Microsoft seen providing hefty Xbox subsidy

Microsoft Corp. plans a hefty subsidy on its next generation gaming console, the Xbox 360, when it hits store shelves this fall, according to industry estimates. The company provided little financial information when it unveiled the device last month, but Patrick Parr and Martin Cecchetto, analysts at UBS Securities LLC, expect Microsoft will pay its manufacturing partners about $375 (U.S.) a unit and sell them to consumers for $299. In a research note, they estimated that two of the contractors, Flextronics International Ltd. and Celestica Inc., will share revenue of between $350-million and $450-million this year and between $900-million and $1.1-billion in 2006. Wistron, a contract manufacturer in Taiwan, will take the leading role, building 60 to 70 per cent of the initial units, the analysts wrote. By some estimates, Microsoft has lost as much as $1.2-billion a year on the first Xbox since introducing the device in 2001, largely because of the price discounts that are designed to take business from market leader Sony Corp.'s PlayStation. MSFT (Nasdaq) fell 36 cents to $25.43. Flex (Nasdaq) fell 24 cents to $13.01. CLS.SV-T (TSX) fell 27 cents to $16.23 (Canadian).

News source: The Globe and Mail

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The xbox 360 isn't about making money on hardware, it's about getting the Microsoft brand (and associated software) into the living room and opening up consumers to hundreds of other revenue streams for microsoft to tap into. Windows, in my view, will eventually start to lose its status as cash cow; might not be 5 years, but it will eventually. The company wants different revenue streams that are going to be long run profit makers - and the xbox 360 is one example.


I'm pretty sure Microsoft makes hefty margins on the online game play service, as well as the games themselves.