Software giant Microsoft Corp. could lose as much as $2 billion on its upcoming vidgame console Xbox before it breaks even in about five years, according to a report released Tuesday by Merrill Lynch.
“Ironically, the more units sold in the early years, the greater the losses,” analyst Henry Blodget said in the report, noting that most vidgame console makers try to recoup much of their hardware costs from software and licensing fees as fewer people buy the expensive consoles.
Microsoft’s production costs are expected to be an unusually high $375 per machine because of the console’s advanced features, Blodget said. Microsoft likely will “lose $125 on every Xbox console” before sales, marketing and other costs.
Those other costs include $500 million in marketing dollars Microsoft has earmarked to compete with stalwarts PlayStation and Nintendo, who combined account for about $11 billion of the $20 billion vidgame industry.
Blodget estimates Microsoft will sell 5 million Xbox units in fiscal 2002, peaking at 10 million in fiscal 2004. The system hits store shelves this fall.
Sony has shipped more than 80 million units of the original PlayStation and 744 million games. Although a lack of product in the market still hampers sales of its new PlayStation 2, Sony has sold 8 million consoles since its launch last year. High production costs forced Sega to stop producing its Dreamcast console and focus more on creating games for PlayStation and the Xbox.
“By the time Xbox is launched, there will be over 250 PS2 game titles available and a likely PS2 installed base of nearly 20 million units,” Blodget said. By contrast, Microsoft is expected to launch Xbox with about 20 games.
Blodget predicts that ultimately Xbox will emerge as a strong No. 2 or No. 3 player, although No. 1 is not out of the question. “It is conceivable, of course, that Microsoft will topple Sony and Nintendo in the games market the same way it did Apple in PCs and Lotus and WordPerfect in office productivity suites,” he said.