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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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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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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.
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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