“Just to be clear, does Microsoft ever earn a profit on the sale of an Xbox console?” Wright follows-up.
“No,” Wright says.
Confirmed Xbox Series X Games
Wright explains that Microsoft keeps selling consoles at a loss because its business model is set up to deliver “an end-to-end gaming experience,” and that hardware is “critical to us delivering that gaming experience.” These experiences include services like games, Xbox Live Gold, and Xbox Game Pass.
As noted by Protocol, Epic’s questions regarding hardware profitability were in order to show that while video game console makers have a justification for its 30% revenue share as it is a primary revenue source for them, smartphone makers like Apple don’t have as strong reasoning for their revenue share models.
Video game hardware has always typically been sold at a loss, save for a couple of instances. Nintendo, for example, has historically not tried to take a loss on hardware and makes a profit on systems sold, including the Nintendo Switch. Sony’s PS4 was also profitable, according to analyst Daniel Ahmad.
Same Microsoft document has a breakdown of hardware revenue / profit estimates for Sony and Nintendo.
— Daniel Ahmad (@ZhugeEX) May 5, 2021
Even now, analysis from documents revealed during the trial suggests that both Sony and Xbox are taking a loss on the hardware, while Nintendo doesn’t as per its long-running strategy. Meanwhile, Microsoft currently generates over a billion dollars in revenue from software and services, just as Wright testified.
Console sales are just one piece of the profit pie and it’s not as if these companies are in the red for selling hardware at a loss. Both Microsoft and Sony are profitable after all, and in the case of Microsoft, the Xbox division is just one of its many departments. But although hardware losses have been known throughout the industry, the Epic vs. Apple trial continues to put on record many of these open secrets.
As part of Wright’s testimony, other documents from Xbox show some of the company’s inner workings including Xbox’s analysis of The Last of Us Part 2 from rival PlayStation, as well as some of the company’s expectations regarding rival releases like how it believed The Legend of Zelda: Breath of the Wild 2 was set to be released in 2020.
Matt T.M. Kim is IGN’s News Editor.