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.