"For well over a decade, we've heard the word "convergence" used to refer to the evolutionary paths of digital electronics, communications, and computing devices. And yet nothing more clearly demonstrates the difference between the console gaming industry and almost any other consumer electronics category than this fact: Both retailers and customers are embracing the choice they're about to be given, between Microsoft's Xbox 360, which premiered yesterday; Sony's upcoming PlayStation 3; and Nintendo's upcoming DS.

For almost every other CE market, both customers and retailers demand either a single industry standard (as is the case with DVD) or a clear industry leader (as is the case with Apple's iPod). Where there's too much duality or multiplicity, the market looks for or even demands a shakeout (case in point: satellite radio) or some form of mutual compromise (Blu-ray vs. HD DVD for the next high-definition video disc standard). At least today, the gaming market is an exception to the rule. But how long can this continue to be the case?

As we reported this morning, electronics analyst firm iSuppli revealed today in its teardown analysis of Xbox 360 that Microsoft is spending as much as $550 per unit in equipment and manufacturing costs, for a unit whose base sticker price is $399. So here is evidence of one aspect of console game marketing that truly is showing signs of convergence with consumer electronics as a whole: The same way HP is willing to lose money on printers to secure future customers for inks and supplies, and Comcast and other CATV suppliers are willing to lose money on digital cable deployments in order to secure customers for premium programming, Microsoft is willing to invest as much as $150 per customer, perhaps even more, to secure a broader customer base.

"Right now, Microsoft is very interested in gaining market share," says Chris Crotty, iSupplies senior analyst for consumer electronics, and co-author of today's teardown analysis report. "In order to do that, they need to take advantage of the fact that their console is out before the PS3 launches."

The interval between Xbox 360's premiere and next spring's Sony PlayStation 3 launch gives Microsoft a window in which to grow its market share base. During that interval, there are very lucrative deals to be made in the licensing of rights to produce game titles for Xbox 360, as well as opportunities for Microsoft to produce a few more "Halo"-level mega-hits for itself. If the rate of such growth during this window is impressive, the company may be able to wield a pre-emptive strike against Sony by securing development deals with one or more top-tier game producers. Such deals can have explosive yields: Whereas in the 1990s, video game titles were created from licensing deals with movie producers for the rights to develop off of movie franchises, today, it's the other way around. "Halo," "Doom," and "Tomb Raider," among others, have become global entertainment franchises, with the game creators now calling the shots.

So for the near term at least, $150 or so per customer is not a bad investment to make, if you're looking at the potential for not just one, but perhaps a string of gold mines. And that cost will even out over time, believes Crotty and iSuppli. Microsoft's costs are so steep now, he told TG Daily, because Xbox 360's two core components - its CPU and its graphics processor - were in large part tailored for it. ATI's graphics processor costs Microsoft about $141 per unit, iSuppli estimates, because it was designed for Microsoft by ATI. But as the design costs are paid off within the next twelve months, Crotty told us, "I think they have the opportunity to potentially break even. There's still good opportunity to wring cost out of the two main ICs - the CPU and the GPU - as they improve the yields for production."" [more]