IHS' teardown estimates the bill of materials (BOM) for the Xbox One at $457, with manufacturing estimated at $14, which means the console’s total cost of $471 is only $28 less than the retail price of $499.
This is very similar, IHS continues, to the new PlayStation 4 from Sony, which carries a hardware and manufacturing cost of only $18 lower than its retail price, according to the preliminary IHS teardown information on that product. And just like the PlayStation 4, Microsoft initially will take a loss on each Xbox One sold when other expenses are added into the equation.
“For both Microsoft and Sony, their latest-generation video game console hardware is unprofitable at the time of release, requiring the companies to subsidise it initially,” said Steve Mather, senior principal analyst for IHS. “However, these companies easily can largely compensate for their losses though sales of highly lucrative game titles. 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. Microsoft may also be more willing to take a loss on hardware sales with the Xbox One than it has for its previous-generation products.”
“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 noted. “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.”
Table 1 presents the preliminary BOM and manufacturing cost estimate of the Xbox One and the PlayStation 4. Note that these teardown assessments are preliminary in nature, account only