Peter Moore recently had an interview with the Guardian, where he explains the business decision to not include a hard drive with every Xbox 360. The decision was based on cost and previous experience with the original Xbox. With a lower initial build cost, the potential to lower the price in the future would be easier.
Microsoft decided to build their video game system with the bare essentials and sell accessories around the system. Essentially, this business model is similar to Apple’s iPod model. Accessories contribute to a huge chunk of the profits for Apple and with a huge profit margin and excellent marketing, accessories became an essential product.
In a similar fashion, Microsoft built the Xbox 360 lineup banking on the lowest denominator, the Xbox 360 Core (now Arcade). The Xbox 360 Arcade is Microsoft’s bare-bone system with no hard drive, no headset, no Ethernet cable. These accessories are all included in the Elite and Premium Xbox 360 models.
Also, there are several other accessories that all of the Xbox 360 models lack which most consumers will definitely need, such as the wireless Internet adapter, which currently retails for $100. Most consumers who purchase the Xbox 360 will keep it in the living room and since the majority of the houses in the US are not pre-wired with Ethernet cable, the wireless adapter is a necessity.
Many consumers who have purchased the new Arcade model are starting to realize the lack of several other vital features. Currently Microsoft is heavily advertising the Arcade model for $200 with every Rock Band commercial. However, consumers who purchase the Xbox 360 Arcade and Rockband will quickly find out that without a hard drive those downloadable tracks and video game demos will not fit on the small flash memory included with the Arcade model.
As far as hard drives are concerned there is only one choice for consumers as third party hard drives will require some modification as well as void your warranty. This was very clever on Microsoft’s part, ensuring that most non-computer savvy consumers will eventually buy the Microsoft OEM hard drive at a substantial markup.
This was a great business strategy for Microsoft because it allows for lower manufacturing cost, as well as create an opportunity to earn profit from customers that eventually buy the necessary hardware to support the software. The PS3 is losing money on every unit because it has everything, including the kitchen sink. The PS3 has an integrated next gen Blu-ray player, hard drive and wireless Internet adapter in every model.
It would be interesting to see how quickly Sony can reach break even costs with the PS3.
