Thursday, July 05, 2007

Measure twice

According to the Washington Post, Microsoft will spend $1.15 billion to fix problems with the Xbox 360. As a result of a lot of broken consoles, it's also extended the warranty to 3 years, adding what will eventually be more cost. But let's do some quick math.

$1.15 billion divided by the 11.6 million Xbox360s sold so far.

Comes out to about $99.14 per Xbox360 for the repairs.

According to Wikipedia, the top end Xbox360 was priced at $399 at launch. The cost to manufacture was $525... a loss of $126 per Xbox.

So as of today, for each Xbox sold, Microsoft loses $225.

If Microsoft didn't have cash coming out its ears, would it have a prayer of surviving? This console war stuff is crazy. They sell consoles at a loss because they make money on the software. But it takes a lot of people using the consoles to make money and a lot of software sales to make a lot of money. Unless the console breaks records, by the time these manufacturers recoup the loss on the hardware, it's probably time to make new hardware.

This entire business model is about throwing yourself down a hill at breakneck speed and hoping that you get enough momentum to clear the canyon in front of you. If you don't sell enough units to pass that critical threshold, you'll probably just keep losing money.

You know, I wonder if the gas companies ever thought of selling cars? Milk companies giving away cereal. Eye solution companies selling contacts. Sorry, I think this whole console nonsense is going away. Web-based device-agnostic games are going to take these guys to the cleaners.

No comments: