Can Microsoft and Sony make money on game consoles?

Sony (SNE) and Microsoft (MSFT) have cut prices on some versions of their video consoles, the PS3 and Xbox 360, down to $299. They hope to use the new pricing to take market share from one another and industry leader, Nintendo.

The question is whether the move by the two companies is one where they lose money on every sale and try to make it up in volume. In other words, the price cuts may make the businesses financial unsustainable.

The unit of Sony that makes and markets the PS3 loses money, but does not break out figures for how much of that loss is due directly to the machine. A look at Microsoft's numbers is more instructive.

A look at Microsoft' 10-K for its fiscal year ending June 30 shows that its "devices" business made a tiny $169 million on revenue of $7.7 billion. Figures from the company's Zune multimedia player are also mixed into the operation, but they are very small due to poor sales of the product. What is clear from the numbers is that Microsoft's game operation runs on razor thin margins. Even if the cost of components to build the Xbox is down, it is likely that the price cut will decrease operating income for the business to take it back to losses like the ones it posted in fiscal 2007.

Microsoft and Sony may sell more of their consoles, but it is likely that their success will be clouded by what it costs to get the improvement.

Douglas A. McIntyre is an editor at 24/7 Wall St. and Microsoft Financial News.

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