Microsoft never gives the precise financial results of its gaming division, leaving a lot of uncertainty about its profitability. The Epic vs Apple lawsuit confirms that the manufacturer is selling its consoles at a loss.
The Epic vs Apple case is very interesting to follow, because it allows us to learn a lot more about the secrets of the video game industry. Whether it is the war chest accumulated by Fortnite, Microsoft’s internal strategy or the negotiations between Sony and Epic concerning crossplay, the trial reveals a lot of things.
A recurring question when we talk about game consoles is their profitability, especially when it comes to Microsoft. The Redmond firm never gives detailed figures on Xbox finances.
In the Epic vs Apple trial, Lori Wright was called to testify. She is responsible for the Xbox business and the growth of the division.
To the question “what margin is Microsoft taking on sales of Xbox consoles?” “, She replies” none, we are selling the consoles at a loss “.
This already has the merit of clarity, but the next question clarifies the situation “to be clear, has Microsoft ever made a profit on the sale of a console? To which Lori Wright simply replies: no.
The razor business model
Microsoft is touching here on a fundamental element of the gaming console industry that is perhaps too little known: it is customary to sell consoles at a loss.
As with a razor or a printer, the business model of consoles is generally based on the sale of consumable: video games. The console is therefore sold at a loss or at equilibrium to more easily convince the consumer, then the manufacturer makes profits on purchases a posteriori.
This is even more true with the dematerialized stores of consoles, where manufacturers receive a greater commission than on physical games. To this we must also add the sale of PlayStation Plus, Xbox Live Gold or Xbox Game Pass subscription.
Hardware being unprofitable certainly played a bigger role in the late 90’s and early 2000’s (oh and PS3 era lol).
Both the PS5 and Series X/S are being sold at a loss right now, but will become profitable down the line most likely.
Nintendo is somewhat of an outlier.
— Daniel Ahmad (@ZhugeEX) May 5, 2021
Not everyone applies this model. Nintendo thus makes a profit as soon as the console is sold. Sony has had a hybrid model since the failed launch of the PS3 which turned out to be a financial hole for the group.
Since the PlayStation are sold close to equilibrium at the start of the generation, then with profits at the end of the generation while maintaining the price of the console.
According to Microsoft’s testimony, we now know that the firm has sold all its consoles at a loss, even at the end of the generation. This explains the very aggressive prices charged on the end of life of the Xbox 360 and Xbox One.
A profitable activity
It should be understood that we are talking here only of the sale of consoles, that is to say of equipment for playing video games. Whether Sony or Nintendo, manufacturers make profits in their video game business through the sale of games and their subscriptions. Sony even achieved a record year in terms of profit, despite the cost involved in launching a new generation of console.
What does this have to do with the Epic vs Apple lawsuit?
One can legitimately wonder why these subjects are brought up during a trial concerning the publication of the Fortnite game on the Apple App Store.
Beyond this simple dispute, Epic Games intends to prove that the control imposed by Apple on the iOS App Store is not healthy given the power of the American giant on the market.
One of the challenges of the trial is for Apple to show that the 30% commission made on the App Store is a market standard also practiced by Xbox and PlayStation in particular.
It is the lawyer of Epic Games who asked the questions to Lori Wright on the profitability of consoles, to demonstrate that this commission is justified by the economic model specific to consoles that Apple does not apply. Indeed, the iPhone is not sold at a loss by the Apple brand, far from it.