Skip to main content

Xbox One teardown reveals console being built at a loss

Microsoft may be spending slightly more to build and distribute the Xbox One than it's taking in, according to a new report from IHS iSuppli.

The research firm said on Wednesday 27 November that its preliminary teardown of the new game console and calculation of its bill of materials (BOM) put the cost of components in the Xbox One at $457 (£279). Tacking on an estimated $14 (£8.50) for manufacturing puts the system's total estimated cost to build at $471 (£288), according to IHS, just $28 less than the $499 Microsoft and its partners are charging in the US for the next-gen console at retail.

IHS earlier calculated Sony's hardware plus manufacturing costs to build its own new console, the PlayStation 4 at $381 (£233), which is $18 lower than its price tag in the United States.

That puts Microsoft and Sony in roughly the same boat in the early days of releasing their new game and entertainment systems, the research firm noted. IHS reckoned that distribution outlays would probably push both companies' cost to build one of its new consoles to around the break-even point versus their retail pricing, if not a bit over.

However, structuring cost this way at the beginning of a product cycle can be a sound strategy, said Steve Mather, senior principal analyst for IHS. Microsoft and Sony could both make up for the shortfall on hardware costs over time, he added.

"For both Microsoft and Sony, their latest-generation video game console hardware is unprofitable at the time of release, requiring the companies to subsidize it initially. However, these companies easily can largely compensate for their losses though sales of highly lucrative game titles," Mather said in a statement.

"Meanwhile, as the cost to produce the consoles decreases according to the normal learning-curve dynamics in the electronics industry, the companies can cut their retail pricing—or pad their profits. Over time, Microsoft is likely to reduce the retail price of the Xbox One in order to maintain sales momentum."

IHS laid out its estimated BOM for the PS4 last week. Microsoft's BOM for the Xbox One came in about $90 (£55) higher than Sony's, which isn't surprising because Redmond has included its independent Kinect 2.0 sensor with each console it sells while Sony built a much more limited motion sensor into the PS4 itself.

Interestingly, the difference in the estimated cost of components in each new consoles is just $16 (£9), according to IHS.

The research firm pointed to a few differences between the Xbox One and PS4, from a hardware perspective. The AMD chips powering each system match eight-core central processing with Radeon graphics processing in a System-on-a-Chip (SoC) package, but the one in the Xbox One is estimated to cost $100 (£61) versus $110 (£67) for the SoC powering the PS4.

Sony's console, meanwhile, packs in more graphics memory—to the tune of an estimated $88 (£53) on the BOM—than the $60 (£36) of DRAM in the Xbox One. The PS4 also has a $20 (£12) internal power supply adding to the cost of components associated with the console itself, whereas Microsoft opted for an external unit estimated to cost $25 (£15).

All told, though, these two new systems are a lot more alike than they are different. IHS went so far as to call the two AMD-powered, eighth-generation game consoles "definitely related" in terms of their architectures, if not quite "clones" of each other.

"Although the AMD chips are unique in the two consoles, they appear very similar in many ways. Both chips are built in 28-nanometer-process geometry, have the same number of CPU cores, and possess similar silicon die surface area between the two, suggesting similar amounts of functionality and processing power," said Andrew Rassweiler, senior director of the IHS teardown service. "Even the net power requirements for the two consoles are very much alike, which further underscores functional similarity. The two consoles are not clones, but are definitely related."

If Sony is indeed slightly subsidising the PS4 as IHS believes, it wouldn't be a huge break from the company's strategy with the previous-generation PlayStation 3, several versions of which are believed to have been sold at a loss.

Microsoft has been less willing to go down that road in the past, IHS pointed out, but may see the market for the Xbox One differently than the one into which it sold its Xbox 360 into for years.

"The Xbox One is designed to serve as a beachhead in the home for Microsoft, with the console's capability to interact with—and interface to—other devices, such as televisions, set-top boxes, smartphones and tablets," Mather said. "Gaining such a strategic advantage in the battle to control the connected home and Internet-enabled living room is well worth having the Xbox One act as a loss leader for Microsoft."

Whatever Microsoft is doing, so far it appears to be working. The software giant said last week that it sold more 1 million Xbox Ones in the first 24 hours of their availability around the world.