Age of subsidizing is over?

[assen]

I wanted to post this in the "Next-gen console tech" thread first, then it occured to me it's relevant to many perennial threads around here, so maybe it
deserves its own thread.

http://www.thatvideogameblog.com/2010/12/02/microsoft-brand-2010-xboxs-biggest-year-ever/

The company’s Interactive Entertainment Business COO Dennis Durkin claimed: “It’s been a good three years for us. We’ve had nice stair steps in terms of growth every year sequentially getting bigger than the previous year, and this year is going to be our biggest year ever.”
With Kinect gaining strong sales the company is to focus on increasing profit: “I want to make money on things that we sell. I think the business of subsidizing things is a historical artifact. And so, for us, it’s about making money and extracting value for the things that we’re building. ”

Nintendo, the most successful company this generation, has probably never subsidized the Wii or the DS; probably the $300 3DS will also cover its costs.

The outrageous (initial?) price of the Kinect has turned out to be a wise choice - it doesn't seem to be hurting its initial sales.

This has wide implications in terms of expected price cuts schedule, expected sacrifices of profit for market share, and expected hardware in the new consoles.

 

[NathansFortune]

I don't think so. We will have to see what Kinect sales turn out to be long term at this price. There are always going to be a few million buyers of new tech regardless of the price, even the PS3 sold 10m units at $599.

It also depends on who pulls the trigger for the next gen first, if it is Nintendo, then yes I think subsidies are over, but if it is MS then they will want to bring out a powerful, but cheap (to the consumer at least) product to the market and that will mean subsidies.

What will happen is the return to a sensible business model, no more $1000 products selling at $400 below cost, or $700 products selling $300 below cost or $1bn write-offs due to terrible manufacturing and design.

 

[Prophecy2k]

I agree there NathansFortune (always picture you looking like Drake in my mind ), although i'd say that it probably won't matter whether Nintendo launches first or not (i would bet real money that both MS and Sony expect them to).

I don't think MS and Sony will be even considering Nintendo when designing their next consoles. I very much see the power/heat/price race run firmly between them since thier very much direct competitors in the market, gunning for the both the same audience primarily.

Nintendo gave up competing with other platform holders with the N64, and thus both Sony and MS will be sure that it's each other they need to be careful for.

E.g. let's say Nintendo launches with WiiNext in 2012. Who ever goes second will be looking to outdo both Nintendo and the one who will bring up the rear (either MS or Sony).

If MS goes second and designs an afffordable NextBox, unsubsidized, and a modest upgrade over the 360. Sony could easily launch a subsidised monster PS4 that blasts NextBox out of the water.... MS would never want to see this.

Call me a bit of a conspiracy theorist, but i really see comments like this as co-orporate "red herrings" thrown out to effectively "trick" their opponents into thinking that MS will "Wii-ify" their next console... then BAM! They'll put out a subsidized beast.

Still... on a more serious note, i don't see how comments like this preclude a company like MS designing a very performant piece of HW designed to be profitable in the first/second year of launch. That's still prudent, and far from the "balls-to-the-walls" approach of Sony with the PS3.

 

[assen]

If MS goes second and designs an afffordable NextBox, unsubsidized, and a modest upgrade over the 360. Sony could easily launch a subsidised monster PS4 that blasts NextBox out of the water.... MS would never want to see this.

After the, ahem, less than ideal start of the PS3, and the general difficulty of changing strategy on-the-fly, I can't agree with the "easy" part.

 

[Shifty Geezer]

Prophecy is saying a subsidized console versus unsubsidized will offer better value to the consumer and secure interest. Basically a $300 cost-price XBNext versus a $300 retail, $400 to make PS4, will have the PS4 the better system all things being equal (no appalling design cockups) which will attract the customers. Of course it's not as simple as that, but if Sony aren't trying to support a new, very expensive technology like BRD next gen, the loss-leader is far more tennable than it was this generation.

It's a tough call for MS and Sony, as they are designing now. Dare they risk losing money? Dare they risk not losing money and then losing market share to the rival who is willing to take a cut early on? Also the better the upfront investment, the longer the legs of the platform enabling it to maintain its appeal into the low-price brackets and achieve massive adoption with associated media sales.

 

[Platon]

I don't think it is that bad business when subsidizing a product IF the long term profits can cover those costs and over all turn the whole project into profit. This is after all a quite strange business. You are making an electronic gadget that is supposed to stand the test of time for the next 5-10 years. In an industry where there are "new" electronics every week and the whole business is almost all about getting the latest new thing, to then be able and make money on 5 years old outdated piece of electronic can seem quite strange when there are hardly models of last years mobile phones sold anymore.

Maybe then it is not so bad if you are losing money the first year if you can manage to cover it later on, it is more or less a form of investment. Although future proofing is almost impossible you can have better and worse conditions to meet future demands and you might therefore not want to be too underpowered from the beginning.

On the other hand I don't see them (Sony, MS) taking the kind of hit they did this time and that is the reason i don't see new console for the next 2-3 years. They might sell it at cost, maybe subsidize a few $ to get that 399.99 price tag but that is about it. They will want something powerful enough to clearly distinguish them from this gen but not cost an arm and a leg to do so, enter mid range PC 2012-13...

 

[acaeus]

the irony

Isn't it ironic that in a generation of -- arguably -- heavily subsidized game consoles, both ps3 and 360 have effectively no more than 256 megs of RAM? (I know a bit more if 360 sacrifices video mem)

 

[dragonelite]

Doesn't microsoft have a extra income on live users.
the subscription fees alone get them like half a billion dollar last year.
They could sell a console at a loss and probably get a chunk of the money back with live subscription fees.

 

[patsu]

It depends on their business model. As usual there are pros and cons. Without the subsidy requirement, someone like MS can find a license partner to help push their platform in places where they are weak. ^_^

 

[mrcorbo]

I agree there NathansFortune (always picture you looking like Drake in my mind ), although i'd say that it probably won't matter whether Nintendo launches first or not (i would bet real money that both MS and Sony expect them to).

I don't think MS and Sony will be even considering Nintendo when designing their next consoles. I very much see the power/heat/price race run firmly between them since thier very much direct competitors in the market, gunning for the both the same audience primarily.

Nintendo gave up competing with other platform holders with the N64, and thus both Sony and MS will be sure that it's each other they need to be careful for.

E.g. let's say Nintendo launches with WiiNext in 2012. Who ever goes second will be looking to outdo both Nintendo and the one who will bring up the rear (either MS or Sony).

If MS goes second and designs an afffordable NextBox, unsubsidized, and a modest upgrade over the 360. Sony could easily launch a subsidised monster PS4 that blasts NextBox out of the water.... MS would never want to see this.

Call me a bit of a conspiracy theorist, but i really see comments like this as co-orporate "red herrings" thrown out to effectively "trick" their opponents into thinking that MS will "Wii-ify" their next console... then BAM! They'll put out a subsidized beast.

Still... on a more serious note, i don't see how comments like this preclude a company like MS designing a very performant piece of HW designed to be profitable in the first/second year of launch. That's still prudent, and far from the "balls-to-the-walls" approach of Sony with the PS3.

Nintendo has shown that you can still be successful without following the approach Sony took with the Playstation line and Microsoft followed with the Xboxes. Add network-based services to the equation and I don't think having the most powerful hardware is as important of a differentiator as it used to be. I'm not saying I expect to see a full embrace of a the Nintendo design philosophy, but an Xbox successor that retails for the same launch price as the 360 did ($399) and sells at a profit doesn't seem that it would be that bad of an option for them.

 

[AlphaWolf]

Loss leaders aren't going anywhere. Consoles didn't invent it, it's going to be very hard for them to stop.

 

[Rangers]

Isn't it ironic that in a generation of -- arguably -- heavily subsidized game consoles, both ps3 and 360 have effectively no more than 256 megs of RAM? (I know a bit more if 360 sacrifices video mem)

Actually it's 512, but not really. These consoles were quite powerful when they came out in 2005. An eternity ago in tech terms.

As of now theyre both hardware profitable, not subsidized anymore.

The next boxes for example, depending on when they actually launch, will have 4-8 GB's of RAM most likely. That will seem reasonable at the time, yet be hopelessly tiny 5-7 years later.

 

[kagemaru]

Yea i don't see either Sony or MS taking any chances with being significantly outdone in performance next gen with their machines. That's a huge market for any one company to have to themselves.

 

[MfA]

Nintendo has shown that you can still be successful without following the approach Sony took with the Playstation line and Microsoft followed with the Xboxes.

Nintendo showed you could be successful by offering something different.

At the moment something different is powerful hardware not (just) sold on gimmicks

 

[patsu]

The approaches are not mutually exclusive. e.g., If it's a gaming phone, then telcos may subsidize it; if it's a home console, they can go either way; if it's an accessory, then they can profit from it out of the gate.

 

[Rangers]

Too the topic, I dont think that console subsidies go away, but I think they'll likely be more prudent next gen.

The console business is incredibly cyclical and expensive. If you look back at Sony's financials, they actually did not profit that enormously from PS2, the most successful console ever. If I recall profits versus losses for the main 5 years or so of that consoles life "only" equaled out +1.5 billion. There were large losses in the gaming division in early PS2 years.

Now if you extend the PS2 out ten years, I'm sure the profits are greater, but then you had the PS3 sucking up all that and more in later years, meaning gaming as a whole has never been particularly profitable for sony. Of course on net I'm sure it's lost a lot of money for MS.

I guess though, as a current example, you can look at how long MS has held the price of the 360 steady as proof subsidizing is already less in favor. I would have expected several hardware price cuts by now in previous generations.

 

[acaeus]

Actually it's 512, but not really. These consoles were quite powerful when they came out in 2005. An eternity ago in tech terms.

As of now theyre both hardware profitable, not subsidized anymore.

The next boxes for example, depending on when they actually launch, will have 4-8 GB's of RAM most likely. That will seem reasonable at the time, yet be hopelessly tiny 5-7 years later.

[edit] my bad I did not specify whether I was talking about main or video mem, but my point remain... not enough ram

I thought the PS3 had 256Mb of main and another 256Mb of video mem while the Xbox had 512 total (split between video and main).

I'm trying to remember the time the xbox, and later the ps3, came out and I do remember thinking the amount of RAM on the boxes as disappointing. Perhaps we/they were just unlucky, because RAM prices took a huge dive shortly after the consoles were out. I know that because we buy server hardware often around here.

On the other hand, MS or especially Sony could have taken another hit, albeit a short term one, and added a bit more RAM to the machines. It would have been even more interesting to Sony because of blu-ray.

I will remember this generation as "loading..."

 

[dobwal]

Too the topic, I dont think that console subsidies go away, but I think they'll likely be more prudent next gen.

The console business is incredibly cyclical and expensive. If you look back at Sony's financials, they actually did not profit that enormously from PS2, the most successful console ever. If I recall profits versus losses for the main 5 years or so of that consoles life "only" equaled out +1.5 billion. There were large losses in the gaming division in early PS2 years.

Sony only recorded one annual loss once during the first five years of the PS2. They loss 410 million (USD) in FY2000. While they recorded a total of 2.62 billion (USD) from FY01-FY04. While that -410 million loss isn't the total loss surrounding the PS2 and was helped by the sales of the PS1, the PS2 totally covered up any losses attributed to the investment into the PSP which was released during FY04.

Even going back and looking at quarterly figures, the Game division only recorded around ~460 million USD in losses over 5 straight quarters or an average of ~90 million a quarter. Those aren't huge amounts when looking at the numbers the xbox, xbox 360 and PS3 drove quarterly during thier lossy periods.

 

[eastmen]

Prophecy is saying a subsidized console versus unsubsidized will offer better value to the consumer and secure interest. Basically a $300 cost-price XBNext versus a $300 retail, $400 to make PS4, will have the PS4 the better system all things being equal (no appalling design cockups) which will attract the customers. Of course it's not as simple as that, but if Sony aren't trying to support a new, very expensive technology like BRD next gen, the loss-leader is far more tennable than it was this generation.

It's a tough call for MS and Sony, as they are designing now. Dare they risk losing money? Dare they risk not losing money and then losing market share to the rival who is willing to take a cut early on? Also the better the upfront investment, the longer the legs of the platform enabling it to maintain its appeal into the low-price brackets and achieve massive adoption with associated media sales.

On the flip side in that senario MS could just spending the money they aren't loosing per console on getting 3rd party exclusives.

Not sure how exciting it be to get a $100 extra worth of tech if the games aren't there ?


Anyway I think MS will design a $500 system at launch that will sell for $300-$400 and sony will do the same perhaps a slightly less expensive system.

MS just has to avoid another RROD senario otherwise this generation has worked out very nicely for them

 

[Shifty Geezer]

Nintendo has shown that you can still be successful without following the approach Sony took with the Playstation line and Microsoft followed with the Xboxes.

Only be being different. If everyone did the same, no-one would have succeeded as a result. So if next gen is all like GC > Wii, with XBNext being 2xXB360, and PS4 being 2xPS3, the platform that stands out as being far more powerful will be the one getting all the attention, unless there's another disruptive tech that adds value beyond the advancement in gaming power.

Putting that another way, if Wii didn't have waggle and had conventioanl controls, do you think Nintendo would be doing well with their non-subsidized, profitable-out-the-door system?