Microsoft to Lose on Xbox, Analyst Says
Microsoft Corp. will sell more than 5 million Xbox video game consoles in its first year, but lose $2 billion on the product before breaking even in fiscal 2005, Merrill Lynch predicted in a report released Tuesday.
Microsoft, which plans to spend $500 million promoting Xbox, has said it initially will lose money on console sales, but make it back on sales of software and on royalties paid by game makers. The strategy is typical of the industry’s approach. Sony Corp., for example, loses an estimated $188 on each PlayStation 2 sold in the U.S., where they are priced at $299, according to James Lin, formerly a games analyst at Sutro & Co.
A Microsoft spokesman declined to comment on the report by Merrill Lynch & Co. analyst Henry Blodget.
Blodget said Microsoft will be at a disadvantage when it debuts this fall in Japan and the U.S. By then, rival Sony will have shipped more than 15 million PlayStation 2 consoles worldwide, giving Sony a substantial lead. The Xbox also will compete with Nintendo’s Game Cube, which also is set to launch this fall.
Each Xbox will cost $377 to produce, based on the cost of parts, Blodget estimated. He rated Microsoft shares “accumulate,” and said he expects the company to lose $125 on each console, excluding related selling, general and administrative costs.
Other analysts who cover the video game industry say there’s not enough information to make such a definitive evaluation of the Xbox hardware.
Other analysts fault the report for failing to mention potential revenue from selling and hosting online games, one of the cornerstones of the Xbox revenue model.
Blodget, 35, recently initiated coverage of Microsoft after building a reputation as an early advocate of Internet stocks, such as Amazon.com Inc. As those stocks declined in recent months, however, so did his credibility.
Microsoft shares gained $2, or 3.5%, to $59.44, in Nasdaq trading Tuesday.
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Times staff writer Alex Pham contributed to this report. Bloomberg News was used in compiling this report.
