There's No Profit Margin for Microsoft on the Xbox One X

Microsoft's upcoming Xbox One X is an impressive piece of kit, given its $499 price point(Opens in a new window). But Microsoft could only hit the specs it targeted by compromising on one critical issue: Profitability. Unlike the Xbox One and Xbox One S refresh, both of which made money from Day 1 and were profitable pieces of hardware, Microsoft isn't earning a cent on the Xbox One X.

That's the word from Phil Spencer, head of the Xbox division. When asked(Opens in a new window) by Business Insider if the Xbox One X would be profitable for Microsoft, Spencer flatly answered "No." When Business Insider asked if that meant Microsoft was taking a loss on the hardware, Spencer stated "I didn't answer it that way." That's not quite a denial, but it definitely implies that the console's price makes it revenue neutral, at best.

Prior to this generation, it was normal for Sony and Microsoft to launch consoles at a loss and then make back their investments via software sales royalties. But the Xbox 360 and PS3 generations changed all that, because the consoles themselves (particularly the PS3) were so expensive to produce. It took Microsoft years to turn a profit on the Xbox 360, and Sony's losses in the early days of the PS3 were so steep, it had pulled their total earnings from 2000 - 2011 into the negative. The console was eventually profitable, but it's not clear if that was enough to clear the losses from early in its own life cycle.

It's a risk for Microsoft to return to the strategy of non-profitable hardware. Any issues that arise with the platform, such as the Xbox 360's Red Ring of Death, will immediately turn the device into a financial liability with no cushion to absorb the shot. And despite offering quite a bit of horsepower at the $500 mark, the company still clearly feels constrained to keep costs under control. Sony tried pushing the PlayStation 3 at a $500 to $600 price point, and suffered disaster for its hubris. Microsoft won't want to make the same mistake.

This could also explain why Microsoft is keeping a lot of focus on the Xbox One S(Opens in a new window), which is profitable at its much lower price. If the Xbox One X doesn't prove a hit with consumers, the company still has a money-making game console to rely on for the mass market. Spencer alluded to Microsoft's other ways of earning profit through Xbox Live subscriptions and software sales. It's clear the company has a multi-pronged earnings strategy to generate revenue, even without a per-unit profit margin.