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Console Pricing Economics
Red Mercury writes "Red Mercury has just released a new installment of Monday Morning CEO. Today's topic: XBox Economics. The article explains some of the myths and realities about game console pricing, how the current price war is playing out, why Sony is winning, and why Microsoft is losing." Interesting piece about all the recent console price cuts.
My only complaint with the article is my disbelief that console manufacturers really expect the markets for consoles to last 6-7 years.
The other side of Moore's Law is that quite a few people are going to be demanding better hardware, more quickly. That's why Sony already has the PS/3 in the pipeline.
Get off my launchpad!
Yeah, but read the article:
The real killer for X Box is the HDD. Sure HDD capacity keep increasing, but HDD cost never does becuse they are mechanical devices. It take a great deal a labor to make a HDD. And right now MS is getting some sweetheart HDD deals because PC sales are down. Seagate will stick it to them when PC sales start picking-up. The real customers that the HDD companies care about are HPQ, Dell and Gateway. MS jist does not do enough volume even with X to get their attention.
at $10 a month for internet gaming on the X-Box.
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See the earlier slashdot story
http://slashdot.org/article.pl?sid=02/05/20/051
It's not the razors or the blades; it's the shaving cream!
This is great news for two reasons. First of all, it feels good to know that Microsoft released something that massive amounts of people didn't automatically adopt. Second, let this be a lesson to them: one of the major advantages of a console system is that you can design a radical system with none of the limitations of a general PC design. Don't compensate with inflated clock speeds when you just design better hardware. Dont get me wrong, Nvidia is an amazing processor but its only purpose is to make up for X86's sad lack of multimedia capabilities. AGP is just trying to make up for sad bandwidth. Just look what the PS2 can accomplish with 4MB texture memory, 32MB main memory and almost no cache whatsoever! It's all in the the multiprocessor design, dedicated 128 bit bus between components, and a really kewl logo. However, I must admit that the Xbox does have ONE advantage over GC and PS2... smilebit is a bunch of lazy windows coders so I probably will never see a port of Jet Set Radio Future :(
The only problem with that line of reasoning is the fact that computer hardware will continue to advance, while the XBox is a static platform.
Most PC games out today don't support 5 year old hardware. 5 years ago, almost no games required a hardware graphics accelerator. Nowadays, you'd be hard pressed to find one that doesn't.
So, 4-5 years down the line, M$ won't be able to dump games to the XB because the technology will be too dated.
Just my $2/100.
I wish I had a kryptonite cross, because then you could keep Dracula and Superman away.
The article disagrees and so do I:
Some seem to think that it doesn't matter if Microsoft loses millions or billions on the XBox, because they will just release the XBox 2, and everybody will buy that, according to some larger Microsoft "strategy" to "own the living room". Game consoles don't work that way, for some reason. If the XBox goes the way of the Dreamcast, nobody... NOBODY is going to be clamoring for the XBox 2 (how many millions of people are eagerly awaiting Dreamcast 2? That's right, zero million.)
If I were in their shoes I wouldn't have dropped the price. Instead I'd have launched a multi-million dollar ad campaign targeting why the XBox is so much better and how the other consoles were slashing prices in fear. Too late.
Look, I love a PS2 and love it. I bought it the day I saw the Xbox. I won't buy an Xbox anytime soon, as long as my favorite games are on the PS2.
Having said that, I disagree with the article. Simply put, XBox is technologically superior to the PS2 (and I'm talking game experience here, not specific specs), and although right now it's not a huge issue (although it is for some people), as time goes on, it'll be more and more important
Pretty soon people will look at PS2 games and then look at Xbox games and PC games and say "why can't my ps2 do that!", and THEN, only then, people will start considering an Xbox again.
If by that time the PS3 is not out yet, Microsoft will get enough momentum to either go ahead and release an Xbox3 or do with the Xbox what the PS2 is doing today, at a much lower cost (as the article says, the cost goes down according to Moore's law)
Basically MS will have a small window of oportunity (6-12 months?) in the next, say, 2 years, that they might or might not take advantage of, and that Sony might or might not prevent. Bottom line, it's not decided yet.
There are two kinds of people in the world: Those with good memory.
To put the numbers in perspective... there have been 20 million Sony Playstation 2's sold since its launch. This article claims it costs Microsoft $320 to make an Xbox.
Microsoft has $40 billion in cash. That's not capital tied up in equipment, that's money in the bank. This means that, if Microsoft decided to contact every PS2 owner around the world, everyone who has bought a PS2 in the last three years, buy them a free Xbox, and send it to them with free shipping... they would be left with only $34 billion.
Microsoft could then buy a controlling interest in Sony Corporation for $26 billion, and then pay retail for a $50 free game for every child in America (from newborn infants up to the 17-year-olds). After doing all that, Microsoft would still have over four billion dollars in cash reserves.
I was never sure about how much a console was but I always expected that Sony and Nintendo were always making a profit, even razor thin ones. Always have and always will. In fact the only time when you can get away with "selling at a loss" is when you *creapy organ music* have a monopoly...
I laughed at the accusations back when N64 and PS2 were scarce on shelves and both Nintendo and Sony where causually accused of shorting supply to create demand and future sales. What idiot in the retail market wants to sell something tomorrow where they might make a profit when they can sell it today and definately make a profit? Back then a PS2 would sell for $300 scarce as it would $300 plentiful. There is no margin to play with in the retail to speculate on so they don't do it. Same thing with what is going on now with XBox's woes. Gambling to turn a profit later in retail products often gets you squashed...
Lets see...other companies that bought into the "sell the hardware cheap, hook them in software" idea.
Off the top of my head, I remember seeing stuff from sources that suggested that SGI was selling Indy workstations and later O2 at a loss. Look where SGI is now unlike Sun and IBM who have stated policies about not giving away hardware just to get people to write software. As mentioned Sega bought into the idea with the Dreamcast and nearly crushed them. Luckily for them someone recognized where most of the money was bleeding from and cut it off.
Selling hardware at a loss just isn't a sound strategy. That is a highly dubious way to invest a company's capitial. So given that Sony invested $1B in actual, real hardware investments over MS just tossing units out the door trying to pay people to buy, which is a sound strategy?
and this is the important part. Microsoft's strategy here is just to bleed its competitors over the next few years to make them very unprofitable. As XBox gains marketshare, the other two vendors will give way. This will then increase the box price for the other two vendors (less volume) and the software available for newer units will probably be less, as vendors will make stuff for the Xbox first. And then the network effect kicks in...
So, it may cost Microsoft a few billion dollars in losses to crack this nut... who cares? In the end Microsoft will control the game market and it will become a monopoly; where each game manufacturer supports XBox, but none of the others. This is one half, and we haven't talked about how Microsoft's Venture Capital fund is sure to help out start-up game manufacturers who promise _never_ _ever_ to make a Sony or Nintendo game cartrige.
Yes, if XBox goes the way of the Dreamcast (cancelled with no successor in sight) then nobody will be screaming for the XBox2--because there won't be one. On the other hand, if Sega had had deep enough pockets to keep the Dreamcast alive, instead of cancelling it when its online games were just beginning to take off, then we might indeed be clamoring for Dreamcast2.
I thought this article brought up two very interesting points which oddly enough I was discussing this AM with my wife after we learned of the GC pricedrop (we have a PS2 and "classic" PSX):
:).
.
* Production control
* Platform Longevity
When talking about hardware, it's all about controlling production and cutting costs whenever possbile. Since Sony controls the production, any increased efficiencies they realize in their PS2 chip fabs directly impact their profit margins. However, on XBOX, if Intel/NVidia become more efficient in creating XBOX components, they pocket the $$$.
In addition, and in the spirit of MS' campaign for "innovation", Sony is taking it to the poor XBOX team, which obviously isn't in this for the long run. Nothing against Blackley and crew, but Sony plays consumer electronics for keeps, has teams dedicated to multiple PS product generation, and are showing it with how they control manufacturing process where, for Sony, a penny saved on costs is a penny Sony keeps (don't think Sony is selling the PSOne for a loss @$49USD
In addition to controlling its own production, Sony obviously employs a number of highly-talented hardware engineers (and yes, some of the Emotion Engine peeps belong to Toshiba) dedicated to creating mind-expanding and truly innovative hardware for the consumer market which will age gracefully and provide high-performance for years to come (For those who insist on comparing XBOX/PS2 from a MHz/RAM standpoint, see the ArsTechnica article on the Emotion Engine). PS2 has lots of room to grow.
Sony knows consoles aren't like PCs: the majority of buyers keep the consoles much longer than a PC and periodically purchase additional software titles. When the next round of the Console Wars commences, you know Sony will be selling the PS2 around $99 . . . and it will still be making a profit on each unit. Will Intel still be making the P3? What about NVidia . .
It points the reader into thinking MS is losing their shirt. And as they may this will not cause their downfall or the failure of the Xbox. PS1, first variant, lost billions for 4 years before turning a profit and Sony is still in the console business with PS2.
The article mentions Moore's law and how Sony's investments in its own plants and R&D help, it doesnt mention that Moore's law is not prejudice it works for MS too, Xbox uses Nvidia and Intel true but a Geforce 2 goes up in price over time as the Geforce 4 is out? No it drops just as quickly as new R&D pushes GF2 down, if anyone Sony should be afraid since MS doesnt have to do any R&D. And Nintedo's Gamecube uses ATI, so its in the same boat as Xbox not Sony. Only thing is Nintendo is the MS of consoles they develop their own software and dont share with 3rd parties, only recently have they decided to change their tune because of the new Xbox competition.
I personally own PS2 and Gamecube. I dont love Xbox but I hate when dumbass reporters misinform their readers.
But, you're assuming that MSFT can buy out Sony. With the consent decrees and the hanging antitrust decree in Europe, it is highly unlikely that the FTC, SEC, or the EEC would permit any such monopolistic buyout to take place, especially during an attempt by MSFT to dump xBox on foreign markets is ongoing.
Fact is - until the price cuts, only MSFT was selling boxes below cost. Sony was at slight margin above breakeven, Nintendo was at a nice profit - and then add in the $50 USD game carts for gravy.
What we need is a price war on game prices, not game consoles. Why do they cost $50 USD - why not $30 USD?
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--- Will in Seattle - What are you doing to fight the War?
Not to mention that by having console developers make games for a PC-like windows platform, it encourages them to make the leap to PC games, which in turn will sell more copies of Windows XP (once Microsoft stops upgrading DirectX on 98).
I think actually the reverse is probably true. Hardcore gamers used to buy PCs, for which MS would get $100 per unit, more or less. If they buy an X-Box, why should they buy a PC? And MS loses maybe $100 per X-Box...
Microsoft is not trying to make money on video games...well they are but they have a much grander vision ahead for which each X-Box is an investment in. This is MicroSofts way into each and every living room of America. They own you at work, now they are going to own you at home. This is their line straight into the entertainment dollar. Anybody read about how they will offer voice-over-ip? I thought one thing, brilliant! Now even grandma's going to get one so she can talk to Johny while he's playing a kick-someones-ass-with-porstar-looking-character games.
[news for me, stuff that doesn't matter]
Sega had to pull the plug on the Dreamcast because (as Gord pointed out) it was the only one of the 3 major consoles that subscribed to the razors-and-blades business plan. However, the implied comparison to MS is not valid.
Sega was a one-trick pony. If the Dreamcast failed, Sega had no other game system to fall back on. In the end, the only strategy for survival was the one that Sega eventually adopted: sell software, not hardware. If Gord could figure this out (and he's just a games dealer), don't you think EA figured this out LONG before that? So game developers were afraid to support it, so Sega lost more money, so eventually everybody knew that Sega would have to get out of the hardware business, long before they publicly announced it.
Microsoft, on the other hand, isn't about to go out of business; so, even if XBox software sales are miserable, developers will continue to target the XBox. After all, if a title flops on the XBox, they can always repackage it as a $20 PC game. I mean, a game developer might abandon the Dreamcast's dev platform and GD-ROM hell, but nobody but nobody is going to stop developing for the Intel-and-DirectX world...
Once Windows is the embedded OS in a Microsoft-controlled hardware product, many good things (for Microsoft) happen:
There is no threat from any other OS.
There is no cry of "Unfair middleware bundling!"
There is no issue of different licenses for different hardware makers, or of rogue hardware makers loading a non-M$ approved desktop.
Everyone who writes software for the box has to pay Microsoft a royalty -- guess what this does to the Free Software folks?
Microsoft can provide ever-greater improvements just by re-flashing the ROM via your (required) Internet connection (don't have one? sign here for MSN for just $5/month more than you're paying now).
Oh, did I mention manditory software subscriptions?
Want more storage space? We'll rent you more for a slightly higher subscription (no hardware upgrade needed)
This this is all a pipe dream? Think nobody will buy this? Think again.
If all this should have a reason, we would be the last to know.
Don't count on it. Microsoft might have deep pockets to absorb the loss, but the companies that make games for it don't. If interest is less than enthusiastic then there are relatively (compared to PS2 and Cube) few consumers to buy the software. And I, as a software developer, am not going to bother to write software for a platform that doesn't have enough paying users.
So, even if Microsoft can afford the losses, unless they start PAYING companies to write software for their platform (which contradicts the idea of selling the hardware at a loss), I don't think MS' gaming bid is going to last long.
I know nobody will read my post all the way down here, but what the hell.
There are TWO reasons that Sony is winning the console war thus far. The reasons most people are listing (great games, etc) are just effects of their selling so many units. The cause of their success with the PS2 boils down to two points:
1) It's named "Playstation 2".
2) Big head start.
I defy anyone to refute that.
[PowerPoint] is a tool for capitalist presentation
Yeah, Sony has absolutely no revenue stream other than the playstation. Comparing MS, Sony, and Nintendo is like comparing apples and oranges and mangoes.
"I love my job, but I hate talking to people like you" (Freddie Mercury)