Microsoft Kinect advertising has already set it in the hole.

Its no secret at this point that Microsoft has planned to spend $500 million alone on marketing Kinect for its release. Thats not too hard to believe when you have Commercials, Oprah, Justin Bieber, Ryan Seacrest promoting the device, not to mention all the product placement they have been doing on TV shows.

So right off the bat in the Kinect department, its already -$500 mil in the hole. But Honestly, its a tad more then that since you have development cost for over the past few years Microsoft has been constantly developing on Kinect and like all things that takes money. Then you also have all the pre-promotions they have been doing "Special E3 show" rings a bell and then all the stages they have set up. Its clear that Microsoft has spared no expense on Kinect.

Just to be fair, lets say over the past two year development and all the promotion stuff came out to $100 million. Since AAA development on a "Game" can easily be up to +$40 million and this is hardware were talking about will cost a bit more for you have to build the software side of it as well. I personally felt that additional $100 million will be reasonable. So the over all total cost of Kinect is $600 million, or with in that margin.

Now the retail cost of Kinect is $149.99. Which is a tad hefty price for an "Add on" but Microsoft with its massive Ad campaign is sure to have it sell. However, this deep in the hole. You gotta sell a lot. And thats sugar coating it.

See, now let me break it down for you. As simple as possible.

1 Kinect unit = $149.99 / then it sales which = $149.99

HOWEVER

That $149.99 doesn't go straight in to Microsoft pocket because of "Production cost". That single Kinect unit cost a fee to create. Now at this point its very difficult to decide on how much a single unit does cost Microsoft to produce and we may never find out but judging by its model size, technology and assembling. I can see it costing much as $99 for MS to produce one. In-fact thats how people guessed earlier on how much Kinect would cost. Analyst who studied over every inch of the device said it would cost MS at least $150 to gain a profit. So once again being fair, lets say Microsoft does gain a profit and much as $50 per unit. Deal.

So again back to the equation.

1 Kinect unit = $149.99 - $99.99 production cost = $50.00 Profit.

So for Microsoft to break even in the Kinect department, it would have to sale at least 12,000,000 million units based on Hardware alone. However, Microsoft will also profit from the software sales that will be sold along with Kinect. Thus help pull the unit out negative side. But theres just one problem with that...Kinect is also bundled with one game. So for many owners may not buy any additional software. So, I would say a safe bet would be that 1 out of every 3 Kinect owners will but additional software.

A single Kinect game retails for $49.99. So Kinect + a single game will cost $199.98. But then you subtract the -$99 production cost bringing the total down to $99.99 profit. So again with a new equation.

-$600 million debt
1/3 Kinect owners = 1 additional software = $99.99 profit
1 Kinect unit = $49.99 profit

So for Kinect to break even will have to sale...drum roll please....

9 million units.

Give or take some, and since theres still a lot of numbers we are unaware of, for example each Game that Microsoft is selling along Kinect cost to develop so theres additional cost and then we are not even sure on the profit margin Microsoft makes off each Kinect. Also some Kinect owners may buy more software or more may buy none at all. Its a tad hard to say just how many units are needed to sale.

But if any thing, this gives you some idea as to how many units MS will need to sale to simply break even.

Additional thoughts:

Now Yes, i'm well aware MS has pockets deep enough to afford this not to mention that in reality, to sell 9 million units for MS would be a decent turn around rate. I could see Kinect reaching that sales number in a year and half. So Business wise, thats considered pretty fast as some business models have a 5 year turn around rate. But, that all depends on the success of the device. If Kinect lives up to the hype then that alone will cause word of mouth to add sales for easily months if not years. However if Kinect is only selling so-so then that will force for more advertising thus costing more. Its that whole profit vs cost. The best product is a product that can sell it self.

So at this point its hard to say just how Kinect will play out the following months. Its clear that MS will need more then just a home run during the holiday season. It needs to hit a home run all through 2011 to bring it well in to profit margins.