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The 360 Is Too Cheap?
The always interesting GamerDad site is running a 'LongShot' column wondering if perhaps the 360 wasn't expensive enough? From the article: "The beginning of a console generation has typically been for those with deep pockets or an unhealthy hardcore jones for videogames. These people are willing to smack down big bucks for the latest technology. The price of 360 was too low to keep the launch confined to that group and it was a big mistake in my opinion. With a higher price tag, Microsoft would have made more money, made sure sellouts wouldn't have lasted for months after Christmas and still sold through all the units they had to sell before the holiday. The demand for a new system was far higher than most people anticipated, especially given the early demise of the original Xbox, a system that will probably be gone from store shelves by February 2007."
I don't think that that's necessarily what he's trying to say. Instead, by having the price between a 360 and OG Xbox be so close together, people who would ahve otherwise happily settled for an Xbox tried to pay the extra instead, and you have a crash of shortages. If they had priced it at say $500, then they still would have sold out, would have made more money, would not have shortages, and would have sold more Xbox's. It is certainly a stretch, but there is a note of truth in his logic.
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Microsoft realizes that artificial shortages creating massive hype for their product even at an exorbitant price range (yes, 400 is too much for a toy) will allow them to sell more machines longer, rather than making them readilly available at a higher cost, and trying to sell them all immediately. Author is a moron. Article is very poor trollbait.
If Microsoft had realized the production problems they were going to face (or admitted to themselves they were going to have them, if they knew early as some say they did) then yes, a high price point causes the "per unit" loss to go down or even become profitable. If you only have N of something, you can charge a premium. The bundles proved there was a market for high end spending, but postulating that they could have moved *all* the units sold to date at a grossly higher price is a bit of a stretch.
To say that Microsoft missed the boat and the PS3 should be sold at a premium really depends on the actual costs at time of release. Sony already *tried* the high priced solution with the PS2 based media product in Japan. That isn't apples to apples though since it was competing with the existing PS2 installed base, which isn't a wise choice. If they expect shortages of Blue-Ray drives or the processors, perhaps they could try the strategy of $800 boxes. I think it is high risk though: the reviewers are going to tear you apart if you don't deliver a $800 experience.
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They have plenty of data about consoles launching in the $300 - $400 range and not flopping terribly. There haven't been any successful consoles (if any, at least that I know of) that have launched in the $700 range. lack of market data from previous launches like that makes a move like that extremely dangerous to do. And selling out is also a great way to build up steam for people to want it more. Reguardless of the price, if I hear console A is selling fast compared to console B that is selling slow, I'll be more interested in console A to see what people are so interested in.
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I'm still waiting for prices to drop on the plain vanilla XBox. Call me a cheap bastard for wanting a $100 USD console.
I agree with you, but for the initial run of units, many (most?) DID sell far above the MSRP. JC Penny, for example, sold their stock at $799 a unit. Not to mention the eBay retailers who managed to sell units for upwards of $1000.
so in reality, a large number of units went for far more than the $400 price. i.e. The market self-adjusted the price. Microsoft may not have seen the profits, but that wasn't the point. Microsoft is selling the console as a loss-leader using the "razor blade" model. Advertising the system to be more costly would reduce demand, and thereby cut profits for Microsoft as fewer games got sold. With the lower MSRP, Microsoft was able to generate not only demand for games, but also buzz about the system. Buzz leads to more system sales (in the future), and more system sales can lead to more game sales. More game sales == more profit.
And that's without assuming that Microsoft isn't using its resources to undercut the competition in an attempt to monopolize the market.
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Any and all profit they could have made on the boxes is totally insignificant to them. MS makes billions, a million or two from this doesn't matter.
What is more important is getting lots of those consoles out there. They want everyone to own one. Well this shortage goes a long way to that. For one it generated massive advertising, you can't buy advertising as good as the 360 hype. Also, it has lead to an aura of "specialness" about the 360. It's hard to get, so it's coveted so people will work for it. Finally, you don't want people getting the idea in their head that it's expensive, you want them to think of it as cheap. Absolute price plays a factor, but also the sellout helps that. If something is sold ou all the time, it's obviously cheap right?
Really, I think this has all played in to MS's hands magnicifently. By the time the PS3 launches, they should have a good pipe of supply going on and be ready for a rpice drop. So the PS3 comes out, they slash prices and flood 360s on the market, not to mention release Halo 3 which has conveniently been finished then. Go a long way to taking the thunder out of Sony's US launch, which is what this is really about. The overall name of the game and the money to be made is not on the consoles, but on being bigger than Sony in the market.
They could have sold through a lot more if they didn't ship 150k units to japan that only sold like what? 10k units? I think they wanted to believe so much that the 360 could take off in japan that they ignored reality. It wouldn't :)
That really hurt them at the beginning. I wonder if it affected the total number of possible sales?
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That's not the point. Any moron is able to do that.
The tricky part is to actually get your money back and a profit on top of it.
Even Microsoft cannot continue to lose money forever on XBox. This is not software, keeping the XBox alive costs a lot of money and things don't look that great for XBox360:
The shortage excuse is over (Microsoft claims that they want to produce about 1 million/month) but they sold less than 200 000 in the US in March (IIRC 197 000), since they sell less in Europe and nearly nothing in Japan, that would be a total of maybe 350 000 worldwide, 400 000 if we are very optimistic. Not even near the million they want to sell. And given the fact that the launch-hype wears off and the PS3 is coming, I guess they will have a very hard time even repeating the XBox1's performance when we are talking about sales. (So far they sold roughly about half of what they sold during the XBox1 launch during the same time frame.)
To put it in other words, they already need a small miracle to repeat the XBox1 "success" and they would still be miles behind the Playstation-franchise.
I know its kind of offtopic but I don't understand why microsoft doesn't act like every other console maker and make a leaner looking lower priced version of the original xbox...which I might actually be tempted to purchase
Not expensive enough? Go to hell. It's a fucking video game system, not a goddamned Rolls Royce.
Well, it USED to be a decent show when it was on tech TV. They had to add Morgan's boobies and dumb adam down to 5th grade level to make it geared more their targeted audience.
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I never claimed they were my figures, they're c&p'd from IGN, i'm not an economic anylist. Also, i did say that the 360 is above average if you take out the outliers that are the NeoGeo and 3DO.
Redoing it quick, if you just take consoles from Nintendo, Sega, Sony and Microsoft, the average comes out to $324.27. The Xbox 360 core then, is still $25 adjusted dollars cheaper than average and the advanced bundle or whatever is not even 20% above average.
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For those of you who have forgotten, Microsoft intended for these shortages to happen. They allocated units and set pricing to make this happen. This scheme was leaked out before the 360 even went on sale. They priced and shipped it to get the headlines: New Microsoft XBox 360 Sells Out on First Day. Best publicity they could arrange.
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I'm not even going to discuss the 360. I did for a while want an original Xbox (almost half just for Xbox Media Center, but then Front Row came out, so my interests in the console has waned considerably), but the price was always (and continues to be) way too high. I might have paid $100 for it. Now that the 360 is out, I was hoping used prices would plummet, but nothing like that has happened so far. At this point I've almost completely lost interest.
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Loss leader economics only works when your production capacity is larger than the equalibrium price. Without the razor blade approach, there's a number of units to produce that maximized returns, and a set of numbers greater and fewer than that that result in less profit. The razor blade model says that it's okay to dip into the set of numbers larger than exceed the optimal production, because you'll benefit in the auxiliery market, video games sales. Ideally there is no shortage of the loss leader product-- selling out is a missed opportunity to expand the installed base. Yet shortages not only happened but persisted for some time (is the shortage even over? I see walmart selling online for 500 dollars =/). So while microsoft may have intended to be a loss leader, what we instead saw was the market raising prices in the face of scarcity. Microsoft was either unwilling or incapable of providing more 360s at the price listed. Effectively, they lost out on both the demand for the product at MSRP by not producing enough, and/or the profits they could have realized by pricing closer to the open market average.
Sure, you can say that they simply did far better than they expected, or that the shortages were intentional. But do you realize how many games you have to buy to justify the difference between 400 dollars and 800? My napkin math suggests somewhere between 8 and 20, depending on how much of each sale goes to MS. And this doesn't even include the fact that people who bought that JC Penny package still presumably wanted to purchase a game or two for it!
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Worldwide (because Microsoft and Nintendo operate furthur than your parents basement) the Gamecube outsold the Xbox.
Nintendo made SHITLOADS more money than Microsoft on their console businesses'.
What was your point again? That in the US, if you spend 10 times the amount of another company on advertising, even if the other company comes from Japan and you're the richest company on the planet, you can eek out selling about a million more units than your competitor (while losing to the winner by more than a factor of 3)?
Is that it? You'd be fired on a good day at any of these three companies for analysing their respective performances in the market that way. Nintendoheads? Thats so cute, attacking a bunch of ditto-heads with a similar ditto-head moniker.
Sony won the console wars. Microsoft lost it in a big way, in so far as their shareholders are concerned. And Nintendo kept quietly making hand over dollar wonder what all the fuss was about.
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