Next-Gen Shift Costing Sony and Microsoft

The shift to the next generation of consoles is costing their parent corporations dearly. GameDailyBiz has an article up claiming that the gaming division at Sony may lose almost $900 million this year, thanks to rollout costs for the PS3. The 360, already in the marketplace, is looking pretty solid. However, in among increased Microsoft revenue announcements (up 13% for the quarter over last year) and a healthy number of shipped systems by the end of June (almost 5.5 million) is a hard statistic. From the Gamastura article: "As for specifics on the Xbox 360 and Xbox's financials, the company's Home and Entertainment division, which includes the Microsoft Xbox video game console system, PC games, the Home Products Division, and TV platform products for the interactive television industry, lost $388 million for the quarter on $1.06 billion in revenue, a sharp increase from the $175 million loss the previous year." A reminder that these systems may be successful, but they're costing to get out there.

Comments

"products for the interactive television industry"

[bunions]

Well, shit, there's your problem.

Sony losing money blah blah blah

[zerocool^]

Where have I heard this before?

Sony will be losing money maybe for a few months on the ps3, then like its' ancestors, they'll break even and be rolling in cash.

Flash forward to May 1995. The E3 Expo was having it's first go, and
everyone showed up. Nintendo was telling us to wait for the Ultra 64 as it
could do "real-time ray tracing" and was just so damn pretty they couldn't
show it to us as we weren't ready to handle it. For if we saw it, we would
go insane!

At the show, Sega and Sony announced their launch plans.

Sega: "The Saturn will be $399US.... and it's out now! We launched it
today! Remember Pearl Harbor? That's right! Strike when don't expect it! Take that Sony! We are going to kill you and dance about on your grave! You can't handle us! We're Sega!"

Immediately following that press conference down the hall was the Sony press conference. There was a big lead up to what the price point would be, and when it would be launched. Finally, the president of Sony walked out slowly on stage and a silence fell upon the room. We all awaited his words, and finally he spoke.

"Two hundred ninety-nine dollars."

Then he turned and walked away.

Back at the Sega conference room....

"Oh no! This can't be happening!"

Everyone was in awe. Sony was bringing the super console known as the
PlayStation to America for almost half the price it was selling for in Japan.

This brought force claims of dumping by Atari. Atari swore that they would have the PlayStation stopped before it came out at that price "because it
was being sold below cost and that's dumping!"

The myth was born.

By the time the PlayStation came out in North America 4 months later, a lot
had changed during the year. RAM had gone from $50US a megabyte to $20. The Yen had gone from 80 yen per US dollar to 110. And Sega had dropped the price of the Saturn to $299. At this point the PlayStation was indeed profitable, and the Saturn was a minor money pit for Sega.

Sega was not only losing money on the Saturn, but asked retailers to expect the same. A "modest $15 per console" loss to help Sega. Well, you can
imagine what many retailers said...

The Saturn was the first console that was actively being marketed and the
company was losing money. While Sony was building the PlayStation from parts they made themselves, Sega was paying a higher price and buying parts from others.

The Nintendo 64 came out the next year at $199 US. Nintendo claims that
they were not losing money on units sold, which I have no doubt not to
believe. Nintendo has better things to do than sell a console at a loss.

The Dreamcast was a money losing venture for Sega. Sega went for broke in building the best console they could buy with the Dreamcast, and sold them at less than cost. A lot less than cost. The theory being that scale of economics would catch up to let them rebuild their once glorious market share and, that the margins on their own games would be good enough to justify a loss.

$800 million lost later, Sega cancelled the Dreamcast.

Xbox. MS has decided to follow the Sega model. Buy off the shelf parts,
have someone else build it, and take a loss in order to push units out the
door. The Xbox was to have been a super console that could do 200 million polygons a second... and then 300 million! Then 125 million.... then... well, tech demo's have it running at 60 million.

Anyway, Microsoft is losing money per console sold, not including what they are spending advertising and support. Reports have it fall between $50 to $105 lost per console. MS has only said that they are losing money, and
won't comment on how much.

Notice what isn't on that list? The PS2.

Unlike Sega and MS, Sony is an R&D hardware company. They make a lot of things. In designing up the PS2, they spent a lot of cash. Then they spent a hell of a lot more cash to build th

Re:Sony losing money blah blah blah

[CaymanIslandCarpedie]

Does that entire thing have to be posted everytime someone mentions Sony might lose money? Couldn't you just post the link?

Re:Sony losing money blah blah blah

[hotdiggitydawg]

Then we look at Sony's stock report for Oct-Dec 2000, and there is an interesting little blurb. It said that had Sony been able to meet demand with another 1 million PS2 units, they would have pocketed $175 million in profits. $175 million divided by one million consoles equals $175 per console profit.

Poor mathematics skills. You want projected profit per console, you need to divide the $175 million profit by all consoles sold, not just the 1 million shortfall.

I'm glad you're not my accountant.

Re:Sony losing money blah blah blah

[Anonymous Coward]

Sega was not only losing money on the Saturn, but asked retailers to expect the same. A "modest $15 per console" loss to help Sega. Well, you can imagine what many retailers said...
Bull. The first console EVER to sell on a loss was the Xbox, that's why the Saturn cost so much; Sega sold at a profit. And it's on record that when Sega lowered the price from $400 to $300, they PAYED the stores the price difference to make up for it (e.g. Store buys console to sell for $400, then Sega says, 'Sell at $300'. Store would normally lose $100, but Sega gave the stores $100 to make up for it.)

The Saturn was the first console that was actively being marketed and the company was losing money. While Sony was building the PlayStation from parts they made themselves, Sega was paying a higher price and buying parts from others.
While that made some of the difference (the video output IC on the Saturn is from Sony!), it's not the majority. The problem was that the Saturn had too many custom parts, almost everything besides the CPUs, RAM, and CD drive was custom, like the TWO video processors and the funny bus to handle four different CPUs (main, slave, sound, CD-Rom (Yes, CD-Rom, it's part of the Saturn's security system)) and other things like MPEG card overlay, controllers, and cartridge port. The Saturn arch. was a hairy monster. The PlayStation was almost entirely made from off the shelf parts. The PlayStation was streamlined. While the PSX was not as powerful as the Saturn (wait, let me finish) it was so much less complicated (and had a much better inital SDK) that it was easier/humanly possible to get good preformance out of it.

With the Saturn, you had two main processors with poor communication to work with, a poor SDK (the first one didn't even natively support light-sourcing!), a DSP for the main CPUs (there was also a seperate sound DSP) you had to program (Well, not had too; most games just let it sit there doing nothing. It was intended for things like calculating projection), a really screwed up and complex video processors; a lot of time is wasted formatting polygon data into the various tables and display lists for the polygon/sprite generator, and funny memory partitioning for video RAM (512kB for texture/sprites and display lists/shading tables/palletes, 512kB for the background processor, and two sets of 256kB for frame buffers. 1.5mB total. The PSX had 1mB in one partition for video RAM). But if you want to see the Saturn out-do the PlayStation, go compare the Saturn and PlayStation versions of Dead or Alive (Saturn has higher resolution, more polygons, better textures and backgrounds). The one of the creators reasons for the Saturn got DOA first that he wanted to put it on the more powerful system of the two. Today, DOA's creator continues to choose the more powerful console, which is, at the moment, the Xbox 360. (Another reason for the Saturn getting DOA first was that the arcade version ran on Sega's Model 2 hardware.) Or you can look at the Saturn Shenmue video which runs on a stock, RAM-upgrade-less Saturn. (To give a timeframe for it, the Saturn version was probably shelved in late 1997 or early 1998, as Dreamcast version footage was around when the Dreamcast was released in Japan in late 1998.)

The Dreamcast was a money losing venture for Sega. Sega went for broke in building the best console they could buy with the Dreamcast, and sold them at less than cost. A lot less than cost. The theory being that scale of economics would catch up to let them rebuild their once glorious market share and, that the margins on their own games would be good enough to justify a loss.
Ahem. The first console EVER to sell on a loss was the Xbox.

Re:Sony losing money blah blah blah

[MobileTatsu-NJG]

Gee, Acts of Gord again. Here's a few problems with his post:

1.) He doesn't show us this fabled stock report.

2.) Stock reports are written to impress shareholders. They could have been using any number of rationalizations to cook up the $175 mil figure. Considering the '2 billion' spent on the PS2, we can already tell there's numerical gymnastics going on with that report. I have a dollar that says they spent a lot of money in the previouse quarter to produce the machines, and the 'profit' arrived in the next quarter.

3.) MANY reputatble gaming mags have reported that PS2s were sold at a loss. Next Generation even had an article talking about the problems Sony had with selling the machine at a loss to people who were buying it as a cheap DVD player. Sony has NEVER refuted this.

4.) Sony builds these machines with the intention of them being on the market for 10 years. Why wouldn't they sell them at a loss to get higher specced equipment in there?

5.) If Sony made so much money on each system, why is Nintendo killing them profit-wise?

I still can't believe that this story has gained so much steam considering that there are no verifiable sources for the info it claims to have. Gord is full of shit.

Meanwhile at the big N

[CastrTroy]

Meanwhile at the big N, they have decided to put out a cheap system that most people will be able to afford, and forego all the expesive research and recalls associated with the leading edge technology the other guys are using. Also, their marketing campaign consists of not telling anything to anyone, and only release details about the system that will make people think about the yet to be released system all day. The shroud of mystery surrounding the Revo/Wii is better than any of Sony's/MS's proclamations that they have the fastest processors in existence.

Re:Meanwhile at the big N

[Anonymous Coward]

And if they manage to pull off a console victory with a name like Wii, it'll be nothing short of stunning.
 
On the day of release, I'll be going to the mall for a Wii, then I'll spend the next few days eating, drinking and Wii'ing. When I'm familiar with it, I'll share my Wii with my friends, maybe take my Wii round to theirs and we can play with each other's Wii. Then when it's old and everyone's got one, I'll put my Wii on eBay and sell it for a small fortune.
 
I mean what's next - is the Wii 2 gonna be called a Poo? Come and play with my Poo... Not since Free Willy has there been a culture feck up of such laughable proportions...

Re:Meanwhile at the big N

[tuffy]

The great thing about Nintendo naming their console "Wii" is the endless variety of jokes, each more witty and original than the last.

At some point, Microsoft may have to dump the Xbox

[Animats]

Microsoft's "Home and Entertainment" business unit is a money drain. It's never made money. At some point, Microsoft may have to sell that business off and focus on their core business, business computing.

The stockholders are getting impatient. Microsoft stock has been flat for five years now. It's definitely not a growth company any more. Trying to grow into the entertainment sector has been a financial disaster. Microsoft is a high-margin company trying to grow in a low-margin area, and that almost never works.

At Nintendo...

[SetupWeasel]

Wii love profit.

This little piggy...

[RyoShin]

This little piggy is in the market, (Microsoft)
this little piggy has yet to come, (Sony)
this little piggy only had some things, (N-Gage)
this little piggy had none, (Phantom)
and this little piggy when "Wii Wii Wii" all the way to the bank! (Nintendo)

Okay, so I need to work on my rhyming.

Re:At some point, Microsoft may have to dump the X

[badboy_tw2002]

Microsoft is sitting on a mutli multi billion dollar war chest. They don't call it a war chest for nothing. They are prepared to lose another billion on the xbox 360 (like most accounts say they did with Xbox) and from all the financials to date it looks like they'll be no where close to losing that as sales are continuing at a healthy pace. Do you honestly think the "3 versions to get it right" myth is a complete falsehood? MS is in this game for keeps. The 360 is a healthy, fully supported platform with tons of developer support. MS wants to be in the living room, they NEED to be in the living room so they can sell you a MS Media Center PC to be in the office that can beam all that MS DRM'd WMA content you bought down to your MS Entertainment Center. This is a long term growth strategy into a still emerging market. All the pieces are coming into play (for-pay downloadable TV shows, music, movies), and MS wants a piece of the action. They want to be the bridge between content providers and your television, and if it takes losing a billion on some games to get there they are going to do it.

360 is costing them a fortune

[metamatic]

I was in Best Buy a couple of days ago, and it's clear that Microsoft is spending enormous amounts of money to buy shelf space and display areas in major retailers. Custom plexiglass display stands, special silver and white shelving, prime end-of-row positioning, big display TVs, couches, posters on the windows, the works.

I didn't see anyone actually buying anything 360 related, though. Everyone was browsing the PS2, PSP and Nintendo handheld areas.

Re:360 is costing them a fortune

[CastrTroy]

The funniest thing is that often these expensive display kiosks are devoid of customers because either the kiosk is broken, or the store owner has disabled it, because he doesn't want highschool kids spending hours in his store, taking up space, and not buying anything.

Sony and Microsoft will lose console war

[Anonymous Coward]

Simple fact is, shops are going to be flooded when Wii starts hitting the shelves

The End Of The Playstation Generation

[The_Real_Quaid]

M$ can handle the enormous costs. Sony is barely scraping by right now with the hardware costs of the failed PSP. The PS3 costs and failure will be their undoing. Never underestrimate M$ viciousness, when they smell blood they go for the kill.

Here is an article I wrote last year about the coming decline of Sony marketshare in the game biz, and the resulting overall financial disaster for Sony Corp as a whole.

Oh and in case anyone wants real, comprehensive financial data, here is a chart that shows profits/loss for Nintendo, Sony (game division) and M$ (game division) by quarter for the last 3 years.

Re:The End Of The Playstation Generation

[The_Real_Quaid]

"Back in 1998/1999 Microsoft was trying to determine where the next threat to their control of the home-computer market was going to come from.
-------
Now, Microsoft believes that their greatest threat comes from web-based systems so do they still believe that losing money on consoles is their best approach?"

There is some truth to that, but there is more to the picture than you are looking at.

M$ realizes that there is an end of the road to their traditional business model. THere is only so many improvements to an O$ and Office Suite that can be made. Eventually tehre is less need to upgrade. So this is why they are making some changes - first, by going to a subscription-based software model. This will help prevent the PC software well from going dry.

The next big change is to get into the consumer electronics business, and content distribution business (a la iTMS or even on-demand cable systems). Consoles are only a small part of this. THere is so much more, from PDA type devices, to media PC, to game console, to home media server, to media services like Xbox Live and movies/music on demand, and virtual marketplace. In short, M$ and Sony are battling not just about games, but for control of the heart of the digital home and digital lifestyle. You better believe that M$ will spend every last dollar in this fight, because they know that they will be the last man standing in a money war.

Here is another write-up I did on the battle for the digital home.

Uh-huh

[Nazmun]

MS lost about 1 billion PER year (well they were 100 million or so shy) on the xbox (it may have whittled down a bit in the end) and the xbox360 sales aren't doing any better and actually much much worse in japan.

I'd say they pretty much failed after pissing away the billions.

On the other hand the ps2 has been enormously profitable. Sony always has a massive startup cost for their consoles as they are a hardware company and spend a ton at the very beginning on research and in building factories.

MS is simply investing in the long-term

[wyoung76]

... it's just a matter of how quickly the competition latches onto it, and does something about it.

I certainly ain't a fanboy, or MS lackey, but I can give credit where credit is due.

Anyway, some things to remember about Microsoft's current strategy and direction:

• as parent poster says, they're sitting on a cash warchest, which is NOT going to be wasted, but rather invested
• the home user desktop is still largely their domain. This means a lot of game/app developers
• DirectX is a very mature and stable platform to develop on
• DirectX for Xbox (whatever MS decides to call it today or in the future, it's still the same to me) and PC will very quickly converge to a common base, thereby making cross-development costs drop
• their purchases of existing gamehouses to add to their own entertainment division continues unabated
• all the metrics they learn from running their own different online services (Live, MSN, ad services, Xbox Live!, etc.) will continue to give them better hints on where the consumer entertainment market is heading
• they're pushing their own formats for video/audio, APIs of all sorts, etc. like crazy (it's basically trying to get the hardware to support their formats, which makes them defacto standards a la DirectX on current video cards)
• they keep rapidly developing and maturing the .NET platform, and they're quite happy to let Mono keep trundling along (in the end, it doesn't cost them anything to magically support all the *nix platforms then)

Quite frankly, as far as their direction is concerned, it's about going for a high-visibility, high-click-rate market segment.

It should go without saying that they want to hold all the keys, and keep the content creators in check. Xbox Live is just the start of the next generation. I've got little doubt that a .NET will eventually make it to Xbox. Maybe not the this or the next generation, but it's getting there.

Like it or not, but Microsoft is using a hardware agnostic approach for the future. They definitely won't be tied to x86 forever, and that's pretty obvious with the current hardware they had developed for the Xbox 360.

It's really now a matter of how well they manage in the execution.

Re:At some point, Microsoft may have to dump the X

[jusdisgi]

At some point the stock holders are going to want the X-Box division to actually turn a profit, not just increase gross revenue. It can't just bleed money forever, and right now its not just bleeding, its gushing money. So the question is, does Microsoft actually have any plans to make any money on the X-Box? It seems they don't.

It's not unheard of to have a division of your company devoted to loss-leader activities. As long as it's valuable to some higher grand strategy (in this case, moving into the entertainment and content industries and into more and more home appliances, thus ensuring embedded markets for MS software, and perhaps new subscription revenue streams) and management can convince the shareholders to trust them, the Xbox division can simply bleed money. And as a small shareholder since '96 and having seen the votes, I can say that nobody's considering deviating away from the "core team" and its vision any time soon. Oh, and about the flat stock price, people forget the big dividends they paid through most of that time. Not this past year, sad to say...

In any case, I'm sure MS (and its shareholders) would be tickled pink to have the X-Box division turn a profit. But with the amount of money they've got sitting around and with the long-term situation as it is, I don't perceive a real serious concern about its losses.

The Source of Nintendo's Revenue

[Nazmun]

When speaking strictly from a console point of view I wouldn't be surprised if Sony had the upperhand in the home console department. WHen you think about the last three years that 1.252 billion includes the money pissed away on the psp as you mentinoed. But 9/10 times the games nintendo has on the top charts in japan are portable titles. I wouln't be surprised if it was the same here in North America.

When you take out the portables i'm sure the numbers will get a lot closer.

But your right from a business standpoint. Nintendo tries to go for the most conservative/cheap route for hardware and still make it up with low cost development games.

Sony on the otherhand is almost always try's to fulfill some crazy grand vision. It's the only way you can justify the 400 million they spent just on R&D for the cell chip. That's not something you'd expect from either Nintendo or MS who would just buy the best (or maybe few grades down ala Nintendo) processor they can put in their console.

Although, Sony's hardware looks like a huge clusterfuck (ps3) it's only slightly more riskier. The EE in the ps2 cost the same to fab (the die size is almost identical) at launch time as the cell and was also quite radical and different from the psx and all other processors around at the time. The dvd was still fairly new 5-6 years ago and high end players cost several hundred dollars. They still pulled it off...

I'm pretty confident they'll pull it off this time too. I hope they don't go crazier in 5-6 years. Every generation they took a bigger and more ambitious risk, if they keep up with this pattern they'd have to spend a crazy amount on the ps4 hardware development and launch.