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Microsoft's Xbox 360 Pricing Strategy

About a week and a half ago, I was at Target, happened to ask (just for the fun of it) if they had any Xbox 360s in stock, and when they replied that they did, I went ahead and bought one on the spot. It was like seeing a free parking space in a prime area of San Francisco -- it's so unexpected that you almost feel like you have to park there, even if you're headed somewhere else.

I didn't really think through the cost of the Xbox 360 before I purchased it. I mean, I thought about it, but not clearly. Microsoft prices the Xbox Core system at $299. So at some level, my consumer brain says, "It's only $299!" Of course, I knew that wasn't really relevant -- no one would buy a Core system. Everyone buys the Premium system, which is $399 but includes extras that would cost more than $100 to add. So at some level, sure, I was saying, "It's only $399!" But even then I was still thinking about that $299 number and it was influencing my decision. $299? That's not a huge deal.

But let's talk about what it really costs to get going with an Xbox 360 system. It's not $399, much less $299.

  • Xbox 360 Premium. Includes a hard drive and a wireless controller. $399.
  • Wireless controllers. Necessary for multiplayer action. $49 each times three equals $147.
  • Wireless adapter. Unless you have Ethernet in your living room, and I don't, this is necessary to connect to Xbox Live for multiplayer online gaming. Note that the 360 doesn't work with any other wireless adapter, including the original Xbox wireless adapter. $99.
  • Games. What's a reasonable starter set of games? Two? Microsoft has raised the retail price of games to $59 each with the 360, so that makes $118.
  • Xbox Live subscription. Necessary for multiplayer online gaming. $49 per year.
That comes to a grand total of $812. But that's not the end of the story. I've bought two more games at $59 each, and then there's Xbox Live Arcade (more on that in another entry), which offers inexpensive downloadable mini-games. So far, I've made two purchases of "Microsoft Points" at $25 each. That brings my grand total so far to $980 -- for a game system!

In theory, one could buy an Xbox 360 Core system (no hard drive, wired controller) and one game and get started with that, and be out $358. But who would do that? No one. If you're going to buy a new game system, you're going to make use of all its cool features -- hard drive storage, wireless controllers, multiplayer gaming, online gaming, downloadable games, and so on. But who would say to themselves, "$980 for a new game system? That seems reasonable." Again, no one. (Okay, almost no one.)

So in the end, I'm impressed with Microsoft's strategy. Yes, they're losing money on each Xbox 360, which costs anywhere from $552 to $715 to manufacture, depending on whose estimate you believe. And yes, they're following the canonical Nintendo model of losing money (initially) on the box and making it back on the games. But how much do wireless controllers cost them to make? I'm sure it's less than $49 -- third-parties sell wireless controllers for existing systems for as little as $19, and they have to make a profit on every one. How much does their wireless adapter cost to make? Third parties sell USB wireless adapters for PCs for as little as $19, and again, they have to make a profit on every one. And Microsoft's marginal cost to add a single Xbox Live subscriber? Next to nothing.

I'd have to crunch some numbers to be sure, but it's entirely possible that with all the additional charges, Microsoft has already broken even on me as an Xbox 360 purchaser. If true, this would mean that their subsequent game revenue (from their own titles and royalties on all third-party titles) would be profit, not subsidization for the console itself. And if that's true, then Microsoft is being clever indeed.

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