Xbox 360 Teardown

Main Features

New generation Xbox game console with 20GB removable hard drive, DVD-ROM (Dual-Layer), 512MB on-board Graphic DDR DRAM, ATI Xenos Graphics Processor Unit (GPU), IBM PowerPC Core, 3.2GHz. Bundle package analyzed here included external power supply (203W), wireless controller, remote, and AV/Ethernet Cables.

Marketing/Positioning

Overview

The Xbox 360 sells for far less than it costs to make currently, per our estimations of this hardware. Furthermore, the bulk of the cost really comes down to a handful of very expensive components, which will ultimately determine when and how Microsoft can get the hardware down to at least a breakeven point over the product lifecycle. So the question in our mind, is not "Is Microsoft making money on hardware?", but rather "How much is Microsoft willing to pay consumers to buy games for the Xbox 360?'

Most of these "breaks" will come in the form of core chipset cost reductions (ATI Xenos GPU and IBM CPU). Both of these core devices are ~$246 alone based on our current assumptions of process technology (90nm) wafer costs, yields, and margins. As yields improve and margins erode, a great deal of cost can come out of these two devices (conservatively at least 20% by merely improving yields alone to 85%).

The bottom line is that Microsoft is not making money on the hardware at this point in time, despite our relatively aggressive assumptions on much of the pricing. This business model comes down to giving away the hardware (clearly) to make it up on game revenues.

Furthermore, by making the design as obscure and customized as possible (all major chips are private labeled Microsoft) and moving proceses around in a way that doesn't directly correlate to PC architecture (Northbridge/Southbridge, etc.), Microsoft are attempting to maintain control over illegal copy usage, by making it very difficult to understand the inner workings of the Xbox, no less create "chips" to override built in measure aimed at not allowing illegal copies to be used.

Release

The Xbox 360 was released today, November 22, 2005. The model used in this analysis was obtained several days before the official release date. In fact, when compared with the release of recent Apple products such as the Nano and Vpod, this release was extremely "leaky" - there was a great deal of information in the press and on the web prior to the release with specific details on the internal architecture.

Volume Estimations

Microsoft is likely proceeding cautiously on this issue because it expects to gain significant market share with the Xbox 360. The company anticipates selling 5-6 million units by June 2006, and should sell a total of 10 million in 2006 overall. Microsoft has achieved about 18% share among current generation consoles. With strong support from online services, a previous record for hit games, e.g., Halo, and the likelihood of improving upon the Xbox's disastrous Japan sales, Microsoft has the opportunity to grow it's share to 40% or higher with the Xbox 360.

Market Shares / Sector Performance

Microsoft's Xbox 360 is the first entry among the next generation of video game consoles, a market that has historically followed an approximate five year cycle. The launch of the Xbox 360 marks the starts of a new cycle. As such, worldwide unit shipments, which will drop 9.1% in 2005 to 28.5 million units, will surge to 38.5 million units in 2006 before leveling off at 44.0 million units in 2007. The Xbox 360 will compete with Sony's Playstation 3 (PS3), due to launch in "early 2006" and Nintendo's Revolution, which should appear in the market in "mid-2006." All three consoles feature improved processing power, increased connectivity, and, for the first time, high definition (HD) graphics. The consoles share a common key supplier, IBM, which is providing custom processors for the Xbox 360 and Revolution, and also partnered with Sony and Toshiba to develop the much ballyhooed "Cell" processor that will power the PS3.

One key difference between the Xbox 360 and the PS3 involves next generation, high definition DVD technology, which will become available to consumers in early 2006. Sony, a key backer of the Blu-ray standard, plans to launch the PS3 with a Blu-ray drive. Microsoft, however, has opted to launch the Xbox 360 with DVD-ROM and wait to add next generation DVD functionality at a later date. Microsoft backs the rival HD-DVD standard, particularly because it has a strong stake in the iHD interactive software utilized by HD-DVD. If the two standards fail to broker a compromise (which seems unlikely at the time of publication), the availability of two rival DVD standards could have a negative impact on growth of the video game market and/or the efforts of Sony and Microsoft to position their consoles as "media centers." If either standard develops dominance, then Sony or Microsoft may have to shift to a dual standard solution for their consoles (Sony has recently positioned for this possibility through a surprising new venture with HD-DVD poster company NEC).

Function / Performance

No testing was performed on the Xbox 360 prior to teardown.

Cost Notes

Our estimate of the total cost of materials (including packaging and accessories) with manufacturing costs is, at the time of this analysis, approximately $552 (that's over $100 more than the comparable costs for an entry-level laptop!). Considering that this unit retails currently for $399 - Microsoft is clearly more than giving away the equipment in exchange for high margin video games. Compared with other new consumer products such as the Nano or Video iPod (where the BOM and manufacturing costs were 45% to 55% of retail price), the Xbox 360 is altogether a different business model.

Main Cost Drivers

Motherboard Main Cost Drivers

ATI Xenos GPU*~$141

IBM PowerPC 3.2GHz CPU** ~$106

Samsung - 512MB GDDR ~$65

Total Motherboard Material Cost Subtotal***~$371

Other Main Cost Drivers

Seagate 2.5" SATA 20GB HDD ~$53

Delta Electronics - 203W Ext Pwr Supply~$25

Hitachi-LG Optical Drive ~$21

Other Material Cost Subtotal*** ~$59

Subtotal of Main Material Cost Drivers~$470

Total Materials Costs ~$529

Materials and Manufacturing****~$552

* - 90-nm process technology - also features a second die (NEC Corp) w/ 10MB eDRAM - see presentation for details

** - 90-nm process technology - see presentation for details

*** - Material costs only. Manufacturing costs not included in this figure.

**** - The total materials and manufacturing costs reported in this analysis reflect only the direct materials cost (from component vendors and assorted EMS providers), manufacturing and test. Not included in this analysis are costs above and beyond the manufacture of the core device itself - cost of shipping, logistics, marketing and other channel costs including not only the OEM's margin, but that of other resellers. Our cost analysis is meant to focus on those costs incurred in the manufacture of the core device (the player, packaging, and accessories in this case) itself.

Alternate Sources

It is standard in the electronics industry for components to to be multi-sourced, and it is logical that although the unit we analyzed features certain manufacturers components that other samples of the product will also feature other manufacturers of various systems and components.

Given all of the information that was in the public domain before, we have analyzed the sources used on other samples of the Xbox 360 we gleaned from the internet and have added references to alternate sources where known in the bill of materials analysis (see Excel spreadsheet and online photo presentation for details).

Manufacturing Notes

Country of Origin / EMS provider

Per markings on the hardware and on the box itself, as well as the list of EMS providers involved (Wistron, Flextronics and Celestica) - most of the Microsoft specific designed components (motherboard, hardware, RF card, and final assembly) are all being manufactured in China. In fact, everything in this particular sample, from what we can tell, came from China, except the Seagate drive which was manufactured in Singapore.

Per the box itself, and given the various suppliers and manufacturing locations for the hard drive it appears that Korea and Thailand would also be potential country of origins for the hard drives.

Design for Manufacturing / Complexity

This design is fairly straightforward - the motherboard, or main PCB assembly contains most of the inherent Xbox complexity. The motherboard, with 1588 discrete components, is comparable in component count to a mid-range laptop or desktop.

Design Notes

The Xbox 360 is not just a PC in disguise. This is not some exotic ATX board format (the original Xbox apparently used what was essentially an ATX board) - it is it's own platform, and unique. First of all, as mentioned above - the entire design is private labeled - there are no major semiconductor devices that use "off the shelf" components, and even if they are, they are disguised by Microsoft's exhaustive private labeling. Neither the processor nor GPU are socketed.

The Xbox 360 motherboard is smaller than an ATX (or the last Xbox) motherboard and has none of the standard motherboard trappings (PCI or PCI express expansions slots, DIMM or SO-DIMM slots, etc). Having said that, this design has not maximized density - there is room for this board and enclosure to downsize. Of course, if a downsized version of the Xbox is released at a later date, the principal design challenge will be extracting the heat from the board efficiently.

The Xbox uses a customized laptop format, 2.5" SATA hard drive, and what appears to be a more or less standard desktop format optical drive (SATA as well) with custom "mounting feet" attached. The use of SATA drives make it easier to fit inside a compact design without adding the cumbersome wire harnesses of standard ATA drives.

The cooling solution is customized, but there is little special about it other than the use of a custom dual-element DC fan solution from Delta.

The external power supply is a beast at 203W, and well beyond the scope of the normal 95W (or so) power supply typically provided with laptops. This power supply features extensive heatsinking and internal thermal management with copious use of thermal grease all-encompassing sinks, and even an internal fan (rare!). This doesn't come cheap.

The wireless controller provided features a chipset (1 baseband and one shielded RF Daughter Board module) and solution similar to the one seen in the RF daughter board seen in our online presentation. This receiver and controller are not the wireless 802.11a/b/g controller - that is an external accessory - sold separately.