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

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The Xbox One, left, with the Xbox Series X and S, right.

Microsoft revealed in a court appearance this week that it does not, and has never, earned money on the per-unit sales for the Xbox. Each console is sold at a loss, and the profit from the project for Microsoft comes entirely from software sales.

This was disclosed during a Microsoft executive’s testimony in the Epic v. Apple bench trial, which began on Monday in Oakland, Calif. The trial is not televised, but the proceedings have been broadcast to the public via a teleconference call; that call, in turn, has been hosted and rebroadcast via several other platforms, such as Twitch and Discord.

Epic is suing Apple over its rules for third-party apps on the iOS store, where Apple takes a cut of both game and in-game sales. Epic, the publisher of Fortnite, is accusing Apple of employing anticompetitive business practices, and hopes to force Apple to let developers use their own in-app payment methods for games sold on iOS.

Microsoft’s Lori Wright, vice president of business development for Gaming, Media & Entertainment, was called to the stand as an expert witness on Wednesday, to give testimony related to Microsoft’s well-publicized attempts to work around Apple to get its Project xCloud service on the iOS store.

Much of the discussion in the Epic v. Apple trial has come down to the amount of sales revenue that a digital storefront owner should be entitled to collect. As part of that, Wright was asked how much the profit margin is on Xbox consoles.

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

One of Epic Games’ lawyers then asked, “Does Microsoft ever earn a profit on the sale of an Xbox console?” Wright said, “No.”

For people who follow the business side of the games industry, this may initially sound like old news. It’s long been understood that Microsoft and Sony sell their video game consoles on a “razor and blades” model, where the company subsidizes its hardware and sells it at a loss in order to make the money back on software and services. (Nintendo, on the other hand, makes a slight profit on every Switch it sells.)

Like a lot of the hard data in the video game industry, there’s a certain amount of analyst speculation involved here. Neither Sony nor Microsoft are inclined to reveal their internal math, so we’re left with tests like various third-party “tear-downs” that estimate each console’s per-unit costs.

As per those independent estimates, both the PlayStation 4 and Xbox One were sold at a slight loss when you consider shipping and marketing costs. However, as a console ages, its components become cheaper, which would theoretically translate to a per-unit profit near the end of the console’s life cycle.

What’s interesting about Wright’s testimony, if you take it at face value, is that Microsoft has never gotten to that point. It’s coming up on the Xbox’s 20th anniversary in November, and in that time, every individual console that it’s ever shipped was being sold at a loss.

Microsoft has made up the difference via taking a 30% cut of revenue from developers who ship games for the Xbox. While it recently announced that it will reduce that cut to 12% for publishers who ship games for the Windows 10 store, the Xbox remains at a 70/30 split.

That, in turn, explains a lot about Microsoft’s recent moves to decouple the Xbox experience from the physical Xbox unit. While its gaming division is posting billions in quarterly revenue, its actual hardware seems to have traditionally been its weakest link.

Wright’s testimony is one of many small revelations that have kept the games industry glued to Epic v. Apple all week. One of the trial’s side effects, as it pits two of the most influential and connected companies in the field against one another, is a slow drip of interesting pieces of information. Given how secretive the games industry traditionally is, various disclosures that were made for the sake of the trial have effectively amounted to a cavalcade of unplanned leaks.

This has included what Epic has paid various third-party developers to secure their titles as weekly free downloads on the Epic Games Store; Epic’s low-key battle with Sony to enable cross-platform play for Fortnite; and some of the “guest characters” that Epic may bring to Fortnite in the future, including Metroid‘s Samus Aran.

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