Consoles are sold at a loss, so that more people will buy the console (licensing fees are proportional to the size of the audience/consumer base). Even the PS3 when it first came out at $600 was a loss leader; if i'm remembering right for the PS3, the cost of the hardware was something close to $1000.
Companies expect to make that money back through 1st party game sales and licensing fees from 3rd party developers for access to the sdk.
That doesn't explain the loss at all. The 360 is liely not costing more to build at this point in its lifecycle and all the games are actively paying their royalties.
The Xbox is profitable. The problem is the other businesses lumped in with them.
i don't disagree; i stupidly answered the question poster asked (how could microsoft not make a profit selling xboxes) instead of the question s/he meant to ask (why did the entire bu lose money).
Companies expect to make that money back through 1st party game sales and licensing fees from 3rd party developers for access to the sdk.