LOS ANGELES (Reuters) - Microsoft Corp. MSFT.O has been quietly working since last fall on a device combining its money-losing Xbox video game console and with its digital video recorder, technology magazine Red Herring reported on Tuesday.
The publication also cited a source as saying internal Microsoft estimates showed that the software giant would lose $750 million on the Xbox game console this fiscal year and $1.1 billion in the next fiscal year, ending June 2003.
That compares with an estimate given to Microsoft Chairman Bill Gates in 1999 that the Xbox project could lose $900 million over eight years, author Dean Takahashi said.
Takahashi recently released a book, "Opening the Xbox," about the early history of the Microsoft console, part of a broader strategy by the software maker to move away from its reliance on PC software into digital entertainment.
Representatives of Microsoft were not immediately available for comment.
At the Xbox's cost of about $325, Red Herring reported, Microsoft loses at least $150 on each box, which retails for $199 but is sold wholesale to stores for $175.
That $325 cost-of-goods will come down to $225 eventually, the magazine said, quoting an unnamed source, though it will likely take five years.
By comparison, the article said competitors Sony Corp. 6758.T and Nintendo Co. Ltd. 7974.OS were expected to lower the costs of their competing PlayStation 2 and GameCube, respectively, much faster, Red Herring said.
Meanwhile, Microsoft engineers have been at work for about nine months on a project combining the company's UltimateTV recorder with the Xbox, Red Herring said.
The magazine cited speculation that such a combined machine could be launched next year for a price of around $500, which factors in the added costs of a larger hard drive and TV tuning equipment.
The Xbox, PS2 and GameCube are competing for share in a global game market that is expected to top $30 billion in hardware and software sales this year.
All three companies make losses on their hardware products, but make up those losses with sales of higher-margin software.