Despite having been on market for two decades, Microsoft never generated profit solely from Xbox console sales!
Protocol reported about the subject that was brought up at the Epic Games vs. Apple trial. Here, Lori Wright, Xbox’ head of business development, got a question from Wes Earnhardt, the lawyer for Epic Games: „How much margin does Microsoft earn on the sale on the Xbox consoles?”
Wright’s answer follows: „We don’t. We sell the consoles at a loss.” Has Microsoft ever earned a profit from console sales? No, Wright claimed, adding that the loss is offset by game (and DLC) sales, as well as subscription services, such as Xbox Game Pass. (However, we remember that the original Xbox was quickly killed off in 2005-2006 so that Microsoft can focus on the Xbox 360, as the console didn’t generate profits, and while the X360 got a head start, on hardware alone, it never turned a profit!)
Daniel Ahmad, Niko Partners’ senior analyst, recapped it on Twitter: „This isn’t too unusual for the console space: the console is sold at a loss initially and usually for some time after. The platform holder recoups the investment in hardware via its first-party game sales, services, and the cut it takes from third parties that sell games/DLC. Hardware being unprofitable certainly played a bigger role in the late 90s and early 2000s (oh and the PlayStation 3 era). Both the PlayStation 5 and the Xbox 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. […] [The] Switch was built to be profitable as soon as possible.
Going by redacted court documents as part of the Epic v Apple case, Microsoft is one of the gaming companies that generate [at least] 1 billion[dollars] in profit from its software and services segment within gaming (in 2019). [The] same Microsoft document has a breakdown of hardware revenue/profit estimates for Sony and Nintendo. Hardware generating a loss for Sony, but profit for Nintendo. Also, you can work out Microsoft’s software and services profit was 2.2 billion dollars from this chart […]. Of course, that 2.2bn would have been offset by a loss on the hardware,” Ahmad wrote.
So this is a reason why we see console manufacturers all have subscription services (PlayStation Plus, Xbox Game Pass, Nintendo Switch Online), as they pull in a lot of cash.