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Microsoft is selling it’s new Xbox 360 at a loss in order to get the retail price down to a level that Microsoft believe consumers will be willing to pay in order to drive software sales.

According to market watcher iSuppli who striped down the Xbox 360 to find out how much its components cost there is “No way” that Microsoft is making a profit on the Xbox 360.

According to the company’s report, the top-of-the-range, hard drive-equipped Xbox 360 costs Microsoft at least US$525 in parts alone. That’s already US$126 more than the US retail price before the cost of assembly, packaging, distribution and marketing are added to the box-cost, and the retailers’ cut is deducted from the price tag.

The big winners are IBM and ATI, whose products together account for 47.1 per cent of the Xbox 360’s bill of materials (BOM), iSuppli estimates. IBM is supplying the console’s 3.2GHz three-core PowerPC processor, which iSuppli claims costs Microsoft $106 a pop – 20.2 per cent of the cost of the console’s complement of components. ATI’s share is higher – 26.9 per cent – which it gains from its $141 R500 GPU, though it has to pay NEC some of that for the embedded DRAM it uses.

The next largest cost is the 512MB of Samsung DDR SDRAM ($65, or 12.4 per cent of the BOM), followed by the 20GB hard disk (10.4 per cent). You can see the full breakdown here.

iSuppli estimates that rising yields of the various chips used in the Xbox 360 will drive down costs going forward. But even if they don’t, Microsoft almost certainly doesn’t expect to make money on the console, passing lower costs on to the consumer by reducing the price of the console. Instead, it will be looking to recoup its hardware losses through software licensing royalties and the sale of its own Xbox 360 games.

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