Steve Balmer, president of Microsoft, related his views on the business of the Xbox. The main difference between the original Xbox and the 360, as far as Balmer is concerned, is that Microsoft is expecting the 360 to make a profit, rather than become a long term loss. Balmer made his comments to Business Week.
Balmer thought back to the launch of the present gen machine and said that Microsoft intended to make up the losses of the hardware through royalty fees and licenses. He said, “Generation one was lose money-gross margin loss on the console for the lifetime. You’ve got to take a lifetime view. We did have a lifetime view that said if you add all the revenue from selling consoles and all the costs of shipping consoles, it was negative. It was a model that made that back on royalties and third-party games and our own first-party games. We actually thought we could pencil it out.”
Microsoft also expected that a higher price for the original Xbox was justified because of the on-board hard drive. “We also didn’t think we would lose as much money as we did because we thought we could charge a premium for a device that had a hard disk in it. But we could premium price [against the] Sony [PS2] because we had a hard disk.” As a result of the higher Xbox price, Microsoft realized fewer sales than were expected.
“Sony, in some senses, is in the exact same position we were in the last generation. By sticking in the darn Blu-ray drive-and they are pricing to recover its cost-they are at a price disadvantage. If they move to match our price, they will lose a lot of money over the life of the console. And I’m not sure that [Sony] would be able to tolerate that… This generation, we’re not pricing to lose money on the hardware over the life [of the machine]. At the same time, we said we can’t have hardware that we can’t recover with the consumer. We couldn’t recover the [costs of the] hard disk. So the hard disk is not mandatory in the 360. The most popular model has a hard disk. But no games require a hard disk.”
To date, the original Xbox has sold over 13.5 million units since its debut in 2001. By comparison, the 360 is expected to sell between 13-15 million units by the end of fiscal year 2007. While Microsoft has almost a year,s lead in debuting their machine ahead of Sony,s PS3, Microsoft vice president, Peter Moore, personally knows that a lead like this doesn,t necessarily guarantee a permanent position in the game console races. While Moore was head of operations at Sega, the company,s Dreamcast game console, released in 1999, went swiftly into oblivion once the PS2 was released the following year.
