Epic v. Apple trial reveals how Microsoft has never made money off Xbox hardware

Microsoft revealed in a court docket look this week that it doesn't, and has by no means, earned cash on the per-unit gross sales for the Xbox. Every console is offered at a loss, and the revenue from the mission for Microsoft comes completely from software program gross sales.

This was disclosed throughout a Microsoft govt’s testimony within the Epic v. Apple bench trial, which started on Monday in Oakland, Calif. The trial just isn't televised, however the proceedings have been broadcast to the general public by way of a teleconference name; that decision, in flip, has been hosted and rebroadcast by way of a number of different platforms, reminiscent of Twitch and Discord.

Epic is suing Apple over its guidelines for third-party apps on the iOS retailer, the place Apple takes a reduce of each sport and in-game gross sales. Epic, the writer of Fortnite, is accusing Apple of using anticompetitive enterprise practices, and hopes to pressure Apple to let builders use their very own in-app fee strategies for video games offered on iOS.

Microsoft’s Lori Wright, vice chairman of enterprise growth for Gaming, Media & Leisure, was known as to the stand as an professional witness on Wednesday, to provide testimony associated to Microsoft’s well-publicized makes an attempt to work round Apple to get its Venture xCloud service on the iOS retailer.

A lot of the dialogue within the Epic v. Apple trial has come right down to the quantity of gross sales income {that a} digital storefront proprietor ought to be entitled to gather. As a part of that, Wright was requested how a lot the revenue margin is on Xbox consoles.

“We sell the consoles at a loss,” Wright mentioned.

One in every of Epic Video games’ attorneys then requested, “Does Microsoft ever earn a profit on the sale of an Xbox console?” Wright mentioned, “No.”

For individuals who observe the enterprise facet of the video games business, this may occasionally initially sound like outdated information. It’s lengthy been understood that Microsoft and Sony promote their online game consoles on a “razor and blades” mannequin, the place the corporate subsidizes its {hardware} and sells it at a loss to be able to make the cash again on software program and companies. (Nintendo, alternatively, makes a slight revenue on each Swap it sells.)

Like numerous the exhausting knowledge within the online game business, there’s a certain quantity of analyst hypothesis concerned right here. Neither Sony nor Microsoft are inclined to disclose their inner math, so we’re left with assessments like varied third-party “tear-downs” that estimate every console’s per-unit prices.

As per these unbiased estimates, each the PlayStation 4 and Xbox One had been offered at a slight loss when you think about transport and advertising prices. Nevertheless, as a console ages, its parts turn out to be cheaper, which might theoretically translate to a per-unit revenue close to the top of the console’s life cycle.

What’s fascinating about Wright’s testimony, in the event you take it at face worth, is that Microsoft has by no means gotten to that time. It’s developing on the Xbox’s twentieth anniversary in November, and in that point, each particular person console that it’s ever shipped was being offered at a loss.

Microsoft has made up the distinction by way of taking a 30% reduce of income from builders who ship video games for the Xbox. Whereas it not too long ago introduced that it's going to cut back that reduce to 12% for publishers who ship video games for the Home windows 10 retailer, the Xbox stays at a 70/30 cut up.

That, in flip, explains so much about Microsoft’s latest strikes to decouple the Xbox expertise from the bodily Xbox unit. Whereas its gaming division is posting billions in quarterly income, its precise {hardware} appears to have historically been its weakest hyperlink.

Wright’s testimony is certainly one of many small revelations which have saved the video games business glued to Epic v. Apple all week. One of many trial’s unwanted effects, because it pits two of probably the most influential and linked firms within the subject in opposition to each other, is a sluggish drip of fascinating items of knowledge. Given how secretive the video games business historically is, varied disclosures that had been made for the sake of the trial have successfully amounted to a cavalcade of unplanned leaks.

This has included what Epic has paid varied third-party builders to safe their titles as weekly free downloads on the Epic Video games Retailer; Epic’s low-key battle with Sony to allow cross-platform play for Fortnite; and a few of the “guest characters” that Epic might deliver to Fortnite sooner or later, together with Metroid‘s Samus Aran.