Xbox Consoles Have Never Made A Profit
There's no escaping the fact we're in the golden age of gaming. From the humble roots of the likes of the Atari 2600 through to the Nintendo 64, PlayStation 2 to the Xbox 360, we've ended up here as the PlayStation 5 and Xbox Series X/S duke it out to be the winner of the next-generation console race.
While Nintendo soars to the top with the Switch outselling them all, Sony is just edging ahead of Microsoft with the PS5. With all these units flying off the shelves, you might think the big three are making a pretty penny off their systems. In a shocking reveal, it turns out Microsoft never makes a profit from Xbox consoles. Players might expect the big three are sitting on mountains of money, and while it might be true in some respect, it's not through the sales of their souped-up consoles.
Why do Xbox consoles never make a profit?
Away from the console race, the gaming world has been gripped by the "epic" fallout between Epic Games and Apple over Fortnite. Microsoft has officially sided with Epic, which means the company has been called to testify about Apple's seemingly gargantuan cut of mobile gaming sales. A bizarre outcome of this is the revelation about unprofitable Xbox consoles. Speaking during the Apple v Epic trial (via Protocol), Xbox Vice President Lori Wright gave testimony about the gaming market.
When Epic lawyer Wes Earnhardt questioned Wright about the profitability of consoles, he asked, "How much margin does Microsoft earn on the sale on the Xbox consoles?" Wright responded, "We don't. We sell the consoles at a loss". Earnhardt continued, "Just to be clear, does Microsoft ever earn a profit on the sale of an Xbox console?", with Wright confirming a simple, "No".
Expanding on what this means for Microsoft's gaming arm in general, Wright said consoles operate at a loss because the company's business model is set up with an emphasis on "an end-to-end gaming experience" where hardware is "critical to us delivering that gaming experience". In layman's terms, she's referring to the likes of games, Xbox Live Gold, and Xbox Game Pass.
What do Xbox consoles not making a profit mean?
As Protocol notes, the idea is to establish that while a 70-30 revenue split might be warranted for console gaming, the figures don't add up on mobile. This is the crux of Epic's argument - stating that Apple is taking an unfair slice of the pie. It's been a long-held theory that companies operate a loss on consoles and make up for this in terms of software sales or other markets, but still, it's rare to hear such a candid admission from someone as high-ranking as Wright.
It's not all doom and gloom for hardware sales though. Industry analyst Daniel Ahmad claims that the same documents show that every generation runs at a loss. For example, the PS5 and Xbox Series X/S currently aren't making a profit but have the potential to further down the line. The PlayStation 4 didn't slash its prices like the PS2 did, meaning a consistent price tag over a number of years meant Sony managed to make a profit on the console. A rare "outlier" is Nintendo, which built the Switch to be profitable out of the box.
The reveal that Xbox consoles don't make a profit further compounds the argument that we could be heading for a solely cloud-based future. If the money is in software, it seems redundant for tech companies to shell out so much money on hardware. A simpler solution could see us host games entirely online through a dedicated network to Sony, Microsoft, Nintendo, etc.
As digital stores become more commonplace, we've already seen Sony remove the need for discs thanks to the Digital Edition PlayStation 5. Microsoft is also putting more emphasis on its Xbox Cloud Gaming, with a potential tease of what's to come. Are we really heading toward a future where our living rooms no longer have boxy consoles sitting next to our TVs? It certainly looks that way.
Images via Microsoft