ByRachelle Riddle, writer at
Writer by day, gamer by night. Everything's a story.
Rachelle Riddle

Microsoft recently posted their quarterly financial earnings and there was a surprising twist included in it — the brand has actually lost Microsoft money. Xbox hardware doesn't seem like it would be such a profit loss, nor does it seem reasonable that would continue pouring money into it if it were. However, it's all part of a grander strategy, one where the hardware props up the software and the software makes the money.

Consoles Just Don't Make Money

[Credit: Microsoft]
[Credit: Microsoft]

Microsoft just hasn't made much money from selling Xbox consoles. Back in 2010 there were questions about whether Xbox was profitable. The same query can even be traced back to 2002. Consoles are a limited market. Much like cell phones, there comes a saturation point. Once you sell one, it's not very likely that consumers are going to be constantly upgrading to the latest and newest version. There's still a hefty amount of users playing on Xbox 360, despite Xbox One being the current console.

Unless a new console is hugely innovative, consumers are going to stick with what they have until it breaks. Xbox hardware sales fell 29% from last year, due to both fewer consoles being sold as well as cut prices on old hardware. However, consoles were never the end-game, they were just the vehicle to other profit avenues.

But Software Does Make Money

[Credit: Microsoft]
[Credit: Microsoft]

Microsoft has always been a software focused company, and that persists in the Xbox division. Though they take a loss on the consoles, they hope to make it back through game sales. Software and services sales were up 11% from last year and monthly active users were up 8% to 53 million.

Consoles sales are limited, but software is where the real money is, according to Xbox head Phil Spencer. Microsoft makes a percentage on each Xbox game sold. People only buy one console, but they'll buy games upon games for that singular machine. This adds up when the average Xbox user owns 30 games.

Xbox users also tend to buy more services. Earlier this year we reported that Xbox sales were only half of PlayStation 4 sales, but on average Xbox users spend more than PlayStation users. Ubisoft's 2015 sales report showed an average of $8.93 per Xbox One user vs $7.22 per PS4 user.

Why Xbox Persists Despite No Hardware Profit

[Credit: Microsoft]
[Credit: Microsoft]

Microsoft stopped caring about individual console sales a while ago. They stopped reporting sales numbers and instead focused on growing a healthy, active user base. Since console sales will only ever go up, it's hard to gauge longevity and activity if consoles are sitting unused and collecting dust. Active Xbox Live users tell a more accurate story.

The Xbox provides a way to build those active users into a thriving community. Console fans are passionate about their preferred hardware and Xbox is easily recognizable for Microsoft. They've actually sunk quite a bit of funds into Xbox research and development, billions of dollars even. It might seem counter-productive to actively invest in an unprofitable venture, but it makes its money back on the software side.

To prevent Xbox from stagnating, they need innovation for new consoles. When new, more powerful hardware iterations are released companies make better and updated versions of their games. This promotes interest again, causing more consumers to invest.

Creating a social gaming network via Xbox Live makes them more money than simply selling consoles. The console is a "foothold," a starting point for Microsoft. It allows them to build around it and focus on the connections or experience. Xbox Live connects the players to their friends, which extends beyond the platform and keeps engagement at an all-time high.

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