An article on Xbox economics from Red Mercury: “The economics of the XBox don’t add up now, and they get worse with time. Sony and Nintendo can kill the XBox on cost alone. The software subsidies that Microsoft expected are a myth. Game console prices will continue to drop, from $199 to $149, then on down to $99. Will Microsoft ever make it to the $99 level of this game? We’ll see. According to XBox economics, it all depends on how much money they are willing to lose.”
The article makes the point that Sony and Nintendo are unlikely to be losing money on their consoles, while Microsoft most certainly is. This, even after Nintendo dropped its price to USD 150 from USD 199.
Microsoft, says the article, is looking to make up via software sales. It would need users buying 15-20 titles for Microsoft to break even.
I think Microsoft is looking at an additional source of revenue coming in from their online service – Xbox Live, which is likely to cost USD 49 per annum. That is likely to be the base entry pice, with additional charges for premium areas — much like how CompuServe used to be in the early 1990s.
For Microsoft, its a great (and cheap) way to learn to (a) how to get into the living room (b) build and sell hardware (c) offer a Net-based subscription service which could later be extended to enterprises and Office.Net.
Microsoft already has the infrastructure in place via MSN for the online service. Now, if only people would buy the Xboxes….