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Analyzing the console subsidization strategy

Blake Snow

Given Microsoft's continued commitment to console gaming despite its $1.26B in losses on the Xbox 360, Next-Gen optimistically reports the console's chances of profitability by 2008 on the back of a one-year head start over the competition and its current game library. More interesting, however, is one Digger's reply to the belief that said losses at the onset of the 360 are standard to the subsidization strategy (early losses, latter profits) also used by Sony. He claims the following two errors in how Microsoft has executed the strategy:

  1. "Outsourcing production. This keeps the production costs relatively stable, instead of having massive drop-offs down the road [to reap big profits]."
  2. "Console life-span. [Microsoft] replaced the original Xbox way too fast. Yes, the new technology is dazzling, but money is made towards the end of a console's lifespan."
Just like any business, it takes money to make money. But how much?

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