The results are in and, as a surprise to absolutely nobody, the Xbox One was the highest selling console in the UK and America during November, beating the PS4 to the top spot. Neither Sony or Microsoft have been forthcoming with their sales numbers for probably the most important shopping month of the year but the values that are widely accepted as “accurate” are ~1,240,000 for the Xbox One an ~840,000 for the PS4. This places the Xbox One ~400k ahead for the month which goes some way to reducing the lead that the PS4 had created during the previous 10 months – but at what cost?
As detailed in a tear down by IHN, the Xbox One costs around $400 to manufacture without the Kinect ($471 with the motion sensor costs included). For comparison, the PS4 costs $381 to make.
Using this $400 as a standard (to make it simple) and multiplying this by the total sales in November, Microsoft sold $496m worth of Xbox One consoles. This does not include any peripherals or additional games as part of a bundle.
During November, the cost to purchase an Xbox One at a store or online fluctuated dramatically depending when you bought the console, where you bought it from and if you bought it as part of a bundle. You could pick up an Xbox One from anywhere between $250 and $500 depending on what bundle you picked out, but the most popular bundles according to Amazon etc were the $349.00 bundles which included a boxed game (Forza Horizon 2, Halo: MCC and Assassin’s Creed Unity).
Considering that the Xbox One console alone costs $400 to manufacture (without including the price of the bundled game or the cost incurred by Microsoft to include it), each one of these bundles cost Microsoft $51 in deficit between manufacturing costs and sale amount. Even without including the overheads and add ons that a brick and mortar store would take off the top, the ~1,240,000 Xbox One sales in America will have cost Microsoft at least $63.24m. An eye watering amount.
So why incur the cost? Why take such a massive hit in the consoles first year by dropping the price, giving away free games with every console purchase and selling each console at a large loss?
Firstly, Microsoft are playing the long game. They know that the Xbox One has had a lacklustre first year of sales – at least in comparison to its nearest competitor – and that they need to build momentum behind the console. Microsoft have the bank balance to take a hit like this in order to put the console in a more favourable position.
Secondly, Microsoft desperately needed to shift stock. It was only a few months ago that Microsoft CFO Amy Hood was calling for a “channel inventory drawdown for Xbox consoles” (when retailers already have surplus of a product, order less as a result and a manufacturer has to reduce or stop production) and Microsoft needed this holiday season to be a success to reinvigorate retailer interest.
Finally, it is the games themselves that make the most profit in the gaming industry and consoles are predominantly loss leaders which gateway later profit through the install base. For each console that Microsoft loses $51 on, there is the potential for hundreds of dollars worth of profit to be made on the games they develop and produce.
While Xbox One fans are popping champagne corks, hailing November as a success for the console, Microsoft has had a more muted celebration. The company knows that this battle is a small one and that the war is only just beginning. In order for the huge jump in sales that the Xbox One has had in November to count for anything, Microsoft need to sell their games to these new customers in order to recover the deficit. With a relatively bare slate of first party games in the first half of 2015, there is always the chance that these new Xbox One owners will have a different console of choice come November next year.