Xbox One production cost estimated to be $471

A teardown performed by IHS found that Microsoft's Xbox One has a $90 higher production cost than Sony's PS4. While the PlayStation 4 is estimated to have a total manufacturing cost of $381, the Xbox One has a bill of materials (BOM) of $457 and a manufacturing cost of $14, totaling $471, or $28 less than the $499 retail price. Taking into account other expenses it seems both firms are still taking a loss on the initial production.

The biggest difference between both consoles is that Microsoft decided to include Kinect as a standard feature of its console. The Kinect adds $75 to the Xbox One's manufacturing cosT.

"For both Microsoft and Sony, their latest-generation video game console hardware is unprofitable at the time of release, requiring the companies to subsidize it initially," said Steve Mather, senior principal analyst for IHS. "However, these companies can largely compensate for their losses though sales of highly lucrative game titles. Meanwhile, as the cost to produce the consoles decreases according to the normal learning-curve dynamics in the electronics industry, the companies can cut their retail pricing – or pad their profits. Over time, Microsoft is likely to reduce the retail price of the Xbox One in order to maintain sales momentum."

Microsoft may also be more willing to take a loss on hardware sales with the Xbox One than it has for its previous-generation products. "The Xbox One is designed to serve as a beachhead in the home for Microsoft, with the console's capability to interact with – and interface to – other devices, such as televisions, set-top boxes, smartphones and tablets," Mather noted. "Gaining such a strategic advantage in the battle to control the connected home and Internet-enabled living room is well worth having the Xbox One act as a loss leader for Microsoft."