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Microsoft Corp., the world’s leading maker of software, is earning money selling the Xbox 360 hardware, according to updated teardown analysis from research firm iSuppli. The information means that the software giant has managed to lower the price of its latest game console by nearly 40% in one year.

According to iSuppli’s most recent analysis, the premium version of the Xbox 360 game machine equipped with hard disk drive has a manufacturing and materials total of $323.30, based on an updated estimate using costs in the fourth quarter of 2006. This total is $75.70 less than the $399 suggested retail price of the Xbox 360. Even though it is obvious that Microsoft still has to subtract freight, toll, retail partner’s profit and other possible charges, it is highly likely that Microsoft has either managed to reduce its loss to minimal, or is making a tiny profit selling the $399 flavour of the Xbox 360.

A year ago the total bill of materials (BOM) cost for the Xbox 360 Premium, including hard disk, the DVD drive, enclosures, the Radio Frequency (RF) receiver board, power supply, wireless controller, cables, literature, and packaging, reached $525, well above the retail price of $399, according to iSuppli. Considering the up to date BOM, Microsoft has managed to reduce the pricing of its console by over 38.5%.

The lower manufacturing cost will allow Microsoft to decrease the unit price of its console or even introduce a new version featuring more capabilities at the existing price tag. For example, Microsoft could equip its Xbox 360 premium with HD DVD drive and selling it at $399 still maintain price $100 lower price compared to Sony’s PlayStation 3, which is available at $499 and $599.

Microsoft’s arch-rival on the console scene – Sony Computer Entertainment Inc. – currently sells its PlayStation 3 game consoles at $241 – $306 loss. If the company manages to trim the production costs by 40% in a year, it will cost $483 to manufacture the $499 version of the PlayStation 3 and $504 to make the $599 flavour.

Microsoft Xbox 360 console is based around triple-core microprocessor developed by IBM, high-definition visual processing unit designed by ATI Technologies featuring unified shader architecture, I/O controller engineered by SiS and some other key components. The gaming machine provides a broad set of multimedia capabilities, including high-definition movies and TV programs downloads in addition to games. Microsoft Xbox 360 core without hard drive is currently priced at $299, whereas the model featuring 20GB HDD and wireless controller has recommended price of $399 in the U.S. Microsoft also offers HD DVD add-on drive for the console for $199.

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