Epic v. Apple trial reveals how Microsoft has never made money off Xbox hardware

The Xbox One on the left with the Xbox Series X and S on the right.

Microsoft announced at a court visit this week that it didn’t and never made any money on unit sales for the Xbox. Every console is sold at a loss, and the profit from the project for Microsoft comes entirely from software sales.

This was revealed during a testimony from a Microsoft executive in the Epic v Apple trial that began Monday in Oakland, Calif. The trial will not be televised, but the trial was broadcast to the public via conference call. That call, in turn, was hosted and retransmitted across several other platforms such as Twitch and Discord.

Epic is suing Apple over its rules for third-party apps in the iOS store, where Apple restricts both game and in-game sales. Fortnite publisher Epic accuses Apple of engaging in anti-competitive business practices and is hoping to force Apple to allow developers to use their own in-app payment methods for games sold on iOS.

Microsoft’s Lori Wright, vice president of business development for Gaming, Media & Entertainment, was called to the booth as an expert witness on Wednesday to share testimony on Microsoft’s publicized efforts to work with Apple to bring the Project xCloud service to market to bring iOS Store.

Despite Xbox bottlenecks, Microsoft reports third-quarter sales of 3.6 billion US dollars, which corresponds to a growth in hardware sales of 232%

Much of the discussion in the Epic v. Apple Trial is due to the amount of revenue that a digital storefront owner should be eligible to collect. As part of this, Wright was asked what the profit margin is on Xbox consoles.

“We’re selling the consoles at a loss,” Wright said.

One of Epic Games’ attorneys then asked, “Does Microsoft ever make a profit from selling an Xbox console?” Wright said, “No.”

To people following the business side of the gaming industry, this may sound like old news at first. It has long been known that Microsoft and Sony sell their video game consoles on a “razor and blade” model in which the company subsidizes its hardware and sells it at a loss to get the money back in software and services. (Nintendo, on the other hand, makes a slight profit with every Switch sold.)

As with a lot of hard data in the video game industry, there is a fair amount of analyst speculation here too. Neither Sony nor Microsoft tend to disclose their internal calculations. So we’re left with tests like various third-party “slips” that estimate the unit cost of each console.

According to these independent estimates, both the PlayStation 4 and Xbox One sold at a small loss when you factor in shipping and marketing costs. However, as a console ages, its components become cheaper, which in theory would result in a profit per unit towards the end of the console’s life cycle.

The interesting thing about Wright’s statement is that Microsoft has never come this far. It’s to mark Xbox’s 20th anniversary in November, and during that time every single console that has ever shipped has been sold at a loss.

Microsoft made up the difference by cutting the revenue of developers who deliver games for the Xbox by 30%. While it was recently announced that this cut would be reduced to 12% for publishers who ship games for the Windows 10 Store, the Xbox remains at a split of 70/30.

This, in turn, explains a lot about Microsoft’s recent moves to decouple the Xbox experience from the physical Xbox entity. While the gaming division generates billions in quarterly sales, the actual hardware traditionally seems to have been the weakest link.

Wright’s testimony is one of many little revelations the game industry was making on Epic v. Apple have stuck. One of the side effects of the study, which pits two of the most influential and connected companies in the field against each other, is a slow drop in interesting information. Given how mysterious the gaming industry has traditionally been, various disclosures made for the trial have actually resulted in a cavalry of unplanned leaks.

This includes what Epic paid various third party developers to secure their titles as weekly free downloads on the Epic Games Store. Epic’s low-key battle with Sony over cross-platform play for Fortnite; and some of the “guest characters” Epic may bring to Fortnite in the future, including Metroid’s Samus Aran.

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