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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.
An interesting comparison to the Red Mercury article is this one which claims M$ lost $80 per XBox sold at the original price...
Microsoft can afford to lose money on the XBOX. They've got enough extra cash lying around to buy a dozen space shuttles.
The point of the XBOX is to allow Microsoft to break into the home entertainment industry. Whether or not the XBOX makes money, it will be followed up by XBOX II and X-HOME-THEATRE system, or whatever they will be called.
Right now, profit on the XBOX would be nice. But the bottom line isn't necessarily the bottom line.
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.
Looks like microsoft may have gotten into a fight with someone a little more cagy than themselves and I am laughing my butt off. Sony is an old hand at dealing with psuedo monopolies and the latest fads. Microsoft is a talented amature at this but it looks like age and cunning are about to teach youth and exuberance a lesson.
CEO of Nintendo " Sonny we were getting sued for anti-competitive behavior while you were still trying to secure your first round of VC funding. Don't try to teach this old hound how to hunt."
Bill Gates " whimper"
Papa Legba come and open the gate
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.)
Now if only we can get MS to keep throwing money away....
"It is a greater offense to steal men's labor, than their clothes"
at $10 a month for internet gaming on the X-Box.
0 21 1
See the earlier slashdot story
http://slashdot.org/article.pl?sid=02/05/20/051
It's not the razors or the blades; it's the shaving cream!
The only problem with that line of reasoning is the fact that computer hardware will continue to advance, while the XBox is a static platform.
Most PC games out today don't support 5 year old hardware. 5 years ago, almost no games required a hardware graphics accelerator. Nowadays, you'd be hard pressed to find one that doesn't.
So, 4-5 years down the line, M$ 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.
Remember a billion here, a billion there and you start talking real money.
But remember Microsoft has TONS of money. If their goal is to own the living room, then by god they will own the living room. Just wait till they day they say the hell with it, drop the Xbox, come out with the Y box, sell that for about $10, and wait until everyone owns one and Sony and Nintendo are out of the console business.
At this point they use their monopoly in the console market to force TV manufactures to make TVs that support some sort of "innovation". Then it will daisy chain from there until MS software, and possibly hardware, runs your entire house.
Of course the flaw in this paranoid delusion is for it to work MS has to offer more than a cheap console and a bunch of crappy games. If all they have to offer for the $10 Ybox is Halo2: More shooting then the gamers will still probably flock to the PS3 with GTA4: Killing some more Hos.
No I don't have any three of the consoles yet, but the choice of which to purchase is getting harder and harder...
Eddy.WriteLinux.Com
Verily, it is truly as the Gord hath prophesied. Indeed, in this particular writing, the Gord reached pretty much the same conclusion as this fellow, only quite a bit earlier. Neat to see he is being proved right.
Editor Emeritus and Senior Writer, TeleRead.org
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.
That's why Microsoft is seriously looking at VIA for both the processor and graphics for the XBox II (which from what I can tell is just going to be a new form factor for the XBox, not a whole new platoform). The Register has also been following reports that MS is investing heavily in chip design personel. I wouldn't be surprised if they try to do the entire Xbox in house.
Phase 1: use off the shelf shit to get the Box to market quickly
Phase 2: reduce the number of outside suppliers needed (i.e. graphics and processor supplier the same) to help reduce costs.
Phase 3: do it all in house for maximum savings.
Interesting strategy if its true, but unless they start getting some compelling games out there it'll all be moot.
This was a helpful analysis to correct the one concerning Microsoft's battle with Sony from the "Beating Bill" article at Business 2.0 . In that article, the author felt that Microsoft was succeeding against Sony because:
a) they didn't get it wrong right off the bat (as one former Microsoftie opines, "If version one of a product does not suck, it's game over."
b) the Xbox has more power hardware
c) it has an ethernet port intrinsically
d) it has the potential to be a future digital hub
e) a survey that states that 27% of PS2 owners intend to buy an Xbox
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.
...and one reason only; the name Microsoft is on it. If this were the Sega xbox, it would be kicking the ever loving shit out of the PS2 in sales in the US, Eurpoe and Japan.
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.
The Gord also prophesied the demise of the Xbox.
Side note: the author of the MMCEO mentioned that Sony & Nintendo could start a software war. I think it's already begun. Sony has employed the same "Greatest Hits" tactic with PS2 games that we last saw on PS1. Gran Turismo 3, Twisted Metal Black, ATV offroad Fury, and Dark Cloud are now $20 (USD). I can't wait for GTA3 to go on sale! The author also noted a 6 or 7 year turnover in game consoles. The PSX's 5 year endurance was unheard of at the time. I think a 2 or 3 year turnover is more accurate.
"Now gluttony and exploitation serves eight!" - TV's Frank
The sucessful ones do last this long and longer. The Nintendo Entertainment was released in 1985 and was still going strong in 1991 when the Super NES was released. The SNES eventually failed to the Genisis, but it some games being made for it 5 years later when, in 1996 the N64 was released. With the N64 behind the playstation, the GameCube was released in 2001.
The Sega Genesis was released in 1989 and was also going well when the Saturn was released in 1995. The Saturn and the Dreamcast never became winning systems.
The Playstation was released in 1995. 5 years later in 2000, the Platstation 2 was released. As the article states, there are games still being made for the first version, and PSOne sales are still moderate. I feel that the PS2 backwards compatibility will carry the first platform for a while.
-no broken link
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?
-
--- Will in Seattle - What are you doing to fight the War?
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]
Point one: the BIOS is distributed over several chips, not contained in one EEPROM.
Point two: the operating system itself is encrypted with strong crypto. It uses a species of crypto related to the EFS encryption infrastructure first released in Windows 2000. Since the OS is in ROM and thoroughly encrypted kiss the thought of booting the XBox with Linux goodbye.
Point three: their DVD-ROM has a reversable motor. XBox game DVDs spin BACKWARDS, and the content starts at the second layer.
Point four: Even the peripherals are non-standard. The XBox implementation of USB means that plain-jane USB periphs WILL NOT WORK with the XBox. There will be a keyboard and mouse for the XBox when hell freezes over.
Microsoft made DAMN SURE the XBox would not end up like the IOpener.
The better chance to get PCs to the 3rd World is the VIA Eden Platform. There are already products using the Eden Platform out, and more are on the way. VIA might not attract the power users (The nForce+Athlon is more appropriate for them) but they will 0wn China with this platform.
And no, not every poor fsck can afford a TV. Some can't even afford a bowl of rice. In places like this, technology is the least of the populace's worries.
Knowledge is power. Knowledge shared is power multiplied.
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.
This is one of those articles that takes present strategy (as viewed from the outside looking in) and runs it into the future.
The whole article assumes that MS will never fab it's own chips into an Xbox... that might not be entirely true.
BOSTON SUCKS!
I think we are approaching a price level where the average game players will be able to afford 2, or even all 3 of the current consoles.
A price cut that makes a console affordable as a 2nd or 3rd machine will not guarantee the same level of games purchases the manufacturers are counting on... for example if the Xbox fell to half it's current price (as some are suggesting, I would buy it as a third machine, but I would probably only buy 1 Xbox game for every 3 or 4 that I bought for the PS2 and GC.
A pizza of radius z and thickness a has a volume of pi z z a
Any analysis of the XBox manufacturing story is incomplete without looking at how Flextronics (the XBox manufacturer) recently told us they will be pulling XBox manufacturing out of Mexico and Hungary (the two current locations of XBox factories) and going into China. Flextronics is taking a serious financial hit. They made a financial gamble on the XBox and they are losing it bigtime. The low margin at which they are manufacturing the XBox only made business sense if the XBox moved in volume and it isn't. Console prices go down and profits goes up when the volume of the pieces goes up. That isn't happening with XBox. It has flopped in Japan and flopped in Europe.
So the behind the scenes story of the XBox is rather simple: the Flextronics gamble failed so at this point Flextronics is cutting their loses. Flextronics is losing big money on this deal and they are scared shitless at losing more.
Microsoft has also stated that they are looking at other manufacturing partners for the XBox. The only question here is can they find another sucker like Flextronics who will be willing to take the same plunge. Its highly doubtful. Who wants to work with Microsoft at this point when all they have to do is look at the Microsoft/NVidia mix up which basically amounts to Microsoft refusing to pay what they said they would.
Microsoft is poisoning the well and destroying all chances they have in the future of securing hardware partnerships for the XBox2. They are a fish out of water. They are accustomed to abusing their business parters and getting away with it because they are the monopoly.
And the entire fiasco from another perspective: no one cares about the human beings who lost their jobs (in Mexico and Hungary) because the international manufacturing juggernaut (Flextronics) decided to axe their livelihoods in order to "serve their customers better".
Links:
Hungary XBox plant shutdown
XBox software sales in Europe
The author also noted a 6 or 7 year turnover in game consoles. The PSX's 5 year endurance was unheard of at the time. I think a 2 or 3 year
I'm not so sure about that. The Atari 2600 and the original Nintendo Entertainment System were each at least 6 year consoles. The Super Nintendo vs. Sega Genesis may have only been a 3 or 4-year affair, but the PSX is still going strong (it's been outselling the X-Box for the past few months anyway).
As a side note; the article cites the Dreamcast as evidence of a failed unit; but the industry is littered with them (Pippen, NeoGeo, Turbo16, 3DO, Coleco, and a few dozen others). The console war is very unforgiving, and highly-geared towards growth; if you're not growing, you're toast. Many of these systems were technically superior to their competitors (3DO, Coleco, Intellevision, Dreamcast) -- but they still ultimately failed due to the second derivative. The XBox needs to keep growing base at any cost now, if they stop, then history says they're dead. Perhaps we'll see a Dreamcast-esque US$99 price-point before next christmas as a last-ditch effort?
The wheel is turning, but the hamster is dead.
> We know that XBOX 2 will have a bigger hard drive,
> slightly better graphics, and shortly after
> release an Office suite targeted to 'college
> kids'.
That wouldn't be hard for Sony to do with the PS3... "Hi is that Sun? Yeah, we want an office suite like thing to come free with every PS3 keyboard and mouse kit we sell, so that we can give the whack to Microsoft. What? You will let us give away StarOffice 7 free for the PS3 keyboard/mouse combo? Excellent, you guys rock."
You can bet:
1) The PS3 will be able to run Linux without a problem - stick it on a bootable DVD even.
2) The PS3 will be around 10x more powerful that the PS2 at least. The PS2 runs Linux fine.
3) So PS3 OpenOffice is extremely likely, shipped on a bootable Linux PS3 DVD, saving documents to either a built in hard drive or to MemoryStick cards (read your OpenOffice PS3 documents on a Sony Cleo!)
4) I bet someone will do this for the PS2 version of Linux now...
Online service is coming along nicely for the XBox. I'll be happy to pay $10/month to access all XBox games online instead of having to pay $5/month per game on a PS2's.
Also how about the XBox communicator? I'll be able to voice chat with my friends while gaming. It's just like Roger Wilco on PC. No console has ever done that.
Don't forget that over 200 games are in development for the XBox.
Anyway, they can say whatever they want. I'm more than extremely happy with my console.
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)