When you toss in all the peripherals, the Xbox 360 costs roughly $525 to manufacture, meaning Microsoft loses a whopping $126 per console. The original Xbox, for comparison, lost $24 per console sold. The gap between manufacturing cost and retail price will diminish as fabrication costs drop and economies of scale kick in, but that still leaves the Xbox 360 with a much larger gap than its predecessor possessed. This gap, in turn, could lead to more pressure on game developers to finish products faster and market them more aggressively.
The Playstation 3 is expected to suffer from a similar problem; the gap between its retail price and actual manufacturing cost may even be larger than the Xbox 360's. Given the ever-rising cost of console development and the difficulty of building games that take full advantage of these new platforms, Microsoft and Sony are gambling on long-term sales to redeem tremendous short-term losses.