Teardown of Xbox, PS4 reveal tight margins
There's no shortage of teenagers (and adult men) who have the new PlayStation or Xbox video game consoles on their Christmas wish list. But these devices don't come cheap, for the consumer or the manufacturer.
The latest teardown analysis from IHS points to particularly tight margins on the retail, not the wholesale price, for both gaming consoles.
The PlayStation 4, which sells for $399, comes with a manufacturing bill of $381. Despite the fact that the Xbox One retails for $100 dollars more than the PS4 ($499), Microsoft's margin is just as shallow, costing $457 to manufacture.
(Read more: Sony close to making a profit on PlayStation 4)
For Microsoft, the biggest factor increasing the hardware cost of the Xbox One is the next generation Kinect system. Kinect, which combines sensor and voice recognition, comes as a standard feature on the console, adding roughly $75 to the Xbox One's bill of manufacturing.
Jeffries analyst Atul Goyal expects both companies are selling their devices at a substantial loss.
"The IHS teardown is just a bill of manufacturing, it doesn't take into account a whole slew of other costs that include assembly, shipping, marketing, royalties ... We estimate a loss of $150 per PS4 unit this year, The Xbox One losses might be lower than for Sony on a variable cost basis, but the point is that both are making money on the games.
Analysis from Motley Fool suggests that for an average $60 video game, platform providers such as Sony and Microsoft receive a $7 royalty fee.
Mr Goyal expects that for popular selling titles such as Take Two's Grand Theft Auto and Activision's Call of Duty, the royalty falls to about $5 of the wholesale cost.
(Read more: PS4 and Xbox One neck-and-neck in games console race)
He expects sales to "drag short-term profits, but a higher installed base will be beneficial for longer-term profits" for both companies.
IHS says Sony and Microsoft will also ultimately benefit "as the cost to produce the consoles decreases according to the normal learning curve dynamics in the electronics industry."
Dane Anderson, the VP of Forrester Research says, contrary to popular belief, the consoles are positioned differently. "The PS4 is focused more as a pure gaming machine, whereas the Xbox One is trying to bridge markets as an all-in-one home entertainment solution as part of its devices plus services strategy."
This strategy, known as Microsoft One, was outlined by outgoing CEO Steve Ballmer back in July. It targets more integration between Microsoft's divisions, by blending products and services.
To achieve this, the Xbox One combines three different operating systems, allowing the device to operate Windows 8 seamlessly alongside the video game system.
(Read more: Microsoft's Xbox One sales top 1 million 1st day)
"From your favorite games, to the hottest TV shows, movies and music, to surfing the Web, to Skype conversations with your family and friends, only on Xbox One can you instantly switch between all of your entertainment and snap them together " says Yusuf Mehdi, corporate vice president of Marketing, Strategy and Business, Xbox.
Microsoft is betting that the integration of other Microsoft features, such as cloud storage services, Skype and Microsoft Office will draw new customers into the company's ecosystem, and keep them there.
—By CNBC's Julia Wood. Follow her on twitter