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MS to lose $2bn on Xbox – analyst

Consoles to be sold at a loss! Shock! Horror!

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Merrill Lynch has come to the shock conclusion that Microsoft is going to lose a lot of money on Xbox. The console could drain up to $2 billion from the Beast of Redmond's coffers before break-even.

As the world+dog knows, consoles are sold at a loss in the early days, as manufacturers subsidise the low price points needed to drive sales of the machine.

Microsoft has yet to announce Xbox pricing, but most observers put it at around $250. Merrill Lynch reckons each console will cost around $375 to produce - simple maths tells you Microsoft is flushing $125 down the pan. The figure might be higher or lower depending on what Microsoft ultimatly asks punters to pay. The Xbox price tag isn't expected to be much higher than the $299 Sony currently charges for the PlayStation 2.

All that's before you take into account the half a billion dollars Microsoft has already said it will spend marketing the new machine.

The trade-off comes in brand licenses - the cut the console maker takes from software sales - but clearly these take time to accumulate, as the number of console owners grows.

Merrill Lynch's estimates - calculated without input from Microsoft - put shipments at five million units to 30 June 2002, the end of Microsoft's current fiscal year. That figure will grow to around ten million units in fiscal 2004. By then, volume production will have cut the cost of the console, reducing the per-unit loss (price cuts permitting), and software revenues should have rocketed (or so Microsoft hopes).

In just under a year, Sony has shipped eight million PlayStation 2s. ®

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