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Microsoft VP confirms Xbox hardware business loses money

Testimony from Xbox exec Lori Wright in Epic v. Apple reveals the inner workings of the Xbox business model.

A close-up of an Xbox controller being held by a player.
A visitor plays a game using Microsoft's Xbox controller at a flagship store of SK Telecom in Seoul on November 10, 2020. (Photo by Jung Yeon-je / AFP) (Photo by JUNG YEON-JE/AFP via Getty Images)

The ongoing Epic v. Apple antitrust trial has shed light on some of the gaming industry's closest-held secrets, and now an Xbox executive called to testify in court on Wednesday has said in plain terms what many suspected all along: console hardware loses money.

Lori Wright, the head of business development at Xbox, is one of the third-party witnesses called by both Apple and Epic in the case over Fortnite's removal from the App Store last summer. As part of her testimony during direct examination from Epic lawyer Wes Earnhardt, Wright was asked outright about the Xbox ecosystem's business model and specifically if Xbox hardware sales were profitable.

"How much margin does Microsoft earn on the sale on the Xbox consoles?" Earnhardt asked.

"We don't. We sell the consoles at a loss," Wright said. Asked why Microsoft would continue to do this, Wright elaborated that Xbox business model involves selling hardware at a loss and subsidizing it with game sales and subscription services, in this case to services such as Xbox Live Gold and Xbox Game Pass. The goal is to serve an "end-to-end consumer experience." When asked if Microsoft has ever earned a profit on the sale of an Xbox device, Wright said no.

Epic's line of questioning is designed to establish the game console market as substantially differentiated from that of smartphones, which would bolster Epic's argument that a 70-30 revenue split on platforms such as Xbox and PlayStation is justified by how those respective hardware makers earn money.

Now, Wright has finally said the quiet part loud: Yes, game consoles lose money. And in fact, Xbox has never had a profitable hardware business, and that's on purpose. This isn't exactly a bombshell revelation, as it's been the traditional console business model for decades. But it is fascinating to hear it out right from the mouth of a high-level Xbox executive.

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