Age of subsidizing is over?

[assen]

Prophecy is saying a subsidized console versus unsubsidized will offer better value to the consumer and secure interest.

To the consumer? No, I think an unsubsidized console will offer less risk for the vendors, and thus be justifiable at all. The current gen is not exactly all roses for MS and Sony, their respective divisions don't have mountains of cash burning a hole in their proverbial pockets to blow off on the next gen.

The "get a foothold in the living room" fallacy first, was torpedoed by the iPhone, which turned out to be the real interesting next-gen device; and second, Sony seem to be doing a second attack now with Google TV - something that is based entirely on services, not kick-ass hardware; correspondingly, MS will probably attempt to counter or match it via software updates and getting carriers/content providers to subsidize the current, already cheap to produce hardware.

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.

I think the choice will be more between a $400 to make, $400 at retail console (with the vendor subsidizing virtually only the meager retailer discount, and taxes), and $600+ to make, $400 at retail configurations that seem to be in the wet dreams of the "Next-gen console tech thread" (so we'll take a Cell with 32 SPUs, add whatever NVIDIA have in 2012, at least 8 GB of RAM and a SSD...).

Doesn't microsoft have a extra income on live users.
the subscription fees alone get them like half a billion dollar last year.

Half a billion dollars over something like 45 million consoles in the wild make for slightly more than $10 per console per year... you can't use this alone as a way of financing the subsidy. You need games.

It would have been even more interesting to Sony because of blu-ray.

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

If you increase the RAM 2x and keep the optical drive at the same speed, you'll double the loading times, not decrease them...

 

[assen]

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?

No, as evidenced by the Gamecube, which probably wasn't subsidized either.

But that's the whole point: an interesting console, where the "interesting" part doesn't come from hardware you have to subsidize, but from something that doesn't scale, cost-wise with units sold, you can gain more.

Again, let's run the numbers. Kinect is rumored to have cost about $1 billion to develop, and now they'll be spending another $800 mln on marketing; let's round it up generously to $2 billion, to make room for ten kick-ass games for it. Somewhere next year the Xbox 360 will reach an installed base of 50 millions.

So Microsoft have chosen to have Kinect, instead of subsidizing each console sold to the tune of $40 - the initial price would have been $260/360, the current would be $160/$260.

Is it the $40 cheaper an obviously better choice? To me, it's not clear.

 

[Shifty Geezer]

To the consumer? No, I think an unsubsidized console will offer less risk for the vendors, and thus be justifiable at all.

So you think Joe Public will rather buy a $300 of hardware console for $300 because it's good for the retail chain, versus $400 of hardware for $300 because it's better value?

The current gen is not exactly all roses for MS and Sony, their respective divisions don't have mountains of cash burning a hole in their proverbial pockets to blow off on the next gen.

This gen isn't the only example of consoles sold at a loss. PS1 and PS2 didn't cripple either Sony nor the retail chains.

But that's the whole point: an interesting console, where the "interesting" part doesn't come from hardware you have to subsidize, but from something that doesn't scale, cost-wise with units sold, you can gain more.

Yes, but the argument is all things being equal, if the differentiator is only tech. If one of these companies can come up with a ground-breaking, must-have feature, then they can get away with selling the hardware at a profit a la Nintendo. If you haven't got a huge differentiator, you're competing toe to toe with the rivals and it's the software library and tech that makes or breaks your system (and services nowadays). If a rival offers more tech for the same price, you are on the back foot. Companies may hate the idea of selling at a loss, but if the competition are doing that, it kinda forces your hand. Same with lots of business - you may want larger profit margins on whatever you sell, but if your competitiors are selling with razor-sharp margins, you'll price yourself out of the market if you don't match them. This is what forces price downwards; companies form cartels to keep prices up; and in the console space the cost of selling at a loss is offset, when you get it right, by the long term revenues, so pricing actually makes sense to go negative profit in the start.

 

[assen]

So you think Joe Public will rather buy a $300 of hardware console for $300 because it's good for the retail chain, versus $400 of hardware for $300 because it's better value?
This gen isn't the only example of consoles sold at a loss. PS1 and PS2 didn't cripple either Sony nor the retail chains.

I'm not arguing what will the consumer choose, but what the vendor would choose to pursue.

PS1 and PS2 were, if I'm not mistaken, vastly more profitable for Sony at the corresponding time in the generation.

 

[Shifty Geezer]

And I'm saying that if the competitor is selling at a loss, the vendor may not have a choice.

 

[mrcorbo]

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?

Looking at the entirety of console history, the loss-leader strategy was only introduced with the PS1 and by my count has worked exactly twice. Nintendo have never AFAIK used the loss-leader strategy and despite this have had some spectacular successes in both home and portables.

In addition, I strongly believe that the transition we've seen this gen to networked devices has fundamentally changed how future products are going to be designed as they will be targeted to reach a wider demographic than just gamers. In this arena, software & services are going to trump AA quality, poly-count and fill-rate. This may not be what most of us want to hear, but it's what I expect.

 

[mrcorbo]

And I'm saying that if the competitor is selling at a loss, the vendor may not have a choice.

The competitor that isn't selling at a loss can always change their strategy. The competitor with the expensive-to-produce box is kind of stuck with their choice.

 

[kagemaru]

The competitor that isn't selling at a loss can always change their strategy. The competitor with the expensive-to-produce box is kind of stuck with their choice.

They can change their strategy, but they would still be stuck with their (technically) inferior product. I understand what you're saying here, but I don't think the benefits are as lopsided as this.

 

[acaeus]

If you increase the RAM 2x and keep the optical drive at the same speed, you'll double the loading times, not decrease them...

true. However, I personally don't mind an initial long loading time. Now, long in-game loading times are caused mostly by lack of RAM and can be very disruptive to immersion, not to mention the overall gaming experience. RPGs have been especially prone to that problem (DA:O and Oblivion come to mind).

 

[Shifty Geezer]

The competitor that isn't selling at a loss can always change their strategy.

What, to become loss leading? Hence the original question, could subsidizing be gotten rid of. No - if one does it, the other does it, even if to undercut rather than match features.

 

[mrcorbo]

They can change their strategy, but they would still be stuck with their (technically) inferior product. I understand what you're saying here, but I don't think the benefits are as lopsided as this.

What, to become loss leading? Hence the original question, could subsidizing be gotten rid of. No - if one does it, the other does it, even if to undercut rather than match features.

What I'm skeptical of going forward is the necessity of matching *hardware* features past a certain point. At what point do diminishing returns make the difference between a product with a $300 manufacturing cost and one with a $400+ manufacturing cost negligible to the average consumer? It is being assumed that all else is going to be equal and only the hardware power is a possible differentiator. I think both MS and Sony are working very hard to make sure this is not the case.

 

[Silent_Buddha]

The competitor that isn't selling at a loss can always change their strategy. The competitor with the expensive-to-produce box is kind of stuck with their choice.

The competitor not selling at a loss is still stuck to an extent just not as much as the company selling at a loss.

You'll still have all the R&D that ideally you'd like to make back before moving onto another product. Even with a console not selling at a loss, it's still quite likely going to be a few years before the initial R&D is made back off the profit margin of the console itself.

If your competitor has a compelling technical advantage (to the consumer) in their loss leading console, there's a good chance your console sales will be surpressd and your projects for making back that R&D will be extended. Likewise, without compelling competition, that loss leading console you are competeing with may now be able to sell more consoles than they were projecting, thus selling more software, thus making back costs more quickly. The Wii neatly sidestepped this whole thing by not having a technical advantage in the console itself but offering a relatively revolutionary control method that it marketed quite well.

There is certainly less risk involved with not having a loss leader, but it doesn't eliminate risk.

Personally I expect both MS and Sony to at least lower how much consoles are subsidized if they don't remove that subsidy entirely. Sony especially doesn't want to revisit the hardware costs that were associated with the PS3. And MS has already stated they want to avoid that situation.

Regards,
SB

 

[AlphaWolf]

What I'm skeptical of going forward is the necessity of matching *hardware* features past a certain point. At what point do diminishing returns make the difference between a product with a $300 manufacturing cost and one with a $400+ manufacturing cost negligible to the average consumer? It is being assumed that all else is going to be equal and only the hardware power is a possible differentiator. I think both MS and Sony are working very hard to make sure this is not the case.

Kinect and move aren't moving the product to their core audience, their goal has been to expand it. The Wii has been a success, but I think that has to be qualified. I don't think there's room in the market for 3 casual consoles.

 

[NRP]

Assen will have to develop his next gen game on a dual core Atom. And it better not look like crap! LOL!

 

[Squilliam]

From a development perspective if game development costs to utilise that performance escalate even further you may develop a situation where only a small fraction of games actually look better on the more expensive platform. So if you get a console which costs $270 and sells for $300 and another one which costs $370 and sells for $300 it isn't a given that the latter will show any appreciable differences for the average and above average video games player. You hit a point of severe diminishing returns in development and then beyond a certain point only one console can show it off. That console would need significant market share before developers would even consider apportioning extra efforts to improve the graphics effects for that one SKU. This may have worked in the past when developers needed every polygon they could get their hands on and Sony came in at the right time with their razor/blades model console. However in this generation a severely underpowered console leads the pack in terms of profit and sales.

From the performance analysis of this current generation, a HDD plays 2nd fiddle to motion controls. So the baseline SKU could afford to not pack in the former whilst still accessing 100% of streamed content and the vast majority of downloadable titles. However it probably cannot not pack in the latter from launch. It is concieveable that the baseline SKU would either lose money or have very tight margins @ $299 whilst the higher end HDD SKU could make up to $100 and on balance give their overall margins a relative boost so they need not lose money at launch on the hardware overall. Effectively the next generation consoles from Microsoft and Sony would be replacements to the current consoles out on the market in price and power consumption and technology maturity.

 

[mrcorbo]

Kinect and move aren't moving the product to their core audience, their goal has been to expand it. The Wii has been a success, but I think that has to be qualified. I don't think there's room in the market for 3 casual consoles.

The former is a response to the latter. Also I don't think less technically impressive --> casual. Black Ops hardly was a technical tour de force, but that didn't stop the "hardcore" from buying it in droves.

 

[Laa-Yosh]

So you think Joe Public will rather buy a $300 of hardware console for $300 because it's good for the retail chain, versus $400 of hardware for $300 because it's better value?

They did pay an atrocious price for the Wii's dirt cheap hardware...

If you haven't got a huge differentiator, you're competing toe to toe with the rivals and it's the software library and tech that makes or breaks your system (and services nowadays).

I think tech is already overrated. Noone seems to care that COD BO runs at a lower res on the PS3, or that the 360 doesn't have a game with God of War 3 visuals.

And on the other side of the fence, any significant content/R&D jump could pretty much bankrupt half of the existing studios with their first failed game. They aren't too eager to get 4 GB of RAM to fill with assets, I'd guess...

If a rival offers more tech for the same price, you are on the back foot. Companies may hate the idea of selling at a loss, but if the competition are doing that, it kinda forces your hand.

90% of today's games are already developed for the lowest common hw level. If the rival is the better hardware, it'll simply be left underutilized for all 3rd party games, publishers won't care to invest extra money for additional assets.
And first party exclusives won't be enough to gain a significant market share advantage either.


In my opinion, both MS and Sony will rely on something other than hardware to sell their systems. The Playstation name is still strong, MS still hase Live and now Kinect. It makes every kind of sense to deal with the boxes as simply as they can and concentrate their efforts elsewhere.

 

[Laa-Yosh]

Also note that subsidizing is a very long term money drain, you'll always have to either make large losses or stick with smaller profits; whereas any investment in other features is a one time cost so it offers a better return in the end.

And as much as I am uninterested in it, OnLive is still looking like a more and more serious competitor. They don't have to subsidize much of the hardware, and as their infrastructure gets better it'll become harder and harder to justify a large investment in the platform for the average customer. MS and Sony might have a hard time selling $400 hardware when you can get a dirt cheap set-top box that can play games just as well (I of course realize that there are huge drawbacks - but I'm not the average customer). So they may have to go with a smaller price just to keep their market share.

 

[AlphaWolf]

Also note that subsidizing is a very long term money drain, you'll always have to either make large losses or stick with smaller profits; whereas any investment in other features is a one time cost so it offers a better return in the end.

And as much as I am uninterested in it, OnLive is still looking like a more and more serious competitor. They don't have to subsidize much of the hardware, and as their infrastructure gets better it'll become harder and harder to justify a large investment in the platform for the average customer. MS and Sony might have a hard time selling $400 hardware when you can get a dirt cheap set-top box that can play games just as well (I of course realize that there are huge drawbacks - but I'm not the average customer). So they may have to go with a smaller price just to keep their market share.

I'd be surprised if onlive makes it to 2012.

 

[mrcorbo]

I'd be surprised if onlive makes it to 2012.

In my mind OnLive needs 2 things to have a chance to succeed.

Firstly and most importantly, they need to find a way to fix their fundamental performance problems. If they can't do this, everything else is moot.

And secondly, they need to find a way to get their hardware/software integrated into BR Players, TVs and Set Top Boxes as a value-add. Sell it to manufacturers as something to differentiate a particular model from the rest of the crowd. As long as they are only shipping a dedicated Onlive box, they are dead in the water.

Unfortunately for OnLive, I don't think they are going to be able to do either one.