Is the Cost of Consoles Right for This Generation?

Sales for Sony's (SONY -0.33%) PlayStation 4 and Microsoft's (MSFT -2.45%) 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.