These documents shed light on Xbox’s finances and PlayStation’s negotiations with Epic, among other details. While some of these revelations have been long known to close followers of the gaming industry, the high-profile trial is exposing a broader audience to some eye-opening information. The trove of documents provides an important glimpse at what goes on behind closed doors.
This week, tech giant Apple and multibillion-dollar video game company Epic Games faced off in court in an antitrust case that could change the way we use our smartphones. In addition to giving us insight into Epic Games’s inner workings, the trial includes multiple pieces of evidence from third parties like Microsoft and Sony.
The Xbox has always been sold at a loss
In the course of the trial, Apple has mentioned Microsoft and Sony as industry peers whose practices justify iOS’s 30% rate; both companies charge Epic the same commission. To rebut this, Epic has claimed that console makers like Microsoft and Sony need their 30% cut on game sales in their digital stores, since the hardware is sold at a loss.
Microsoft’s vice president of business development Lori Wright confirmed in testimony that the company sells Xbox consoles at a loss and has never made a profit from selling the hardware. Wright said it was more important for users to “be able to have a console” and enjoy an “end-to-end user experience” which includes buying Xbox games and subscriptions.
Microsoft explained in a statement on Thursday: “The gaming business is a profitable and high-growth business for Microsoft. The console gaming business is traditionally a hardware subsidy model. Game companies sell consoles at a loss to attract new customers. Profits are generated in game sales and online service subscriptions.”
Historically, other consoles have followed a similar business model, according to Niko Partners senior analyst Daniel Ahmad, who named Sony’s PlayStation 3 as a console that was estimated to have lost $300 on each unit sold for some number of years, thanks to the research and development costs of adding Blu-ray and a specially designed “Cell” processor.
“It is typical for console hardware to sell at a loss (initially), and have the software sales make up profit — similar to a razor and razor blade model,” said Ahmad. “Software and services are high margin, especially when distributed digitally, while the profit margin on hardware is low, or even negative initially.”
Meanwhile, Apple’s sale of iPhones is extremely lucrative, Epic CEO Tim Sweeney noted last December.
“Apple’s hardware sales are, I think, the most profitable business line in the history of the world. It has massive markups on the hardware, which they deserve to earn, because they’re building great hardware,” Sweeney said. “But the console business model is different. Sony and Microsoft generally over the console generations lose money on the hardware.” The issue for Epic is that Apple’s 30% commission sits atop the money it earns from people buying iPhones and iPads, said Sweeney. “It’s not subsidizing the hardware. You paid for it and you paid Apple a massive profit margin, when you bought the device.”
Apple said Wednesday it does not believe this argument will really move the needle when it comes to antitrust law.
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