...no successful subsidization examples other than Sony Play Station 2? What about your lead-off reference to Gillette, who started it all (or were you referring only to tech products)?
Microsoft are drived by profits, and share prices. They won't give away the device only to flood the market.
"Microsoft loses about $156 per XBox 360 they sell, with the assumption they'll make up the difference in game and Xbox Live revenues"
That assumption has cost Microsoft billions and there is a huge margin on games. There is virtually no profit in the download business except to the content owners. Apple uses its store to drive sales of its high profit iPods. You think Microsoft has a future by selling its player at a loss?
Of course, the problem with such a strategy is that those customers that buy a new Zune every year (assuming MS can manage a product line refresh as consistently and effectively as Apple) are going to keep MS in the red. A 360 won't be completely eclipsed by a 361 this fall, so they have more time to sell those blades.
Everyone sells the same blades for the same price. But Apple made a better razor. There goes the Gillette reference.
Apple could just buy all the Zunes in November and return them in January...but seriously folks...
If Zune comes out in November for the Holidays at a subsidized price then Apple could offer their 30GB iPod at or near the same price from November thru Jan 15th. Jan 15th will give those who bought Zune a chance to have "buyers remorse" and return it to get an iPod. Apple strategy...No big Christmas-coming-out-party for Microsoft.
I don't think they will subsidize. None of the rental businesses have been a great success with music. They all lost a lot of money.
The only successful business is Apples solution. No profit on music, profit on the hardware.
Microsoft would do it. They can and will, because they would be quite happy to wipe Apple off the planet. It's not to innovate or to provide a better experience for customers, it's simply to destroy the income of a competitor. With Apple's increase in profits, they are looking really good and MS is looking really bad. Moreover, this could spill over into the desktop market (some say it has) where people will even consider OSX as a viable alternative to Windows. iPods are subsidising Apple's reemergence in the desktop market: take away the iPod, takeaway OSX.
Does anyone seriously think that with all the troubles at Microsoft (Vista delays, Xbox losses, etc.) that the stockholders will allow this to happen? Ballmer and the other big wigs would cash out before this happens.
Re cfenger's comment about Gillette and razors: I don't actually think Gillette bought their way into that market. I believe they actually were the innovator in the disposable blade market, and therefore they profited on both the razors and the blades. The subsidy model came later.
The issue I'm pointing out is that losing money on the main product and making it up on renewables almost never works for the second and third movers in a market. Why? Because they never achieve the critical mass necessary for the consumable play to pay off. And the first mover rarely has to subsidize to make it work. Notice that Apple made money on both iPods and music at the same time -- it just made more money on iPods.
History suggests that Microsoft will never make money on the XBox 360 because it is the underdog, and subsidies don't work for underdogs. Its only hope is that Sony completely screws up -- which while possible, seems unlikely, no matter how hard they seem to be trying. 
Again, thanks for reading and spending the time to comment!
Carl
However, history doesn't favor a Microsoft win here, though; there are no examples of a company successfully building a sustained profitable business from such a subsidization strategy
1. All of the cellular companies.
2. Either Okidata or Lexmark did it first, but now virtually all inkjet manufacturers sell consumables as their primary business.
3. Virtually all photocopiers.
Apple is making most of its money on iPods and iTMS. It's hitching more and more if its future to that horse (including the unusual step of preannouncing their set-top-box -- vapourware isn't usually in the Apple vocabulary... but that's another article entirely).
Take a look at their announced 3Q06 numbers, and this shouldn't be too surprising. For every Macintosh that Apple sold in the third quarter this year, they sold 6.1 iPods, and 350 iTunes songs (about 56 songs per iPod sold this quarter). Macintosh was responsible for $1.8B in revenue. iPod players for almost $1.5B. iTMS for $457M. Yep... iPod + iTunes is responsible for (slightly) more revenue than Macintosh -- and it's at a significantly higher profit margin.
Apple's profits for the quarter that ended July 1 were $472M, on $4.37B of revenue. 10.8% of revenue is profit.
Microsoft's profits for the quarter that ended July 1 were $3.8B, on revenue of $11.8B. 32% of revenue is profit.
Microsoft could easily afford to lose $500M by offering a heavily subsidized Zune player -- without making up the subsidy by selling services. If they lured away just 20% of Apple's iPod/iTunes revenue through this, the impact on Apple's bottom line would be significant.
A sizable proportion of iPod owners are high school and college aged. The difference between $99 and $299 is dramatic in this demographic -- I don't think 20% is an unattainable goal.
Data from:
http://images.apple.com/pr/pdf/
q...306data_sum.pdf
http://www.microsoft.com/msft/
ea..._rel_q4_06.mspx
"Heavily subsidized" Zunes are just one of the ten iPod vs Zune Myths answered by RoughlyDrafted Magazine:
10 iPod vs. Zune Myths
http://www.roughlydrafted.com/
RD...5974628809.html
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