Xbox One X “not the money-making part of the business”: Phil Spencer, Xbox Chief

Xbox One X

Despite its steep $499 price-tag, the Xbox One X doesn’t actually make Microsoft any money, says Xbox chief Phil Spencer. Microsoft is usually very reserved about putting out its numbers, in general, so it was a little refreshing to hear this from none other than the head of Microsoft’s gaming unit, which rakes in unknown billions every quarter.

Gaming is buried into ‘More Personal Computing’, one of four segments that Microsoft reports on every quarter. For the full fiscal 2016, Microsoft made over $40 billion from this segment. That’s not surprising, considering the fact that the segment also contains Windows, Devices and Search Advertising revenues.

The entire segment has been under pressure because of declining Windows revenues, and Microsoft, in its 2016 annual report, said this:

“More Personal Computing revenue increased, primarily due to higher revenue from Devices, search advertising and Gaming.”

The Surface family didn’t really deliver too much in 2016, and search advertising is a pretty stable business, so a significant portion of the revenue increase for the segment will have come from gaming.

But hardware is clearly not where the money is coming from. If the Xbox One X doesn’t make money despite being priced at a premium $499 – with absolutely no bells and whistles other than its inherent power – then it’s reasonable to assume that none of their earlier consoles are a source of profitability.

So where do the profits come from? Spencer makes this very clear:

“I don’t want to get into all the numbers, but in aggregate you should think about the hardware part of the console business is not the money-making part of the business. The money-making part is in selling games.”

In the same interview with Business Insider’s Ben Gilbert this week, he also confirmed that Microsoft wouldn’t make any money on the Xbox One X hardware.

That’s where the entire game ecosystem around the Xbox family comes in. Xbox Live is a strong driver of profitability for Microsoft. According to the 2016 annual report, Xbox Live had no less than 49 million members. A little digging into their numbers also reveals that gaming brings in about $1.3 billion a year for Microsoft:

“Gaming revenue increased $132 million or 1%, primarily due to higher revenue from Xbox Live and video games, offset in part by lower Xbox hardware revenue.”

But what’s interesting is how strongly Xbox Live and other gaming revenues are growing:

“Xbox Live revenue increased 17%, driven by higher revenue per transaction and volume of transactions. Video games revenue grew 34%, driven by the launch of Halo 5 and sales of Minecraft. We acquired Mojang AB (“Mojang”), the Swedish video game developer of the Minecraft gaming franchise, in November 2014.”

Putting all that together, it’s clear that assets like Xbox Live, PC games and Minecraft are the drivers of profitability in Microsoft’s gaming segment.

But that leaves one question unanswered: If Microsoft won’t make money off the Xbox One X, then why is it so expensive?

One look at the components should help answer that question. The 8-core Custom AMD CPU, 12GB GDDR5 of graphic memory, 6 Teraflop GPU, 326 GB/sec memory bandwidth and advanced liquid cooling system are all components of that overall cost.

Phil Spencer was also very nimble about sidestepping the question of whether or not Xbox hardware is a loss-maker. When pushed to answer, he merely said:

“I didn’t answer it that way.”

Microsoft might not be making any money on console sales, including the Xbox One X when it comes out this November, but it’s a sure bet that even if they’re losing slightly on the consoles, their game ecosystem more than makes up for it.

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