A few months ago, we found out that Epic was trying to get a Microsoft executive to testify during their big Apple lawsuit, and it looks like we’ve got our winner. Xbox business development vice president Lori Wright took the stand yesterday at Epic’s request to talk about the Xbox and the console games industry in order to paint it as a totally different market than smartphones.
For example, whereas pretty much every smartphone is sold for profit, Microsoft has never sold an Xbox console profitably. When asked by Epic’s lawyer point-blank what Microsoft’s profit margin was on the sale of an Xbox, Wrist responded: “We don’t. We sell the consoles at a loss.”
And when asked if Microsoft had ever earned a profit from the sale of even a single Xbox, Wright replied, “no.”
This led to the obvious question of why anyone would sell a device at a loss, to which Wright explained that Microsoft’s business model is to sell the consoles at a loss but make back those losses and more on game sales and subscription services like Xbox Live Gold and Xbox Game Pass.
Wright justified the 70/30 revenue split on Xbox due to selling consoles at a loss, and Microsoft needs that revenue in order to justify building new consoles in the first place.
Related: Xbox Head Still Hasn’t Given Up On Bringing xCloud To Other Consoles
And even with those console losses, Xbox’s overall revenue is way up this year thanks to “record engagement” with those subscription services. Game Pass recently hit 23 million subscribers, with overall gaming revenue up 50% compared to the same time last year.
This isn’t exactly a huge bombshell for industry insiders. As Niko Partners analyst Daniel Ahmad noted, most major game consoles have been sold at a loss, including the PS2, PS3, and of course, every Xbox ever made. The PS4 eventually became profitable because Sony never cut the console’s price below $299. Nintendo is an outlier for selling the Switch at a price that is actually profitable.
The PS5 and Xbox Series X/S might someday become profitable, but for now they’re both being sold at a loss.
Although Microsoft maintains a 70/30 revenue split on Xbox, the Microsoft Store recently announced an 88/12 revenue split on PC to match the same revenue sharing as the Epic Games Store. Since Microsoft doesn’t need to make up any losses on PC hardware, the massive revenue share really isn’t necessary–which is sort of the same situation on the Apple iPhone.
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