Microsoft's Red-Ink Game (Xbox 360)

Microsoft's Red-Ink Game provides cost estimates of the just-released and super-hyped Xbox 360 game console. Estimates are that it costs $126 more that the sale price to build the box.

Looking just at the chips, this machine has some expensive silicon:

Semiconductors alone account for $340, -- more than 72% of the materials cost -- iSuppli estimates. One key component, the IBM-designed microprocessor chip at the center of the console (see BW Online, 10/25/05, "Inside IBM's Xbox Chip") costs about $106. Both IBM and Chartered Semiconductor (CHRT) of Singapore are building the chip for Microsoft.

ROOM FOR IMPROVEMENT. Analyst Chris Crotty with iSuppli says that as both companies improve their manufacturing efficiency and production yields, they will likely reduce the chip's cost by 20% to 25%. The same will likely apply to ATI (ATYT), which is building the graphics-processing unit, or GPU, for the Xbox. iSuppli estimates that the chip is the most expensive component in the system at $141.

And how about the cost of the Sony PlayStation 3, to be released next year?

Crotty expects that Sony's loss on the Playstation 3 may be even wider, as the cell processor that IBM, Toshiba, and Sony designed for the system is more complex.

Estimates vary as to how much the cell processor will cost. Richard Doherty of Envisioneering Group in Seaford, N.Y., expects the cell chip to cost about 50% more than the Microsoft chip. "Based on what we've seen so far, the Playstation 3 could cost as much as $600 to make in today's pricing," Doherty says.

And Crotty says that since it's a more complex chip, its price will fall more slowly than the price on the Xbox chip.

Ouch! No wonder the games cost $60 per title, to make up for the hardware losses.