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Microsoft is debating whether the next Xbox has to be profitable on a per-unit basis from the day it’s released, or whether the company can afford huge subsidies as it did with the first two consoles.According to insiders quoted by game industry publication Kotaku, Microsoft’s board of directors has taken up the argument as Microsoft begins to plan the next generation Xbox, which will probably come out in 2014 or 2015.
Selling game consoles for a profit from day one would be a huge strategic shift.
The business model for the Xbox has always been to create cutting-edge hardware and sell it at a loss to establish dominance, then hope to sell enough games and Xbox Live subscriptions to cover the investment.
When the original Xbox launched in 2001, and again when the Xbox 360 was released in 2005, Microsoft was estimated to be losing $125 per box just on cost of goods.
Over its lifetime, the business segment containing the Xbox is down more than $5.5 billion — not including the cost of acquisitions such as the 2002 purchase game developer Rare, which cost more than $300 million.
Sony has always pursued a similar model, but Nintendo broke the mould with the Wii at 2006, which was per-unit profitable from day one.
Now Microsoft is over the hump: the business group containing Xbox has turned an operating profit for each of the last 11 quarters, including a $1.05 billion profit last quarter thanks to sales of Kinect.
It may not be willing to reset.
That’s especially true because Microsoft has dramatically increased its investments in search, where it’s lost billions over the last five years, and mobile, where it just paid Nokia more than $2 billion to get the mobile giant to distribute Windows Phone 7. Investors may not have the patience for further losses in gaming.
The risk: if Microsoft goes the Nintendo route, Sony might be willing to accept huge per-unit losses to come out with a more technically advanced console and reclaim the lead.