Just like for the older Xbox, the new Xbox 360 costs more to manufacture than Microsoft charges for the system. The retail price is $399 (which will eventually be cut down, which is the pattern for video game consoles) but the cost for all of the components is $552.27.
Microsoft must believe that people who purchase the console will also purchase enough games to make up the difference or the online service which involves a monthly fee. On the surface, this seems like a good sales strategy. It’s similar — but not quite the same — as printers that sell at a loss, allowing all the profit to be made by the sale of consumable ink.
The Xbox strategy is different because the games are less consumable; although players will often play the game, win, and then move onto the next, many games are designed to provide more entertainment than just “beating” them. While printer users are forced to buy more ink from the manufacturer (unless the users opt for cheap ink refills, a workaround that newer printers are built to restrict), video game console users are not required to purchase more games in order for the device to function.
Microsoft has another strategy regarding the Xbox, and this one involves supply and demand. At the early stages of the device’s “release,” supply is controlled and limited. With the high demand, or perceived high demand, this causes the street price — what someone is willing to pay — to shoot up. This results in bidding wars on eBay, for example.
A quick glance at the auction site’s bids shows that the Xbox 360 is still hot, and people are actively bidding $500 to $900. The article from Reuters mentions a bidding price of $1,200 and a “Buy It Now” price of $2,500, so it appears demand is starting to wane.
Of course, Microsoft won’t see money directly from the inflated auction prices, but they will benefit from the press involved. This is all good for the company, and therefore good for the shareholders. (MSFT is included in some of my mutual funds.)
There has been bad news for the company as well. Microsoft received some negative press, especially from techies, when people began coming across hardware glitches such as the software freezing (getting stuck) and overheating. A fix has been found, but a better solution will hopefully come from Microsoft through a revision of the hardware and software.
I think the message for consumers is clear. Don’t feel the need to be the first on the block with new technology. While it’s exciting to be the first amoing your friends to have a much sought-after device, is it worth the premium? Being privvy to the early version also puts the buyer at risk for bugs and glitches (despite copious laboratory testing), which are often fixed in a later revision.
I just noticed that Five Cent Nickel touched on this topic as well.
Personal note: I’ll be flying back home from California today, so I won’t be online much. I had a wonderful Thanksgiving out here, and I hope all my readers were able to celebrate the holiday, if they chose to do so, with much love, happiness, peace, and food.
Updated February 7, 2012 and originally published November 25, 2005.