4. Do a break-even analysis of Microsofts investment in X-box. Based on Microsofts forecasts (Exhibit 17), do you think Microsoft is in a position to recover its investment?

They also incurred costs of $2.5 billion in start up costs.

Exhibit 17 - Xbox Financial Data FY02 FY'03 FY'04 11 Console Sales Unit sales (# of Xbox units sold in millions) FY'05 12 FY '06 10 P 13 Console Prices and Costs Retail price per unit Wholesale price per unit Production cost per unit 299 209.3 350 249 174.3 300 249 174.3 250 249 174.3 250 199 139.3 250 Software Game Sales ("Attach Rates") Unit game sales per customer in first year of a customer's Xbox ownership Unit game sales per customer per year after first year of Xbox ownership Software/Game Prices and Costs Retail $ price per unit Production $ cost per unit? 49.0 36.3 49.0 36.3 49.0 36.3 49.0 36.3 36.3 Assumptions 1 Assumes wholesale price is 70% of retail price 2 Assumes 75% 3rd party software sales with royalties of $7/game for Microsoft, and 25% sales of in-house software with $30 gross margin for Microsoft Notes and Sources 1 Microsoft's fiscal year ends on June 30th 2 Figures are a conservative composites of data from various media, broker and market research sources Exhibit 17 - Xbox Financial Data FY02 FY'03 FY'04 11 Console Sales Unit sales (# of Xbox units sold in millions) FY'05 12 FY '06 10 P 13 Console Prices and Costs Retail price per unit Wholesale price per unit Production cost per unit 299 209.3 350 249 174.3 300 249 174.3 250 249 174.3 250 199 139.3 250 Software Game Sales ("Attach Rates") Unit game sales per customer in first year of a customer's Xbox ownership Unit game sales per customer per year after first year of Xbox ownership Software/Game Prices and Costs Retail $ price per unit Production $ cost per unit? 49.0 36.3 49.0 36.3 49.0 36.3 49.0 36.3 36.3 Assumptions 1 Assumes wholesale price is 70% of retail price 2 Assumes 75% 3rd party software sales with royalties of $7/game for Microsoft, and 25% sales of in-house software with $30 gross margin for Microsoft Notes and Sources 1 Microsoft's fiscal year ends on June 30th 2 Figures are a conservative composites of data from various media, broker and market research sources