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Microsoft squeezes little profit out of each Xbox One

Which component in the new console costs the most? Research firm IHS takes an inside tour and reveals the priciest parts.

Microsoft's Xbox One.
Microsoft's Xbox One. Sarah Tew/CNET

It's a thin line between profit and loss: the retail price of the Xbox One is just $28 higher than the cost of parts and manufacturing, leaving Microsoft with little to take home.

Microsoft sells each Xbox One for $499 after spending $471 to build it, according to a peek inside Microsoft's new gaming console by research firm IHS, as shared with AllThingsD.

The cost to build an Xbox One is $90 more than the $381 Sony spends on its PlayStation 4, which costs consumers $399. That leaves Sony with an $18 profit on each unit.

"If your cost is within $10 to $20 of the retail prices, there's very little chance you're making a profit on the console," IHS analyst Andrew Rassweiler said when the firm released its PS4 teardown.

What drives up the manufacturing costs of the Xbox One?

The Kinect is priced at $75, but the most expensive component is the AMD microprocessor at $110. Similar to the AMD chip in the PS4, the processor in Microsoft's console combines both a CPU and graphics processing unit (GPU) to tackle the heavy graphics load that Xbox One games demand.

Memory chips add another $60 to the manufacturing cost, while the parts used to assemble the Xbox One console kick in another $332, according to IHS.

So how will Microsoft turn a decent profit on the Xbox One deal? Like Sony, Microsoft expects to make money on game sales. Down the road, the cost of components will drop. However, Microsoft could counter that by lowering the price of the console.

"That's the way it happened with prior versions of both the Xbox and the Playstation," Rassweiler told AllThingsD. "Microsoft could eventually eke out a break-even scenario. But they'd probably use it as an opportunity to cut the retail price, in hopes of selling more."

Clarification, 6:59 a.m. PT: Although this story correctly cited the retail price ($499) and the manufacturing cost ($471) of the Xbox One, it inadvertently misstated the relationship between those dollar values. The manufacturing cost is, of course, $28 lower than the retail price.

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