Microsoft's War for the Living Room

John Gruber, on Microsoft's Console Losses
"If it’s true that Xbox is losing billions of dollars per year, it certainly puts Sony’s and Nintendo’s console struggles in a different light. It’s hard to compete against a rival that is willing to lose billions year after year after year."

It sure is, but the video game industry already knew that. Microsoft surprised Sony last generation with the Xbox 360 pricing. Which is why Sony reversed the tables on them with the pricing for this generation. Microsoft was willing to lose a lot of money getting hardware out the door, because they were able to see the value of being in everyone's living room. 

I'm not entirely sure that they're losing as much money as the analyst Rick Sherlund believes, though. Actually, I'm almost entirely certain that they're not. 360 hardware isn't the loss-leader that it was for the first year or two after launch, and Microsoft makes a handy amount on every game title sold (usually anywhere from $6-10). Additionally, Microsoft's attach rate for the 360 has been extremely high.

With the Xbox One ("lovingly" referred to as the XBone) being priced at $499, Microsoft has made the conscious decision to not subsidize their hardware sales. We'll see how that works out for them, especially given the PS4's price point at $100 below.