Microsoft Doesn’t Make a Profit on Xbox Consoles

A Microsoft executive admitted during the Apple v. Epic court case that the software giant’s console business has never been profitable. And court documents show that to be the case with Sony, but not Nintendo, as well.

The revelation come when Xbox vice president Lori Wright took the stand in Apple v. Epic.

“How much margin does Microsoft earn on the sale on the Xbox consoles?” an Epic Games lawyer asked Ms. Wright.

“We don’t,” Wright answered. “We sell the consoles at a loss.”

“Just to be clear, does Microsoft ever earn a profit on the sale of an Xbox console?” the lawyer then asked.

“No,” she answered.

This fact has been widely understood for years, of course: The videogame market is much like that for razors, where the companies try to make up losses from their hardware businesses by selling software and services (“razor blades”). In the case of videogames, hardware makers also try to cut costs over time by manufacturing cost-reduced versions of their consoles that still lose money, but less money. I recall a Microsoft executive telling me that it had hoped to eventually make money on some future cost-reduced Xbox 360, but that never happened.

The reason this question was asked during the Apple trial, of course, is to show that the videogame and smartphone markets are quite different despite the fact that both feature app stores that take 30 percent cuts. In Xbox’s case, those fees are how Microsoft tries to make up for the losses it generates by selling videogame consoles. But Apple makes heady margins on its iPhone and iPad hardware, as it does with its App Store as well.

Put another way, Apple subsidizes its App Store and other services with hardware sales while Microsoft tries to subsidize its videogame hardware sales with software and services.

“Try” being the operative word: While Xbox has likely experienced the occasional quarterly profit over the years, and its Xbox software and services can be profitable, my contention is that the business overall has never been profitable because of the hardware losses. Regardless, the hope for the future is that Xbox can be made profitable by moving away from hardware sales and towards more margins-friendly online services like Xbox Game Pass and Xbox Cloud Gaming.

Court documents also show that Sony’s PlayStation business has been profitable overall, but that firm, like Microsoft, doesn’t make profits from hardware sales. But Nintendo, curiously, does.

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Conversation 18 comments

  • nbplopes

    06 May, 2021 - 9:34 am

    <p>Devices sales don’t subsidize the App Store. They do not provide that service at a loss by a wide margin. </p>

    • Paul Thurrott

      Premium Member
      06 May, 2021 - 9:51 am

      <p>They did. I’m sure it’s profitable on its own now, but the App Store wouldn’t/couldn’t exist without the iPhone, and that infrastructure had to be built out and paid for somehow. That somehow was iPhone sales. Datacenters don’t pay for themselves as they’re being built. </p>

      • powerjunky

        10 May, 2021 - 4:13 pm

        <p>Actually, the iPhone and App Store were always designed to work together. What would the iPhone have been without apps? A calculator that you can call on? There was never any external storage or other method of installing software. Apple didn’t use the sale of iPhones to pay for data centers. They had those for years before this. Also, saying that data centers don’t pay for themselves is also naive. All businesses start up with an upfront cost. You pay for a product to be produced before you can sell it. You don’t profit then produce (at least not prior to crowd funding).</p>

  • skyczy08

    06 May, 2021 - 9:41 am

    <p>This is a bad comparison that unfortunately the courts will look fortunately upon Apple as viewing them as making as much money as possible on software/service…..</p>

  • LT1 Z51

    Premium Member
    06 May, 2021 - 1:33 pm

    <p>Nintendo makes money because they don’t use expensive top of the line components for their video games. Since the days of N64, Nintendo has been focused on Value and not on the Graphics arms race. Cartridges were used on the N64 for example because CD-ROM technology was expensive in 1996.</p>

    • sykeward

      07 May, 2021 - 2:02 pm

      <p>True, Nintendo is very concerned about hardware costs now, but they were definitely going for the performance crown with N64. They selected cartridges for the N64 because they were concerned about loading times and piracy with CDs.</p><p><br></p><p>Ironically, they actually wanted to sell a CD drive add-on for the Super Nintendo in the early 90s. They called it the "Play Station" and partnered with Sony to develop it, but terminated the deal late into development because of a dispute over software royalties. Sony further developed the technology into the original PlayStation and the rest is history.</p>

    • tekisasujohn

      07 May, 2021 - 11:52 pm

      <p>"<span style="color: rgb(0, 0, 0);">Since the days of N64, Nintendo has been focused on Value and not on the Graphics arms race."</span></p><p><span style="color: rgb(0, 0, 0);">s/N64/Gamecube/. The N64 years were defined by Nintendo’s focus on graphical prowess via their partnership with Silicon Graphics. </span></p><p><br></p><p><span style="color: rgb(0, 0, 0);">"Cartridges were used on the N64 for example because CD-ROM technology was expensive in 1996"</span></p><p><span style="color: rgb(0, 0, 0);">Eh, that depends on storage requirements and applying that to a system’s lifespan and projected storage usage. By the mid-to-late 90s, N64 cartridges used fractions of the storage offered by PS1’s CD-ROM format and were hideously more expensive. But going by Sega’s numbers, even in the early-to-mid-90s a mass market CD-ROM solution wouldn’t have been more expensive than cartridges.</span></p>

  • madthinus

    Premium Member
    06 May, 2021 - 2:17 pm

    <p>So confirmed: Water is still wet. Only Games company making margin on hardware is Nintendo. </p>

    • spacein_vader

      Premium Member
      07 May, 2021 - 1:59 am

      <p>And to Ninendos credit they still are price competitive enough to sell, powerful enough to provide a good or great gaming experience and have excellent software. </p><p><br></p><p>Given that and their willingness to take risks on things like motion controls certainly makes them unique in the market. </p>

      • curtisspendlove

        07 May, 2021 - 5:45 pm

        <p>This. </p><p><br></p><p>If they want to sell an Xbox at profit. They need to make it worth the profit (at least in the eyes of the consumers). </p><p><br></p><p>I’m sure Sony and Microsoft would very much enjoy selling hardware at a profit. </p>

        • Paul Thurrott

          Premium Member
          08 May, 2021 - 8:59 am

          Here’s something else you can be sure of. If Sony or Microsoft COULD make a console at a profit, they would. But they’ve made a business model choice. And it seems to work out overall.

          • curtisspendlove

            10 May, 2021 - 1:00 pm

            <p>Right. And Apple’s business model choice is to make money on hardware and services. </p><p><br></p><p>Why is that wrong?</p>

            • Paul Thurrott

              Premium Member
              10 May, 2021 - 2:29 pm

              That’s not wrong. What’s wrong is abusing your monopoly power to harm competitors, partners, and consumers.

            • oadrian

              12 May, 2021 - 10:19 am

              <p>In a properly functioning market, profits are supposed to go down as competition increases. Sony and Microsoft actually compete fiercely. They also don’t make a ton of money.</p><p><br></p><p>Apple has very little competition once you’re locked to their system. That’s a problem with all the stores, really, but especially for non-subscription services. If you leave the Apple or Google ecosystem you are leaving all your paid-for content behind. With Xbox and PlayStation, I can at least trade in disks and re-sell unwanted content. With Google, I can use other stores with better terms.</p><p><br></p><p>The fact that Apple can make money on both ends means that they have abused "something". Either they effectively have no competition, making them a monopoly abusing their position; or their business practices hide the fact that people aren’t getting the value that they want which is deception; or their customers are paying for something purely perceived — the logo / brand / status symbol.</p><p><br></p><p>There is no version of this where they are harmlessly fleecing their customers.</p>

  • curtisspendlove

    07 May, 2021 - 5:28 pm

    <p>I still don’t understand why this distinction even matters. </p><p><br></p><p>Apple should be punished because they are able to sell (nearly) all of their products at a profit?</p><p><br></p><p>That sounds to me like “good business”. I betcha Microsoft would *love* to sell Xbox consoles at profit. </p><p><br></p><p>But the problem is that they can’t. They aren’t so much better than the other consoles that people are willing to pay a cost difference. </p><p><br></p><p>I would also have liked to hear *anyone* in the console realm answer the question “so…if you were able to sell the console at a profit… you’d immediately reduce the margin on games by 18%”. </p><p><br></p><p>It’s never going to happen. They’d pocket the extra money and brag how awesome it is that Xbox can be sold at a profit (or … they’d hide that fact and pocket the money anyway). </p>

    • MoopMeep

      08 May, 2021 - 8:16 am

      <p>Nobody points out that Xbox and Sony games are much more expensive than apple and google games too. So just to sell a game, Microsoft and Sony take 30% of 60-70 dollars, apple and google take about 30% of 5-6 dollars. So Microsoft and Sony get about 15 dollars just for posting something to their store. Maybe the governments should impose a rule that an online store can only make a dollar for selling something they didn’t even develop</p>

      • Paul Thurrott

        Premium Member
        08 May, 2021 - 8:33 am

        And you aren’t pointing out that, unlike mobile apps and games, the $60 Xbox and PlayStation games often cost millions of dollars to make, if not more, similar to the cost of Hollywood movies. Also, your math is invented.

        • MoopMeep

          08 May, 2021 - 2:56 pm

          <p>Exactly, the poor developer spends millions making the game and then Microsoft and Sony take 30% just for putting it on the store. </p>


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