Microsoft announced pricing for its upcoming Zune HD today, coming around 25% below the prices of equivalent iPod Touches. I wondered if Microsoft is making any money at such prices — after all, it’s based on a fancy new chip and has other nice specs.
Then it occurred to me that perhaps Microsoft has room to lose money on the hardware. If customers buy the Zune subscription music service, MS will be taking in around $15/mo after the initial sale.
This is not unlike how AT&T subsidizes the iPhone. Apple couldn’t afford to sell the iPhone at $99/$199 and expect to make money. But AT&T will happily make up the difference, since they will receive an additional $60–100/mo on the device for the next two years.
Ditto the Xbox. Microsoft sells the hardware at a loss and makes money on games and other licensing.
So, due to its subscription service, the Zune can undercut Apple’s pricing considerably and get away with it.