Xbox to Cost Microsoft in Short Term

According to a report Merrill Lynch high-tech watcher Henry Blodget issued yesterday, Microsoft will take a financial soaking on its Xbox game console in the short term to attain market share and the number-two spot behind market leader Sony PlayStation 2. With the video-game market estimated to be worth $15 billion to $20 billion worldwide, the top two players in this market will likely stand to reap the rewards. Although the Xbox will eventually turn a profit--probably in 2005, Blodget says, Microsoft will lose $2 billion on the Xbox before 2005 (or $125 per console).

Meanwhile, the Sony PlayStation 2 is finally picking up steam after a rough start. Sony has sold 8 million units, giving the product a clear user base, and has several applications under development. So although the Xbox will ship with more impressive hardware, the PlayStation's entrenchment will be a factor. Such was the case with the first-generation PlayStation, which vastly outsold all of its competition despite the fact that it was technologically inferior almost from the outset.

Regardless, not everyone agrees with Blodget's assessment of the Xbox. Contrary to Blodget's report, Sega's Dreamcast, not the PlayStation 2, came to market first with a high-end 128-bit console. But Sega lost millions of dollars on the Dreamcast, despite selling millions of units. The problem was that Sega hadn't diversified itself enough to sustain development of its core products; both Sony and Microsoft are multifaceted corporations with interests in a variety of markets. And both companies can use profits from other product lines to shore up their financials. The loss of $125 per unit is comparable to what Sony loses on each PlayStation 2, so this loss probably isn't a factor, either. (Video-game consoles are almost always sold at a loss to keep the more lucrative software market going.) Customers will buy only one console, but they'll probably buy several software titles, usually at $50 to $60 each.

Microsoft will unleash the Xbox this fall. Although Microsoft hasn't announced its pricing, most analysts expect the company to undercut Sony's $300 price for the PlayStation.

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