Microsoft is reportedly subsidizing $100-200 per Xbox while Sony started breaking even more than a year ago, help me understand

[Below2D]

Phil Spencer recently said this:

Today, Spencer said, Microsoft gives people choice in how much they'd like to spend if they want consoles. The company offers the $499 Xbox Series X and the less powerful $299 Xbox Series S. Microsoft subsidizes the cost to the tune of $100 to $200 per console, with the expectation that it will make the money back on sales of accessories and storefront purchases, he said. It's up to gamers if they'd like to pay $10 or $15 per month for Game Pass subscriptions. They can also buy games outright, or play certain games for free.

Source

While Sony's CFO back in August 2021 reported that the $499 PS5 was no longer being sold at a loss.

Sony's chief financial officer, Hiroki Totoki, has this week confirmed that the company's $499 PS5 console is no longer selling at a loss.

Typically, when a new games console launches its price point is below the actual cost of manufacturing. But over time, through a combination of bulk component orders and the refining of the hardware design, the cost falls below the retail price. The PS3 was sold at a loss for nearly four years, the PS4 was profitable within six months of its launch, and the PS5 has taken eight months. Considering the novel new design and global chip shortages, that's quite impressive.

Source

The PS5 was turning a profit after only 8 months. The Xbox consoles are still taking a hefty hit per unit over 2 years later. What explains this disparity? Do keep in mind that Sony was making a profit before the move to 6nm which occurred recently so that cannot explain the difference. The difference in the BOM is pretty dramatic. I'd understand if the SX was a tier above the PS5 with its components but it really isn't. Furthermore, I believe the PS5's SSD also costs more to manufacture and the Dualsense as well. If that's true, then I have no idea how come Microsoft is losing so much money per unit.

Volume? Supply chain issues?

 

[BRiT]

The full 32 minute video is here (might be behind a paywall) if you want to watch it to ensure what exactly was said as opposed to interpretations or summaries of what was said:

https://video-api.wsj.com/api-video/player/iframe.html?guid=195A5DB5-FF0F-48A8-90CD-9662D56A108C&playerid=twittercard

 

[iroboto]

Phil Spencer recently said this:



Source

While Sony's CFO back in August 2021 reported that the $499 PS5 was no longer being sold at a loss.



Source

The PS5 was turning a profit after only 8 months. The Xbox consoles are still taking a hefty hit per unit over 2 years later. What explains this disparity? Do keep in mind that Sony was making a profit before the move to 6nm which occurred recently so that cannot explain the difference. The difference in the BOM is pretty dramatic. I'd understand if the SX was a tier above the PS5 with its components but it really isn't. Furthermore, I believe the PS5's SSD also costs more to manufacture and the Dualsense as well. If that's true, then I have no idea how come Microsoft is losing so much money per unit.

Volume? Supply chain issues?

From what I understand MS includes R&D costs into the console when they say they sell at a loss. This came out during the Epic and Apple trial.

If you’re looking purely at components I don’t think we could match up $100 and $200 differential.

 

[Johnny Awesome]

Yes. The devil's in the details.

 

[eastmen]

yea but its more fun to believe that MS wouldn't be able to have amd make them a console at a similar price point than sony.

 

[milk]

From what I understand MS includes R&D costs into the console when they say they sell at a loss. This came out during the Epic and Apple trial.

If you’re looking purely at components I don’t think we could match up $100 and $200 differential.

So, since thus is now BeyondAccounting3D I'd like to get some feedback from specialists over here. What is the proper way to account for RnD expenses?

 

[Nesh]

So, since thus is now BeyondAccounting3D I'd like to get some feedback from specialists over here. What is the proper way to account for RnD expenses?

I have the same question. My best guess should be proportional to units produced so far

 

[Nesh]

The full 32 minute video is here (might be behind a paywall) if you want to watch it to ensure what exactly was said as opposed to interpretations or summaries of what was said:

https://video-api.wsj.com/api-video/player/iframe.html?guid=195A5DB5-FF0F-48A8-90CD-9662D56A108C&playerid=twittercard

Can you share exactly what was said or at least what time he mentioned that in the video?

edit: ok found it. He doesnt elaborate on anything but that could be general talk about the console business. Probably thats how it was at launch or the beginning, trying to explain that the main profit doesnt come from the console sales themselves. The main profit is bet on other sales. Unsure if the 100 or 200 subsidy is what accounts now

 

[iroboto]

So, since thus is now BeyondAccounting3D I'd like to get some feedback from specialists over here. What is the proper way to account for RnD expenses?

I believe these often fall under capitalized costs and typically if you are in the area of industry innovation you may also
Be able to apply for tax credits for your R&D project if your country supports it.

If we are talking about how the numbers 100 and 200 loss is full accounted for.you set a target goal of total build units; say (70M * average price - (build of 70M units +R&D costs) )/ 70M units gets you your average loss per console.

 

[Zaphod]

So, since thus is now BeyondAccounting3D I'd like to get some feedback from specialists over here. What is the proper way to account for RnD expenses?

In the 2008 revision of the System of national Accounts a significant change was the explicit treatment of r&d as capital formation, that is, “investment” rather than "expenditure". I believe all EU/OECD countries, at least, now have tax/accounting laws requiring R&D to be put on the balance sheet and gradually written off.

 

[Deleted member 11852]

The console industry model of selling hardware at a loss has always looked a bit dubious when you look at monopolies law, because it looks a bit shady but somehow it's near questioned. It's effectively anybody else out of the market.

From what I understand MS includes R&D costs into the console when they say they sell at a loss. This came out during the Epic and Apple trial.

Can you cite that, because that surely cannot be the case. For one in the US there are massive tax subsidies for R&D which means you need account R&D costs at the time, not pass them onto consumers years later (that would be fraud), and second Microsoft reported always every quarter and annually that have no long term debt - which unaccounted R&D costs would be.

I can well believe Sony can make PlayStaton 5 much cheaper than Microsoft. Sony probably buy 1,000x as many components for all of their devices than Microsoft need to and you score real savings with long-term component agreements, but $200 is ridiculous. Something is amiss.

But if you watch that video, that is exactly what Phil Spencer said with literally no explanation but why their costs are through the roof.

 

[Nesh]

In the 2008 revision of the System of national Accounts a significant change was the explicit treatment of r&d as capital formation, that is, “investment” rather than "expenditure". I believe all EU/OECD countries, at least, now have tax/accounting laws requiring R&D to be put on the balance sheet and gradually written off.

So no longer accounted in the cost per unit then?

 

[Nesh]

The console industry model of selling hardware at a loss has always looked a bit dubious when you look at monopolies law, because it looks a bit shady but somehow it's near questioned. It's effectively anybody else out of the market.



Can you cite that, because that surely cannot be the case. For one in the US there are massive tax subsidies for R&D which means you need account R&D costs at the time, not pass them onto consumers years later (that would be fraud), and second Microsoft reported always every quarter and annually that have no long term debt - which unaccounted R&D costs would be.

I can well believe Sony can make PlayStaton 5 much cheaper than Microsoft. Sony probably buy 1,000x as many components for all of their devices than Microsoft need to and you score real savings with long-term component agreements, but $200 is ridiculous. Something is amiss.

But if you watch that video, that is exactly what Phil Spencer said with literally no explanation but why their costs are through the roof.

There could be something else too. They might be probably paying extra the suppliers to secure more units for production for their products amidst the chip supplying crisis.

 

[iroboto]

The console industry model of selling hardware at a loss has always looked a bit dubious when you look at monopolies law, because it looks a bit shady but somehow it's near questioned. It's effectively anybody else out of the market.



Can you cite that, because that surely cannot be the case. For one in the US there are massive tax subsidies for R&D which means you need account R&D costs at the time, not pass them onto consumers years later (that would be fraud), and second Microsoft reported always every quarter and annually that have no long term debt - which unaccounted R&D costs would be.

I can well believe Sony can make PlayStaton 5 much cheaper than Microsoft. Sony probably buy 1,000x as many components for all of their devices than Microsoft need to and you score real savings with long-term component agreements, but $200 is ridiculous. Something is amiss.

But if you watch that video, that is exactly what Phil Spencer said with literally no explanation but why their costs are through the roof.

R&D is a single time cost. You also have a limit on how many units will be sold and the price points they will sell at. If for example both Sony and MS paid 150M on R&D but Sony targets 180M units sold and MS 80M units and they are the same price. Sony will sell at a profit, and MS will not.

 

[Zaphod]

So no longer accounted in the cost per unit then?

Might be, somewhere.

I am by no means an expert on internationally comparative accounting standards or law. I do have a comparative policy review lying around somehere (OECD), I believe but may be from the EU) that said something to the effect of "all examined jurisdictions have incorporated the basic concept of r&d as an (intellectual) asset for accounting purposes" (my paraphrase, I'd have to see if I could find it).

Of course physical assets may go elsewhere on the books, and I'm sure there are many exceptions around. I know some allow basic research to be written off as incurred and I've seen rules for getting "failed r&d" off the books. Out in the wild I'm sure that there is all sorts of technically legal/proper accounting shenanigans going on.

Edit: Seems the standard in the US is to expense r&d costs as incurred regardless.

Mea culpa, me and my Euro-centric world view. I also mostly know this stuff from the policy side and not the business side.

 

[Deleted member 11852]

R&D is a single time cost. You also have a limit on how many units will be sold and the price points they will sell at. If for example both Sony and MS paid 150M on R&D but Sony targets 180M units sold and MS 80M units and they are the same price. Sony will sell at a profit, and MS will not.

I'm not sure what you're trying to say here. Whilst there is no information from Microsoft about Xbox R&D, every quarterly and annual financial report issued by Sony shows millions invested in R&D as an ongoing expense. Here is the last one, and you can go back through all previous supplementals to see 'Research and Development expenses by segment' - with G&NS being PlayStaton. R&D definitely isn't a single time cost for Sony.

If Microsoft are spending more on R&D than they can recoup from the product then they need to re-examine their business because that's obviously not sustainable.

 

[iroboto]

I'm not sure what you're trying to say here. Whilst there is no information from Microsoft about Xbox R&D, every quarterly and annual financial report issued by Sony shows millions invested in R&D as an ongoing expense. Here is the last one, and you can go back through all previous supplementals to see 'Research and Development expenses by segment' - with G&NS being PlayStaton. R&D definitely isn't a single time cost for Sony.

If Microsoft are spending more on R&D than they can recoup from the product then they need to re-examine their business because that's obviously not sustainable.

I think I'm referring to the straight R&D cost of the console upon release.
If we're talking on going R&D for OS, services, firmware, accessories and improvements, and future console hardware etc I wouldn't know.

This is too theoretical and not worth discussing.

 

[Deleted member 11852]

I think I'm referring to the straight R&D cost of the console upon release. If we're talking on going R&D for OS, services, firmware, accessories and improvements, and future console hardware etc I wouldn't know. This is too theoretical and not worth discussing.

I agree, but you proposed R&D as being the reason.

Moving along.. there is definitely something amiss with Microsoft's hardware being subsidised by $100-200. I couldn't even wildly speculate how that is a thing unless Elon Musk is hand building every one.

 

[milk]

Isn't it also possible that for internal analysis and discussion MS does its accounting considerations differently from how it reports it legally, and here Phill is mentioning how they consider the cost of the machines internally?

 

[eastmen]

I agree, but you proposed R&D as being the reason.

Moving along.. there is definitely something amiss with Microsoft's hardware being subsidised by $100-200. I couldn't even wildly speculate how that is a thing unless Elon Musk is hand building every one.

The likely senario is that this is akin to shipped vs sold. MS takes the cost of actually building and delivering the unit. Then they take the R&D they spent and divide it by the amount of consoles they expect to sell to find out the cost per unit of R&D .

Sony would have 2 advantages here. if sony expects to sell at least what the ps4 sold then they would be dividing up the R&D spread across a 120M units while MS would be spreading it across 60M units. Also sony only developed one console this generation while MS has developed both the series s and the x.