Firt off, let me start by saying these are estimates in US dollar figures based on information revealed about Kinect's production costs as well as pre-360 Slim production costs with updated estimates.  These are not official figures, just simply a personal analysis and guestimation.

The Xbox 360 S:

I've tried searching for more recent Xbox 360 production costs estimates but can't seem to find any more recent than 2007.  If any of you find something more recent, please link it to me and I will update this thread.

Now, as of 2007, iSuppli had the 360 Elite production costs at $323.  This was back when the Elite was selling for $480.  By the end of 2008, the Falcon and then Jasper revision was released which lowered costs by shrinking the CPU, GPU, and power supply.  This accompanied a price drop to $300 for the Pro and $400 for the Elite.  At this point, I have estimated that it cost roughly $225 per 360 Arcade thanks to the hardware revisions.  Then the entirety of 2009 pressed on with no price cuts.  At the end the SKU's were shuffled once again to remove the Pro and replace it with the Elite.  The only change this represented was a hard drive upgrade.  Also, the standard HD AV cables were reduced to just Composite AV cables.  This entire year of production with minro cost savers such as the cable update should have saved them another $25-45 per unit making the production costs of an Xbox 360 at $180-200.

Then came the 360 S.  Not only did this revision shrink the CPU and GPU, it combined them under one chip at 45nm.  This allowed a reduction in motherboard size, cooling, casing materials, power supply, etc.  The only addition to the 360 S that would represent some mild cost added would be the draft-N wireless which by component should only cost about $5-10 per 360 S.  As a result of these massive revisions, the production costs could be as low as $105-135 per 360 S, even possibly lower.  Again, if I could get a more recent 360 S component break down by iSuppli this would be much easier so if anyone has information, please pass it along!

Adding on the $20 for shipment, packaging, ect. this leaves total profit per 360 S sold to be anywhere from ~$75-145 per unit sold (4GB vs 250gb hard drive respectively)!

Microsoft Kinect:

Reports have been coming in that the components of Kinect cost just $56 total.  Now granted this is not the entirety of the costs.  There are also production costs, shipment costs, packaging, etc.  The breakdown of all those costs, however, I would estimate to be no higher than an additional $20 per Kinect. 

That adds up to a total production cost of just $76 per Kinect.

Kinect Retail Price:  $149.  Now I'm sure some of you will want to say "But the Retailers get a cut so the price MS sells them to retailers is lower!" and you would be absolutely right!  However, unlike most accessory markups, Kinect is seeing more similar to Console Markup rates.  According to a distributor that handles many electronics, video games, computers, etc. D and H, the cost per Kinect for their account holders is $138 per Kinect.  Granted, I'm sure this drops if you are ordering them in the alotments of hundreds to a thousand per shipment.  I would venture to say at most, though, you would be getting a Kinect for around $125 per unit.

That leaves the total profit per Kinect sold to be ~$50 USD.

Summary:

To wrap this up, Microsoft has been making strong profits for the last 2 fiscal years even during heavy Kinect R&D times.  With the costs of production so low and profits per item so high, it would seem very plausible that Microsoft is in the perfect situation to have competitive price cuts in 2011.

I am not forgetting the massive $500 million ad campaign for Kinect.  I have no idea if this budget comes from EDD or another section of the Microsoft quarterly reports.  Even with that massive budget, after 5 million Kinects we would be at $250 million profit already, not counting profits on hardware, software, XBL, and accessories, so it is safe to say this budget will be paid back in full in a very short period of time.

I would not be surprised to see a $50 price reduction on Kinect Standalone kits as well as up to a massive $100 cut on 360 Standalone kits.  I would guess prices to be more in line with the following at sometime in 2011:

360 S 4GB - $129
360 S 250GB - $199
Kinect - $99

360 S 4GB Kinect - $179
360 S 250GB Kinect - $249

As always, MS could surprise us again with updated hardware rather than such high prices.  Only time will tell.

good read. Yes this does leave room to make money and still cut price.

MS has made good on this gen.  By the time they cut price, cost will have come down more.

lets hope they cut price and not just change up bundles. They might just get rid of the arcade but I think being in a position to sell close to 100 bucks is going to sell like hot cakes. they could also make kinect come in every xbox with controller and all. 200 bucks 4g and 299 for 250-kinect bundle. I don't know if that would be the right choice but could happen. seems your analysts would be most on track. 

Would be interesting to see how much the arcade would sell at 100-125 price point. I think it would go nutz. Then they would make more money on hardware sales of hardrives and flash drives.

One thing they got rid of too was the memory card slots in front of the xbox. Wonder how much that saved them money.

You left out some important things.

• Research and development.
• 3rd party IP royalties
• marketing
• corporate expenditure

what? so you say costs  are  $75 and they get $125 right? so $50 profit.

then you say they make $250m profit with 5 million sold kinect?

5m kinect x $50 profit = $250m profit

$500m ad campaign - $250m profit = $250m loss after 5m sold kinect!

and you forget taxes (in germany like 30€ for the 150€ retail price), development and operating costs like the service (more people for call center, warranty)

ah yeah kinect adventures costs a little bit as well to develop and produce. 

sry if i dont understand you because english isnt mine but i think your calculation is a big fail.

nice thread Nightsurge, bookmarked for later!

Isn't this all made moot by the fact that fiscally responsible or not, Microsoft can and would cut the price?

Xbox Live makes enough munnies to pay for that all!

Atleast I'd imagine so.

Well obviously that is true.  I merely wanted to show that with MS's recent pricing strategy and lack of recent price cuts they are profiting very nicely and will be able to actually afford more risky price strategies if necessary and still avoid taking losses on hardware.

First off, I said that the $500 million ad budget would be paid in very little time.  That $250 million was JUST from Kinect.  Obviously profits on 360 hardware, software, etc. will make up the rest of that $250 million in a very short amount of time is what I was saying.

As far as taxes, none of that goes to the manufacturer so I am not sure I get why you mentioned that.

I very briefly tried to cover the topic of R&D by simply stating that even with the Kinect R&D going on these past 2 years MS has remained very profitable in the Entertainment and Devices Division.  Kinect Adventures I suppose would introduce some other minor costs, but as it is mostly just a demo for Kinect's technology I believe it can be included without trying to separate anything.

I think it's very possible that next year you'll be seeing Microsoft very aggressively cutting price to try to widen that gap that's been closing between the 360 and the PS3.  The numbers you give, nightsurge seem pretty realistic.  So this holidy may be a "let the early adopters turn us a quick buck before we hack and slash at prices over the next two years" approach.

I would not be surprised to see a $99 360S 4GB Slim in early to mid-2012.  We might see two decent price drops around E3 and November of 2011.  I'm betting we will.