Videogame consoles sell at a loss. There is no secret there. The"loss-leader" Gillette model rings true in the videogame console industry as well. Losses in the initial sale and margins accrue through the life of the console through cartridges or "Live" subscriptions. WSJ had a good article about this today, following is a summary of my major take-aways.
Exponential Demand Forecast: Within the first 90 days of the Xbox 360's launch, Microsoft executives expect to deliver as many as three million Xbox 360 consoles, putting them on track to sell up to 5.5 million units by the end of July.
Meeting demand is critical for competitive market: "The faster I can build volume, the better off I am," says Robbie Bach, president of Microsoft's Entertainment & Devices Division. Given that Sony wont be shipping PS3 till next year - this is great chance to catch on the Sony marketshare - at last count they held close to 70% of the market.
Manufacturing complexity: There are 1700 components that go into building the XBox
The Supply chain requires super Project Management skills: across
* TWO seperate Factories run by Flextronics Corp and Wistron Corp. are in South China
* A microcosm of 30 manufacturers of other electronics parts are around these factories. (reduces shipping time and china-import-taxes)
* The chips are made in Microsoft and IBM (US)
* Harddrives are from Japan and Korea
* Graphics Chips are designed Canada (ATI) and made in Taiwan
* The Controller from Wisconsin (US)
* About 250 suppliers make parts for the machine and 25,000 workers world-wide have roles in making either the parts or the Xbox 360 itself making this a Project Management nightmare
Testing each box for QA is tedious:
After each Xbox 360 rolls off the line, it undergoes two hours or so of automated testing and five minutes of manual testing before being packed into a plane or a 40-foot-long ship's container. Back at Microsoft's headquarters in Redmond, there is a database chronicling the genealogy of every Xbox 360, including where it was made and shipped and exactly which parts are in it, so that any problems can be traced quickly.
Shipping to the world isnt easy either:
* The finished machines move through Hong Kong, then by boat to Chiba, Japan; Rotterdam, the Netherlands; or Long Beach, Calif.
* Some units reach the U.S. by air freight, landing in either Chicago or Toledo, Ohio. All U.S.-bound Xbox 360s eventually pass through a central distribution center in Memphis, Tenn., where they are packed onto trucks and trains bound for stores run by Wal-Mart Stores Inc. and Best Buy Co., among others.
..... All this when just 2 days ago Felipe Oyanedel (Harvard 04) (Strategy Manager in our group) came across the aisle to my office to complain he couldnt find the XBox 360 in the CompanyStore and doesnt expect it for the holidays here either. Ofcourse not Felipe - the boxes are being made in China as we speak ... and being sent across a boat arnd the world....