Xbox Economics 101

Xbox is more expensive to manufacture than its competitors, Sony’s PlayStation 2 (PS2) and Nintendo’s GameCube. Therefore, to remain competitive, Microsoft must sell each box at a loss and make up the difference by selling games and services.

Various analysts estimate that each Xbox costs between US$320 and US$380 to build. PS2 costs about US$185, according to an estimate by The Envisioneering Group, and GameCube around US$150, according to Nintendo. The discrepancy is primarily because Xbox has a built-in hard drive and Ethernet connector, which PS2 and GameCube lack. Xbox also boasts more memory and a more powerful CPU and video processor.

Sony has an additional advantage in its US$1 billion chip manufacturing plant dedicated to making processors for its game consoles. This allows Sony to more easily streamline the manufacturing process—for example, it could combine its graphics chip (called Graphics Synthesizer) with its CPU (called Emotion Engine) in a single chip. In contrast, Xbox uses mostly PC components from multiple suppliers that might not cooperate to improve efficiency—Nvidia’s video processor will probably never be combined with Intel’s CPU, for example.