Microsoft confirms it has never made a profit on Xbox hardware
Microsoft has never made a profit on its Xbox consoles. That says the manufacturer during the lawsuit between Epic and Apple. It is well known that manufacturers often sell consoles at a loss, but Microsoft has never confirmed this.
Xbox CEO Lori Wright was asked during the lawsuit what the profit margin is on Xbox consoles, to which she replied: “We sell the consoles at a loss”. When asked if Microsoft has ever made a profit on Xbox console sales, she replied “No.” One conversation report is on Twitter.
The questions were asked in the context of revenue models and committees that platforms use. Wright stated that the Xbox division can only be profitable by charging a 30 percent commission on sales of games and DLC through the download store on the console. Such revenue offsets the loss incurred from the hardware sales.
Recently, Microsoft announced that it would lower the commission for PC games in the Microsoft Store to 12 percent. That will take effect from August. According to documents released from the lawsuit, Microsoft also had plans to do the same for Xbox games, but Wright says Microsoft won’t do that anyway.
Selling consoles below cost is common practice. Some consoles do become profitable over time, as it becomes cheaper to manufacture the hardware. However, this is often accompanied by price reductions and manufacturers use losses.
Analyst Daniel Ahmad notes Note that the PlayStation 4 did become profitable, because the suggested retail price was kept at $299 for years. Microsoft lowered the prices of its Xbox One during the same period, while Sony did not. Only Nintendo has a different strategy, the Switch was designed to become profitable as quickly as possible and it is. The handheld has relatively cheap hardware.
‘$2.2 billion profit for Xbox division in 2019’
While the console hardware itself is not profitable, the Xbox division is profitable. Microsoft does not disclose specific sales and profit figures for the Xbox division with its quarterly figures, but a document has been released with the lawsuit that provides more clarity about this.
For example, Microsoft lists its Xbox division with game companies that made more than a billion dollars in profit in 2019. The exact amount has been glossed over, but Microsoft stands between Nintendo and Activision-Blizzard, who made $2.3 billion and $1.6 billion respectively that year. On another slide, the names of the companies have been painted off, but the amounts are shown. There is an amount of 2.2 billion dollars. Presumably that was the profit of the Xbox division in 2019. The profit comes from the sale of games and subscriptions, such as Xbox Live Gold and Game Pass.
Microsoft also creates profiles of competitors in the document. For example, the company calculates that Nintendo had a turnover of USD 5.9 billion in 2019 from hardware, with a net profit of USD 332 million. Sony reportedly generated $5.1 billion in sales from console hardware that year and made a $1.7 billion loss on it. Microsoft’s comparable figures have been omitted from the document.