Well I'll search for a few links but I believe the R&D costs for the MS Surface were placed in the Entertainment Division. So which would make sense since it should fall into that category. So when you look at it that way there are a lot more things that are trhowing negatives into the equation.

Some "answers":
1. R&D expenses are for the whole division - which last FY end Jun 08 totalled almost $1.6 Billion. So that is a lot of R&D - granted for the whole division.

Contrast that to Nintendo - $300 million only. So on just sheer numbers, the EDD division spends so much more on R&D. Relatively, it is even bigger, since Nintendo Revenues are much higher than the EDD division.

If you speculate that most of that R&D is for the Zune, Windows Mobile, etc.., then the XBox Platform is actually now "quite profitable".

Hence, MSFT can really afford those price cuts. Think about it, XBox Revenue comprised 71% of the EDD last FY.
If you proportionally allocate the R&D - then XBox spent about $1.1 Billion on R&D alone.

I don't know for sure, but that number sure sounds like a lot, just for the XBox Division.
More than likely, more R&D is allocated to the other segments like Windows Mobile (Danger), IPTV, etc.

Because if you think that R&D for XBox is $1.1 Billion, then either they are already researching the next XBox or some other gaming device.

thanks squilliam.

though if that is how much it initially cost, that was back in FY Jun 06.

we just finished FY Jun 08 - and by all indications, they should be making a positive gross margin on the consoles, in my opinion.

 not sure... maybe that's why R&D spending is quite large.

A note regarding R&D:

If R&D spending does not increase by another 40%, then it will make the profit projections much larger on both analyses.

$1.9 Billion in R&D (projected) is quite a huge number.
Again, to compare, Nintendo is projected to spend only $300 million in R&D.
No data on Sony Game Division though.

The number you use are not accurate as you totally ignore the price cut that took place in Europe at the end of March..

Seeing how Others represented over half the hardware sales this last quarter and they had a 150$ cut in March I find it hard to believe that the revenue per 360 will be the one you list..

Your analysis seems to be based solely on US data.

I would contest the revenue on games too.

30$ revenue per game , 20$ of which are gross margin ?

Add the retailer margin and you're suggesting third party publishers gets no money back from 360 games ????????

The game sells for 60$ and I thought it was a commonly accepted that the publisher would get back at least 25-30$ ( typical number we hear is 1 million unit sales needed to break even on HD console game that cost 20 million$+ to make)that they would share with the developer. Your numbers don't fit that model..

Too many assumptions.  The $550 is the material cost.  Like my truck.  It's transmission went bad.  As such, it cost me $530 in parts and $670 in labor.  Obviously the xbox is not as labor intensive but a reasonable guess would be the 360 was originally produced with $550 materials and a total cost of $700.

Why wouldn't you speculate that most of the R&D costs are actually due to the major xbox redesigns?  If you assume that most of it is due to the Zune.  We'll say that $1 B is due to the zune.  And the Zune sells about 1 million units a year, so that is a whopping cost of $1,000 in R&D due to the Zune.  That's before you take into manufacturing costs of each unit.  Are they really losing $1,000 per Zune? 

This is the math I like: Software, accessories, zune - Profitable assume $0 because it lessens possible Xbox losses.

Total 2007 loss for the year $2 Billion.  Subtract one time warranty charge of $1.1 billion.  Approximately 10 million xboxes sold.  .9 billion loss / 10 million = $90 loss a unit.  So can xbox afford this price cut, yes they are Microsoft.  But their is no way they make money on hardware with the drop.

@Ail,

The average revenue we used in our projections is $230 per console.
That is already $70 less than the $300 we used.

Is this what you are referring to?

 Price dropped by 150$ on half the market, price supposed to drop by 50$ on other half.

Maths would say in the end it drops by 100$ overall......

My biggest beef isn't with that but with your software revenue anyway......

The numbers there just seem totally wrong. They might be right if it was first party software but I highly doubt Microsoft will sell 90 millions copies of first party software in the next 12 months.......

And the licencing fee is nowhere where you put it and surely not going to increase this year.....

But they state in the reports (gotta read the text, not just the numbers!) that they has lower than expected profits becasue they sold _more_ than expected XBoxes last year.  They admit they lost money on each xbox unit sold. So they are still negative on the units. They might be positive overall for the xbox ecosystem (ie Live games, etc) bit unti by unti they still lose money.

From 10-k "Cost of revenue decreased $683 million or 13%, reflecting the impact of the $1.1 billion Xbox 360 charge in fiscal year 2007 (which primarily related to the warranty expansion), partially offset by increased Xbox 360 product costs related to increased unit console sales."

Cost of revenue would have went down even more if it wasn't for selling all those Xboxes!

Margins on software are huge, MSFT overall margins are in the 70% range. I would crank up the margins on the software, you have it ~ 50% and set each Xbox unit as break even only - ie $0 margin on the actual xbox.