In the console wars, the real money is made online

Microsoft appears to be counting heavily on Xbox Live subscriptions and game purchases to buoy its gaming-related revenues.

A teardown of the just-released Xbox One reveals that the console costs $471 to make, earning the company a measly $28 for every next-gen machine that hops off the shelves. The margins are even worse for Sony's PS4, which brings in a profit of $18 on a build cost of $381. Both teardowns were performed by industry watchers at IHS.

That suggests that, eight generations in, console makers still believe games are where the money is made.

There's a precedent for this. Amazon, for instance, has sold its Kindles at a loss before, in an effort to hook people on buying e-books. And Microsoft wasn't afraid to lose money on the original Xbox, either.

The strategy has worked wonderfully for Microsoft, even as games have grown cheaper over time and the cost of producing big, blockbuster games has risen — sometimes into the tens of millions of dollars.

But console makers have developed another revenue stream to stem their losses on hardware, and that's the subscription layer that comes with many consoles these days. Xbox Live is mind-bogglingly lucrative. In 2010, the last year for which we have a concrete estimate, the service made an estimated $1.2 billion. More recently, transactions on Xbox Live have jumped as sales of old Xbox 360s declined ahead of the One's release. Meanwhile, analysts say Sony stands to make $1.2 billion a year itself from PlayStation Plus, its own version of Xbox Live, by the time the PS4 gets into its swing in 2017.

A subscription to Xbox Live is mandatory if you want to be able to record your gameplay, watch HD movies or television or take advantage of the One's integration with Skype. PlayStation users can't hop on online multiplayer without a PS Plus subscription.

Buying a console comes with some pretty steep upfront costs. But the real money doesn't start changing hands until after you leave the store.

 

Brian Fung covers technology for The Washington Post, focusing on telecommunications and the Internet. Before joining the Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic.

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