Microsoft Corp. loses hundreds of U.S. dollars on every Xbox 360 game console it sells, according to market analysis firm iSuppli. According to the company, the most expensive components of the console are graphics processor developed by ATI and central processing unit designed by IBM. The company expects Microsoft to lower product cost to the level at which the consoles are sold today in a year from now.

Factoring in costs for the hard disk, the DVD drive, enclosures, the Radio Frequency (RF) receiver board, power supply, wireless controller, cables, literature, and packaging – the total bill of materials (BOM) cost for the Xbox 360 Premium reaches $525, well above the retail price of $399, iSuppli said. The high BOM cost for the Xbox 360 is not unusual. In the video-game business, equipment producers often market games consoles as loss leaders for more lucrative software and licensing fees.

IBM designed and co-manufactures the custom microprocessor that powers the Xbox 360. The microprocessor is a triple-core PowerPC that runs at a frequency of 3.20GHz.  At a cost of $106, this single part accounts for 20.2% of the total BOM cost for the Xbox 360 Premium, according to preliminary findings from firm.

Other key semiconductors in the Xbox 360 include the graphics processing unit (GPU), the memory and a Southbridge I/O controller.  The GPU, designed by ATI Technologies to provide high-definition (HD) graphics, costs an estimated $141, including embedded DRAM from NEC.

The main memory, 512Mbytes of GDDR DRAM from Samsung Electronics Co. Ltd., accounts for another $65 of the BOM. The SiS Southbridge chip costs an estimated $12. Other semiconductors and electronic components make up the remaining cost of the $370 mainboard.

Factoring in costs for the hard disk, the DVD drive, enclosures, the Radio Frequency (RF) receiver board, power supply, wireless controller, cables, literature, and packaging – the total BOM cost for the Xbox 360 Premium reaches $525, well above the retail price of $399.

“It’s really not surprising for the initial cost of the console to approach or even exceed the retail price. The good news for Microsoft is that during the next year, improved yields for the IBM microprocessor and the ATI GPU should save at least $50 per unit, in addition to other cost reductions,” said Andrew Rassweiler, manager of iSuppli’s teardown analysis service.