EL SEGUNDO, CA – IBM and Microsoft once teamed up to dominate the PC market. Can they make history repeat itself in the video-game console business?

A teardown of Microsoft’s new Xbox 360 Premium video-game console conducted by research firm iSuppli indicates that IBM silicon is a key factor driving the cost and functionality of the product. iSuppli's analysis found the total bill of materials cost for the new Xbox reaches $525, well above the retail price of $399. IBM designed and co-manufactures the custom microprocessor that powers the Xbox 360. The microprocessor is a triple-core PowerPC that runs at a frequency of 3.2GHz. At a cost of $106, this single part accounts for 20.2 %of the total BOM cost for the Xbox 360 Premium, according to preliminary findings from iSuppli.

The IBM chip and other ICs in the Xbox 360 total an estimated $340 per console. Other key semiconductors in the Xbox 360 include the GPU, memory and a Southbridge I/O controller. The GPU, designed by ATI Technologies to provide HD graphics, costs an estimated $141, including embedded DRAM from NEC. This makes the ATI GPU the single most expensive component in the Xbox 360, exceeding even the cost of the microprocessor. The main memory, 512Mbytes of GDDR DRAM from Samsung, accounts for another $65 of the BOM. The SiS Southbridge chip costs an estimated $12. Other semiconductors and components make up the remaining cost of the $370 motherboard.

Factoring in costs for the hard disk, the DVD drive, enclosures, the RF receiver board, power supply, wireless controller, cables, literature, and packaging – the total BOM cost for the Xbox 360 Premium reaches $525, well above the retail price of $399. The high BOM cost for the Xbox 360 is not unusual. In the video-game business, equipment producers often market games consoles as loss leaders for more lucrative software and licensing fees.

“It’s really not surprising for the initial cost of the console to approach or even exceed the retail price,” said Andrew Rassweiler, manager of iSuppli’s Teardown Analysis Service. The good news for Microsoft is that during the next year, improved yields for the IBM microprocessor and the ATI GPU should save at least $50 per unit, in addition to other cost reductions, Rassweiler said.

The Xbox 360 marks the start of a new growth cycle within the video-game console market, iSuppli said. After declining 9.1% in 2005 to 28 million units, the next-generation consoles will cause the market to boom to reach nearly 40 million units in 2006, not including handheld game players, iSuppli predicts. The firm says the market will rise to 44 million units in 2007 and 45 million in 2008.

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