IHS Markit announced that, according to its preliminary teardown analysis, Microsoft’s new Xbox One S delivers improved performance and features for a minimal increase in cost.

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Unedited press release follows:

IHS Markit Teardown Analysis: Microsoft’s Xbox One S Brings Significant Value Gains with Minimal Commercial Pain

LONDON — Despite a small increase in bill-of-materials cost, the new Xbox One S delivers for consumers in terms of improved performance and features, according to preliminary results from the Teardown Analysis Service at global business information provider IHS Markit (Nasdaq: INFO).

The combined hardware and manufacturing cost of the new Xbox One S game console from Microsoft, the new analysis says, amounts to $324. That’s just $24 more than the most recent Xbox One teardown analysis conducted in March of this year, primarily due to upgrades in the fabrication of its central processing unit (CPU), the inclusion of a two terabyte (2TB) hard drive and an ultra-high-definition (UHD) BD-ROM player in place of the previous conventional Blu-ray drive.

“The new Xbox One S represents a natural evolution in the product line, incorporating technical advancements that have become available since the previous design,” said Kevin Keller, the senior principal analyst for IHS Markit who spearheaded the teardown analysis. “It provides the improved performance, smaller form factor, and enhanced features that gamers expect and demand.”

The manufacturer’s suggested retail price is $399 for the 2TB model, which is $75 more than its bill of materials and manufacturing costs. A lower-priced version, sporting a lower-density hard disc drive (HDD), is also available for $299.

“It is typical in consumer electronics to adopt a ‘give away the razor, sell the blade model’ when a product is initially introduced — particularly in the gaming sector — given that buyers are also expected to purchase new games to play on the devices,” Keller said. “Even in this case, while not completely upside-down, margins are still slim once you consider all of the downstream value-add.”

The competitive positioning game
Instead of releasing a direct equivalent to the upcoming Sony PlayStation 4 Neo, Microsoft is attempting to regain the market initiative with an improved form factor, including the new UHD Blu-ray drive, small improvements to its processing capability and HDMI interface to enable 4K video support, upscaling of 4K games content and support for HDR. Microsoft will then follow this with its more powerful Project Scorpio console at the end of 2017.

Microsoft now has the first mainstream games console on the market that supports both UHD Blu-ray and 4K output for streamed and disc-based video. Plus, the company is shifting all manufacture of Xbox One over to the new Xbox One S model, so it will benefit more rapidly from yield improvements and a reduction in material costs, compared to Sony with its more niche PlayStation 4 Neo offering.

“The Xbox One S is a solid strategic move by Microsoft in the commercial context,” said Piers Harding-Rolls, director, games, IHS Markit. “For such a small increase in bill-of-materials cost, the new Xbox One S offers a significantly more attractive proposition to the consumer and that positions it more strongly against the PS4.”

Slightly higher component costs, lower R&D
The new CPU device in the Xbox One S, supplied by AMD, is now fabricated by TSMC (Taiwan Semiconductor Manufacturing Company) using a 16 nanometer (nm) “FinFET” process, rather than the previous standard of 28nm technology. While this process resulted in a “die shrink” at this early stage it’s typical to have a lower yield rate, which has been built into the estimate of $99 versus the previous device cost of $76. “As the production of this device matures, and as yields rise, we can expect commensurate cost erosion,” Keller said.

The hard drive in IHS Markit’s previous teardown analysis was 1 TB, which was assessed at $32. The configuration for the new Xbox One S analyzed by IHS Markit included a 2 TB drive, with an estimated cost of $55. In total, Microsoft offers three hard-drive configurations at various prices: in addition to the 2 TB drive in this teardown, there is also a version with a 500 gigabyte (GB) drive selling for $299 and a 1 TB drive version selling for $349. The new console also includes a UHD BD-ROM player, with a bill of materials (BOM) cost of $33.50, versus the previous $18 conventional Blu-Ray drive.

In addition to those cost-additive factors in the console components, there were several developments that brought some of that cost back down and offset some of that increase. For example, due to deceased power consumption of the new CPU, a reduction in heatsink and fan cooling requirements was realized, resulting in a smaller and less expensive cooling solution. Incidentally, this also helped reduce the overall size of the product.

Goodbye, “brick”
Decreased power requirements also resulted in a smaller power supply, which not only dropped the cost, but also allowed a smaller module to be installed inside the enclosure. In fact, the Xbox One S no longer requires an external “brick” power supply, for this very reason. The enclosure requirements of the external supply were also eliminated, further reducing costs from $21 to $14.

Several other design refinements were also evident, particularly in the mechanical enclosure componentry, resulting in a significantly lower parts count than the previous Xbox One. These refinements, along with the smaller enclosure, cut the total enclosure mechanicals BOM nearly in half — from $36 to $19. In addition, memory costs have further eroded, even since March of this year, resulting in a $2 cost reduction.

Another interesting finding was discovered in the WiFi solution. While this product, as in the previous version, includes three wireless local area network (WLAN) devices – two in the console and one in the controller — the source for all three has shifted from Marvell Semiconductor to Mediatek. This represents a major design win for Mediatek.

The Teardown and Cost Benchmarking Service from IHS Markit provides complete, detailed analysis of electronics — from small devices such as wireless handsets and tablets to larger equipment such as servers and automotive infotainment systems — delivering a comprehensive assessment and cost breakdown of all electronic, electro-mechanical and mechanical components. IHS analysts have performed more than 2,500 teardowns, identifying and pricing over three million components and taking over 90,000 teardown photos.

About IHS Markit (www.ihsmarkit.com)
IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.