Is the Cost of Consoles Right for This Generation?

Sales for Sony's (NYSE: SNE  ) PlayStation 4 and Microsoft's (NASDAQ: MSFT  ) Xbox One have hit record-breaking heights, but high sales are only one aspect of a profitable console. How much does it cost to produce these popular new systems, and how does this cost compare to previous generations?

Slim margins
The research firm IHS performed a teardown of each console and gave us estimated production costs based on each system's components.

The PlayStation 4 costs roughly $381 to make, only $18 less than its retail price of $399. A large portion of this cost can be attributed to a large microprocessor produced by chip maker AMD that costs $100. The microprocessor chip's large size gives it a higher probability of defects, which leads to more chips being produced to replace faulty ones and increases the overall cost of the chip.  There are also at least 16 individual memory chips inside the PS4 that cost a total of $88.  These two components make up almost half of the PS4's overall production price. 

With a retail price of $499, it's not surprising that the Xbox One costs more to produce than the PS4 does. The system tear-down showed that the cost of the console, controller, and Kinect totaled $471, $90 more than the new PlayStation. The most obvious extra cost is the Kinect gaming camera that comes with each Xbox One and costs roughly $75 to produce. The other large cost comes from the AMD microprocessor that's found inside the system. This chip costs $110, which is $10 more than the PS4's microprocessor.

The Xbox One has a higher profit margin of $29 per unit sold compared to Sony's $19 unit margin. However, compared to last-generation consoles -- formerly current-gen -- Sony has made the most improvement.

History lesson
The Xbox One is selling at a higher price point than the PS4, but seven years ago it was a much different story. The PlayStation 3 was available as 20GB and 60GB systems which sold for $499 and $599, respectively, while the Xbox 360 sold for $399. The 20GB and 60GB PS3 systems had respective estimated costs of $805.85 and $840.35 to produce which netted Sony losses of $306.85 and $241.35 per unit, respectively. Sony's strategy was to get a system into consumer's homes and make back the loss by selling video games. The Xbox 360 had an estimated cost of $323.30 to produce, which gave Microsoft a $75.50 profit for each console sold at launch.

As technology improved, the cost to produce each console dropped along with their retail prices, but Sony appears to have learned a lesson from the PS3 launch. With a much lower retail price and a positive profit margin Sony has almost matched Microsoft's profit margin for this generation.

Parting thoughts
The PlayStation 4 recently launched in Europe and South America and sold a reported 250,000 units in the UK alone.  Its margin might be lower than the Xbox One's margin, but the PS4's record-breaking sales at launch domestically and abroad show a dramatic improvement for the console. Remember, Sony's success doesn't mean that the Xbox One has failed. Microsoft's console sold over 1 million units at launch with a higher margin. Both consoles have sold well, and moving forward Sony and Microsoft should start to focus on offering consumers new, high margin games.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2013, at 1:28 AM, spydi wrote:

    Do you really think an AMD microprocessor costs Sony $100? "The microprocessor chip's large size gives it a higher probability of defects, which leads to more chips being produced to replace faulty ones and increases the overall cost of the chip." I would find a new company immediately if they gave me that excuse.

  • Report this Comment On December 15, 2013, at 2:16 AM, Bunnyking77 wrote:

    If the XBOXone is so expensive then why can't it run games at 1080 HD native at 60 FPS unless they are at a lower setting than the PS4?

    Any article that talks up the XBOXone's gaming capabilities might as well say the Nintendo's Wii U is amazing... Which it is.

    The XBOXone isn't that great news media... It's lackluster, slow and unappealing unless you instal an SSD Drive.

    The cost of the XBOXone is high but it comes with so much baggage. (Kinect 2.0)

    We don't want that.

  • Report this Comment On December 15, 2013, at 3:44 AM, Ahlfs wrote:

    PS4 will come out on top in the end of this console war, i guarantee it! I buy consoles to play games not watch TV they have little boxes all over the place for $99 bucks if you want all that TV #$%$. The PS4 "IS" the better "Gaming" console as shown countless times of it running Faster, Cleaner and by far Prettier!

  • Report this Comment On December 15, 2013, at 6:30 AM, blksodlier wrote:

    This site is the worse. The little cost breakdown is all wrong, and does not even take into account any of the distribution it takes to get the systems into the markets for sale. Also, the news is all very old and just copied from major gaming sites like ign, but given a new title here to look new or different.

  • Report this Comment On December 15, 2013, at 1:16 PM, ShadowOfTheVoid wrote:

    The author's comment about the 360's manufacturing cost is in error. The original manufacturing cost of the Xbox 360 Premium SKU was $525. The $323 figure is the cost of the Elite SKU, which was released in 2007.

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