Microsoft is paying a 31 per cent subsidy on its premium Xbox 360 that, according research firm iSupply.

Based on an analysis of the components in the gaming device, Andrew Rassweiler, manager of iSuppli’s Teardown Analysis Service estimated the bill of materials for the device runs at about $525.

The bill of materials does not include costs for testing, distribution, and marketing.

The graphics card from ATI is the most expensive part of the gaming computer, costing an estimated $141. The custom designed triple-core PowerPC processor comes in second at $106.

The premium Xbox 360 is the higher end model of Microsoft's new game computer, selling at $399. The 'core' version retails for $299. The big difference is that the premium model features a hard drive, which is needed to play Xbox games that were designed for the previous generation of the console. A hard drive is also required for online gaming, causing buyers to favour the premium over the core model.

iSupply predicted that prices for the processor and graphics card are likely to drop next year as a result of improved manufacturing yields. This should bring down the cost by $50.

It is common for game console makers to subsidize their devices to build market share. They make up for the losses through the games that are sold for the devices, for which the game developer typically pays a license fee to the device maker.

The Xbox 360 went on sale in the US last Tuesday. The European launch is slated for 2 December, followed by Asia on 10 December.