During the Apple vs. Epic court proceedings, Microsoft confirmed that it's sold every Xbox console at a loss, meaning it makes no profit from its hardware sales. While an open secret among hardware manufacturers like Xbox, PlayStation, and Nintendo, it puts into perspective how critical exclusive game sales and Xbox Games Pass subscriptions are the the company.
This doesn't come as much of a surprise since Xbox has been doubling down on services and may even be bringing the highly anticipated Battlefield 6 to Xbox Game Pass. Microsoft has also been very aggressive with its acquisitions in hopes of expanding its first-party lineup, both in the hopes of driving exclusive-incentivized console sales, but also to entice people to subscribe to Game Pass as well.
During the Epic v Apple lawsuit (thanks, IGN), Epic Games lawyer Wes Earnhardt asked Xbox VP Lori Wright about the profitability of Xbox console sales. The reasoning for the line of questioning was to show why platform holders like Xbox and PlayStation take a 30% cut of game sales and to suggest Apple doesn't need to, since it doesn't rely as heavily on games and services. Wright answered that all Xbox consoles are sold at a loss and that Microsoft's focus is on the platform's games and services, such as Xbox Live and Xbox Game Pass. Xbox Game Pass hit 23 million subscribers recently, further exemplifying how valuable such services are to Microsoft's gaming division.
This isn't exactly an industry secret, as many platform holders double down on exclusives and services in order to generate enough revenue to actually profit. The high cost of console parts makes it hard to sell at a profit without setting a controversial price point. As such, virtually every new console is sold at a loss so that customers can afford them and buy into the wider ecosystem. Sometimes, by the end of a generation, consoles become slightly profitable as the parts lessen in value. It's rarely enough to make a big difference, though, which is why Xbox continues to be so aggressive with how it develops its platform.
Xbox has expanded to other platforms, such as PC, using Game Pass and xCloud, and there are reportedly ambitions to even try to bring the Xbox brand to rival consoles. Xbox has already published some games like the Ori franchise on the Nintendo Switch, ensuring its brand is spread to multiple platforms and can get players in the ecosystem. Between consoles, PC, mobile, and possibly other platforms, Xbox has a strong grasp on the market and can likely sell its consoles at a loss without batting an eye. It's how Microsoft can make such a staunch hardware competitor to the PS5 and still sell it at a somewhat reasonable price despite selling fewer than Sony's console, even though it's just as expensive to manufacture.
Source: IGN