzy
The future is definitely cloud based gaming.
Once we can get good enough internet, my speed is stuck 6mb/sec and we can have top end graphics at 4K 60fps the best the game can be then that is it, all cloud based.
I’m all digital at mine. Games, music, films and tv.
I have zero physical media, so it’s only another advancement on what I have all ready once we get the technology there.
@Nugziam The only information they are getting from my searches of 'wigdvdjjfbrbrj' is that this guy is just doing this for the points.
@Blessed_Koz I would guess Sony is losing quite a bit less than Xbox.
Lower CU count, more units produced, more common parts between digital/disc vs XSX/XSS plus the higher price.
This has been an industry standard practice for a long time now. It's basically the same as the "sell the razor for cheap so you can make money off your blades" strategy.
@Dezzy70 I hear what you are saying about bandwidth, but that in general is expanding and expanding too. It's also spreading further and further too and its 'customer' demand that will speed up that '3rd party' infrastructure. If they can't, their competitors soon will offer better, faster deals to meet the growing demand to play games.
All you are streaming is 'data' back and forth - the same data your TV receives through the HDMI cable from Cloud and sends the Data of your input back - the rest is all done elsewhere so you only need to reach a 'stable' minimum to offer any game of any scale at a decent (720p, 1080p) resolution, 60fps experience - Ray Tracing, all the amazing scale, scope of a game running on super computer with infinite power just presented at a 'low' resolution. If you TV/Bandwidth can handle 4k, then you get 4k. Point is, the only limitation on the visual quality is the end users device/network - its not the hardware. If you are not limited by 20TF, you can chuck as many polygons as you want, need to make whatever game you want - not cut ideas out because the hardware can't do it fast enough, not limit games to run on 'min' spec hardware and fit within a 'Bluray' file size to sell physically, not have to spend weeks trying to get there 'port' running on 'Console' hardware at an expected level (4k/60 or 1440/60) with RT and ultra realistic visual quality beyond what even RTX4090 with DLSS3 could offer.
@themightyant yeah that was my thought, even if the stores are taking a much smaller percentage, all the steps involved must cut into revenue by a big amount.
Now retailers also sell digital codes, what’s the take on those - cause if I buy a digital code through target and redeem it on my console, what’s Microsoft/Nintendo/Sonys take on those?
My first thought is it would be lower - but I really don’t know!
@Dezzy70 at some point gaming moves to cloud for causals and PC for the hardcore that demand performance. Having Sony and Microsoft in the console space always seemed a little overkill, even tho i have purchased everyone they both ever made. But at this point i bought a PS4 and PS5 for Sony exclusives only. Throw in the fact a Nintendo for Nintendo first party only. Xbox for all 3rd party and first party cause i prefer the controller. But if they did go 3rd party i would move to PC so I could use a Xbox controller. I just can‘t bring myself to use a Sony or Nintendo controller and hardware for my Shooters and competitive games.
@Dezzy70 The future is definitely cloud based gaming.
Once we can get good enough internet, my speed is stuck 6mb/sec and we can have top end graphics at 4K 60fps the best the game can be then that is it, all cloud based.
I’m all digital at mine. Games, music, films and tv.
I have zero physical media, so it’s only another advancement on what I have all ready once we get the technology there.
I agree with that. I have 400MBPS internet and Cloud isn’t to far off from being there. I am a performance fanatic so it’s not my preferred way to play. But for causals that play maybe 3-8 hours a week, i can see that being the future and not the distant future either. If Xbox Goes down tho as i said I would move to PC. Even tho i am not a PC guy. I own all Apple Products. So that would be a big change for me.
@uptownsoul You are right to be sceptical of anything you read on the internet, that should include articles, not just comments. But part of that scepticism needs to be directed at the original source information too and see if it passes a basic sniff test. Are they also trying to deceive you? Usually investors reports and similar are framed in the most positive way possible and you have to look carefully to see how they are pulling the wool over your eyes, as they won't be lying.
As for sources no problem. Lets go back to the original source of this news story, Jim Ryan's own briefing document for investors, will that suffice for you?
https://www.sony.com/en/SonyInfo/IR/library/presen/irday/pdf/2021/GNS_E.pdf
Page 10 left hand column. PS5 Cost of Goods vs. Ave Wholesale price. That does not mean the same as they make a profit on each console. I know it's hard, but don't be misled. Peace.
@trev666 every time you use bing. you are giving them money. bing alone makes more than a billion dollars a year for them.
@uptownsoul Another timely bit of evidence came to light in Sony's Q2 2022 financials released today.
https://www.sony.com/en/SonyInfo/IR/library/presen/er/pdf/22q2_sonypre.pdf
See Page 9. They stated one of the plus points was a "Decrease in losses from hardware" i.e. they are still making losses on hardware, just less than before. If they were making a profit on hardware it wouldn't be worded like that.
That's not news, Sony pioneered that model 27 years ago....it's kinda standard now unless you're Nintendo.
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