Technology and microchip research company iSuppli estimated that the total cost to manufacture and test a premium Xbox 360, the software giant's sleek and powerful new gaming machine, is US$552.27 (HK$4,307.70).

But a premium package that includes accessories and a hard-drive that allows gamers to play existing Xbox titles started retailing Tuesday at US$399.

Microsoft aims to sell about 5.5 million premium and lower-priced basic Xbox 360 units by the end of June. The machine will compete with Sony's PlayStation 3 and Nintendo's Revolution, due to go on sale next year.

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Still, console makers have historically subsidized manufacturing costs by creating and selling their own video games and by collecting fees from publishers who make titles for their systems. Several new Xbox 360 games are priced as high as US$60.

Chris Crotty, senior analyst for consumer electronics at iSuppli, gave a breakdown of core costs for the Xbox 360.

The IBM chip that runs it, he said, cost US$106. ATI Technologies' graphics processing unit, which provides the system's high-definition graphics, is about US$141, including DRAM memory from NEC. The 360's main memory from Samsung Electronics added another US$65, while an SIS Southbridge chip cost about US$12.

Other costs include a DVD drive, accessories, literature, packaging, assembly and testing.

The price of the system's two main chips should drop during the next year as manufacturing efficiency improves, Crotty said. That should save at least US$50 per unit, in addition to other cost reductions.

Analysts had predicted the Xbox 360 would initially sell at a loss. "We expected the cost of the console to at least exceed the retail price," Crotty said.

Microsoft, currently in second place to Sony in the US$10 billion US video game market, is gunning for the top spot with the release of its new console.

But Crotty said the big winner in the video game wars is IBM, since its microprocessors power all three of the new consoles.

"A lot of people ask me which company will win in the video game console market - Microsoft or Sony," Crotty said. "I reply, IBM."

The Sony PlayStation 3, due for launch early next year, will utilize the new Cell processor developed jointly by Sony, Toshiba and IBM. Nintendo's Revolution platform will also feature a custom IBM chip at its core.

The release of the machines is expected to reignite hardware sales growth. Crotty said that iSuppli is forecasting 38.5 million video game console sales next year compared with 28.5 million in 2005.

Whatever the economics of the Xbox 360, it has already sold out at most US stores - and many of the new owners are flipping the consoles by the thousands on Web auction site eBay for almost twice the retail price.

By Wednesday afternoon, 10,700 Xbox 360s had traded on eBay at an average price of US$781.

An eBay search for the term "Xbox 360" returned nearly 27,000 listings.

Microsoft spokeswoman Molly O'Donnell said the company is resupplying retailers with Xbox 360s as quickly as possible. "They'll be supplied on a week-to-week basis."

Meanwhile, Microsoft reported that some Xbox 360 owners are reporting problems with the console.

"We have received a few isolated reports of consoles not working as expected," O'Donnell said.

Some systems had crashed during regular play as well as during online game play using the Xbox Live service.

Problems included screens going black and the appearance of a variety of error messages. REUTERS