Leasing Consoles

[Silenti]

An old "Inside Gaming", numerous threads and some of my own wild thoughts just kind of coalesced into this idea. I'll post them first before getting to the meat of the idea so everyone understands where I am coming from.

1. Relatively recent complaint that MS still has an external, and very expensive, adapter for wifi on the 360 vs. it being free on the PS3.

2. High cost of all MS peripherals.

3. High initial cost of PS3 and the potential they are still losing money on every PS3 Slim sold.

4. The drubbing Sony has taken in the press, sales and amongst gamers for the high initial price.

5. The talk on the "next-gen" thread about the roadmaps beyond 22nm and scaling issues = an uncertain cost reduction on the next gen.

6. I'll flatly state 1 opinion of my own. There will not be a crowd following the course of the Wii (i.e. - MS and Sony going low cost, small form factor and hardware profit from the start.) I just don't see them walking away from the existing fan bases that demand high tech to a large extent.

I recently thought about my own purchasing of 360 peripherals. Setting aside the HD-DVD player, which I got cheap and was only mildly interested in, I have spent about the same, maybe a little more to add the hdd and the wireless adapter to my 360. However, I didn't have to pay it all up front.

Now the meat. What about straight leasing. Similar to buying something on a credit card or leasing a car. There are a million different little ways to pull this off, so I won't go into the possibilities. The idea is straightforward, lower the initial cost of entry for people and have the manufacturer make up a significant portion of the difference, or all of it, hell maybe even some profit, over time. Introduce the new consoles at whatever price point you think they will sell for, but as your manufacturing capacity increases, sell them for an initial say 2-300$ depending on what they think works best for them, and have the remainder financed over 2 years, paid straight over the service. Maybe for every year you hold a Live Gold account you get 25$ off what you owe that year. Let it be paid in monthly installments, or yearly, however the manufacturer and the customer are comfortable. As above, there are a million little ways to do this. This way, the manufacturer instead of being out the difference between what it costs to manufacture and the price it will support at market, they can only be out some finance.

I'm sure there would be a lot to be worked out here. Get a MS account that has credit on it that you pay towards, just like Live or a cable service. Go through the retailers. Hell, the options are limitless and you could go as far as people with very good credit being able to lease it for 0$ down and say 15$/month for 3 years all the way up to 300$ down say 10$/month for a year.

That is a hell of a lot smaller hit to the consumer and more money to cover the costs, over time at least, to the manufacturer. To some extent, MS already did this with their peripherals. Maybe they still would. My only point here is to cut down on sticker shock and get more people into the systems earlier despite the higher costs and questionable cost reduction for next gen. The manufacturers still get paid, the consumer gets a lower cost of initial entry, etc.

Other than working out the different ways you could go about this, and I'm sure there are plenty of different ways I have failed to outline, why not have something like this available? Flaws? Or am I just pissing up a rope here?

 

[Cheezdoodles]

Um. I dont get why you want this.

If consumers are not credit constrained to being with, they can just use capital markeds to do this for themselves. If they are credit constrained they will not be approved for leasing to begin with.

Also if we assume that consumers are rational, there is absolutely no point in this, as NPV is what will factor in the decision,and leasing something doesn't make it any less expensive, its just a different downpayment plan..

That is a hell of a lot smaller hit to the consumer and more money to cover the costs, over time at least, to the manufacturer.

You apparently dont understand the concept of net present value.

Its not a smaller hit to the consumer, only the initial payment is smaller. Net is atleast the same (but most likely higher, since people like to earn money on people not understanding NPV). Similarly its completely irrelevant for the manufacturer if he gets 600 today or if he gets 300 today and 30 bucks for 10 months + some extra interest.

He can just take the 600 bucks and put 300 of them into some bonds or whatever and create a 300 initial, 30$ for 10 months + interest, payment stream if he wants.

 

[Shifty Geezer]

How are the console companies going to front the investment to product this expensive hardware that they're not going to get paid off for years? Especially considering at a lower price of entry you'd think more peole would buy. So let's take PS3 as an example. Sony spent $800 making each of the first 5 million consoles and sold them at $600 shortly after making them (some months), costing Sony a total of $4 billion - $3 billion = $1 billion. Now if those consumers bought PS3 on credit, Sony would have had to put up $4 billion to cover 5 million customers, with no expectation to get that money back for years. And with the PS3 now launching at $15 a month, the number of buyers would be astronomical, meaning many billions invested up front.

It's not worth it. As Ostepop says, leave those wanting credit to use existing credit options.

 

[Silenti]

Ok. First, I don't necessarily want this for my own personal reasons. It was to offer something besides 20% credit cards for people to purchase the console. It was about marketing and defraying the cost of keeping high tech in the consoles.

Osteopop: I do understand NPV. My point is the same as when someone buys major appliances or vehicles under different terms than cash outright. It can be a lot easier for people to justify payments over time, and make them if they are small enough, to purchase something they otherwise would not. Perhaps appliances are the best example. Yes, you can pay cash up front, or there are numerous other methods available. Strange things happen, like people deciding they can buy more or have it now rather than saving for it. THose people who get it earlier start buying games and accessories. The vast majority of people are not going to go the route of investing something to make those payments for them. This is solely to get people purchasing.

Shifty: The options I offered above were not specifically tailored. Take your example of the PS3. Rather a poor choice overall I would think, but hey. Instead of totally eating the 200$ and watching their console stagnate from a lack of install base, they could have sold it for a lesser amount, whatever their internals said it would support, and tacked on a monthly. Look at it this way. Sonly lost 1B$ by these simple numbers. What if instead they had sold it for 500$ and collected 200 more in payent over 2 years. Some of the additional losses would be offset by more game and accessory sales and eventually they would have been paid 700$ instead of 600$, reducing the loss.

My major point here is more a marketing one. I can justify the 70$/month internet line. If you told me I was to pay 840$ up front. Not so much. Even if you have a credit card, you are still looking at the total price, and not thinking in terms on monthly payments.

Obviously the manufacturers would have to scale the prices, financing vs. production capacity/cost/ etc. to suit what they can handle. The specific numbers were not meant to mean anything, just outline the idea.

 

[Shifty Geezer]

Shifty: The options I offered above were not specifically tailored. Take your example of the PS3. Rather a poor choice overall I would think, but hey. Instead of totally eating the 200$ and watching their console stagnate from a lack of install base, they could have sold it for a lesser amount, whatever their internals said it would support, and tacked on a monthly. Look at it this way. Sonly lost 1B$ by these simple numbers. What if instead they had sold it for 500$ and collected 200 more in payent over 2 years. Some of the additional losses would be offset by more game and accessory sales and eventually they would have been paid 700$ instead of 600$, reducing the loss.

But then the person paying is paying substantially more in credit (1/6th), which doesn't strike me as much different from a loan or credit card. If it's going to cost more, even in the long run, I don't think there's anything different to the console companies offering credit versus other credit providers. In this example, Sony would also be losing out on the extra expenditure up front too. Would it be better for them to have $600 up front or $500+$200 over two years? If for millions of machines, I imagine the former, but I'm no economist (as Ostepop will tell you ).

And they can't keep the same price with interest free credit because they'd attract more customers at time when the machines are there most lossy. It's actually in the console companies' interests to keep demand down so they aren't losing too much money producing boxes, and it's only when the machines aren't huge loss leaders that they want to ramp up sales.

My major point here is more a marketing one. I can justify the 70$/month internet line. If you told me I was to pay 840$ up front. Not so much. Even if you have a credit card, you are still looking at the total price, and not thinking in terms on monthly payments.

Well, that's psychology of sales. I guess it works for mobiles. You can also get laptops 'free' with mobile internet access plans, that end up very expensive. Perhaps loads more people would have bought an $800 PS3 if it were $13.33 per month for a five year contract. Or maybe $300 plus $5 per month for 5 years. You'd still have the trouble of fronting more expenses though, and the old worry about people not actually being able to afford to pay off their debts so you don't actually see all that money.

 

[DuckThor Evil]

Would it be better for them to have $600 up front or $500+$200 over two years? If for millions of machines, I imagine the former, but I'm no economist (as Ostepop will tell you ).

Definitely the latter is the better option by far. basically that's 100$ now or 200$ during the next two years. Even if you get that 200$ at the end of the second year, it would be FAR better. However I don't think the leasing method is that practical on items such as consoles and paying 500$ up front and then 200$ during the next two years sounds kind of retarded, except if you get some additional service for those dollars.

 

[Cheezdoodles]

Ok. First, I don't necessarily want this for my own personal reasons. It was to offer something besides 20% credit cards for people to purchase the console. It was about marketing and defraying the cost of keeping high tech in the consoles.

There are other sources of financing than 20% credit card interest rates.

Osteopop: I do understand NPV. My point is the same as when someone buys major appliances or vehicles under different terms than cash outright. It can be a lot easier for people to justify payments over time, and make them if they are small enough, to purchase something they otherwise would not

Im not sure that you do?

Follow this logic, People who are credit constrained will not be able to obtain credit, hence they will certainly also not qualify for a leasing plan.

People who have credit, can make these purschases either way, as they can just borrow and create their own "lease plans".

So far, this lease plans gives nothing to consumers, because people who have credit can create this lease plan themselves, and people who dont have credit will not be sold a lease plan anyway.

Leasing does not make it more affordable to own a good, your simply shifting the payment structure! Its irrelevant for me if i pay 600 today, or pay 100 per year for the next years (if interest rates are roughly 10,55%). NPV is the same. You are not getting any more purchasing power, not more goods, nothing.

You cannot afford any more goods if you take the 100$ per year option! You will not buy anymore goods. You have the SAME purchasing power.

You cannot afford anything more on the 100 a year downpayment plan, if you think that you do, you just dont understand NPV math

Perhaps appliances are the best example. Yes, you can pay cash up front, or there are numerous other methods available. Strange things happen, like people deciding they can buy more or have it now rather than saving for it

And this does NOT increase their ability to afford the appliances, it just increases payment options, that perhaps to some people are to complicated to understand, which in turn makes them think that they can afford things they normally cannot.

My major point here is more a marketing one. I can justify the 70$/month internet line. If you told me I was to pay 840$ up front. Not so much. Even if you have a credit card, you are still looking at the total price, and not thinking in terms on monthly payments.

Well, 70$\month is cheaper than 840$ up front.

If lets say you could pay 800 up front or 70$\month, then, assuming only yearly interest rates, the 800 up front option is better as long as interest rates are lower than 5%.

Even if you dont have 800 in your wallet, you should choose this option, as you could just borrow 800 from your bank at some interest lower than 5% and repay in one year for payments BELOW 70\month.

There is no marketing point here aside from that if you stick on monthly prices instead of total prices, chances are that more retards will think they afford your products. If you assume consumers are rational, this lease plan would do absolutely nothing to increase sales, nor to benefit the company..

What if instead they had sold it for 500$ and collected 200 more in payent over 2 years.

Your example is flawed. Lease plans should just be different ways of FINANCING, the price should be equalient if discounted for time value of money. Your just adding numbers on one side. Nobody will buy such plans:

If consumers had the choice over 600 intital and 500 initial + 200 next year (or two years), unless interest rates are above 61,8%, nobody in the world would buy the lease plan, because youd pay MORE.
(again, simple NPV math).

Your lease plan, for people to buy, assuming rationality, must offer the same NPV. If it does not, one option is cheaper than the other and everybody will buy the cheaper option. Your example doesn't make sense, as your just creating a higher price for the consumer and for some reason think that consumers will still buy the product in the same quantities for the higher price.

Would it be better for them to have $600 up front or $500+$200 over two years? If for millions of machines, I imagine the former, but I'm no economist (as Ostepop will tell you ).

500+200 over two years (assuming 100$) is equivalent with 600 up front if discount rate is 61,8% per year. Obviously, since discounts rates are not that high, a 500+200 option would be the best. Sony can just sell the 100+100 future payments on the bond market today, and recieve whatever the PV value of that is in cash today.

 

[Shifty Geezer]

If consumers had the choice over 600 intital and 500 initial + 200 next year (or two years), unless interest rates are above 61,8%, nobody in the world would buy the lease plan, because youd pay MORE.

I think you're overestimating the average consumer's financial sense. Peole do borrow money they can't afford, and pay more for things wihtout factoring in whether they can afford it or not. Which many end up not being able to do. I know several people (all university graduates, so not typical thickos ) who have got credit cards without understanding what credit is.

I think if a console company offered a console at $15 a month for five years, they'd see alot more adopters than the same console at $600 at launch despite it costing more in the long run, because their perception of the cost is changed from a large lump sum to an insignificant monthly fee. I know people who ahve overpaid for laptops because of mobile contracts, for example. Had they bought the laptop seperately and gone with a cheaper phone plan, they'd have been better off, save the fact it'd have need a large amount upfront.

Thus I think Silenti's idea has merit, as, by your choice of words, there are a lot of 'retards' who wouldn't comprehend the budget and would impulse-buy a thing they want at a monthly expense they can afford. It be very bad for the console companies though.

 

[upnorthsox]

I think you're overestimating the average consumer's financial sense. Peole do borrow money they can't afford, and pay more for things wihtout factoring in whether they can afford it or not. Which many end up not being able to do. I know several people (all university graduates, so not typical thickos ) who have got credit cards without understanding what credit is.

I think if a console company offered a console at $15 a month for five years, they'd see alot more adopters than the same console at $600 at launch despite it costing more in the long run, because their perception of the cost is changed from a large lump sum to an insignificant monthly fee. I know people who ahve overpaid for laptops because of mobile contracts, for example. Had they bought the laptop seperately and gone with a cheaper phone plan, they'd have been better off, save the fact it'd have need a large amount upfront.

Thus I think Silenti's idea has merit, as, by your choice of words, there are a lot of 'retards' who wouldn't comprehend the budget and would impulse-buy a thing they want at a monthly expense they can afford. It be very bad for the console companies though.

Well since we're talking lease here, let's make the terms more lease like. How about 10% down($60) and $15 p/mth for 2 yrs with an option to buy at the end of lease for $250. Or how about no money down and $20 p/mth for 2 yrs for a console and online service with an option to buy at $250 at end of lease?

The problem with the lease model is that traditionally it's benefits, maintenance and tax break, don't really apply here. Still, the lease sceniarios above could make sense for some esp. with a walkaway after 2 yrs.

 

[Shifty Geezer]

The problem with the lease model is that traditionally it's benefits, maintenance and tax break, don't really apply here. Still, the lease sceniarios above could make sense for some...

Including the console manufacturer who has to shell out $800 at launch to make the box?

 

[Rurouni]

Instead of just plain leasing, they should make it like you 'subscribe' something.
Let's say that Xbox360 is priced at $300... and MS can give you an option to buy it for $150 dolar with a condition that you subscribe Xbox live gold monthly for 2 years (or $60-70 with 3 years contract)... probably they could throw in some premium gold pack goodies to give more incentives.
Kinda like US cellphone provider doing right now.
I don't know if it will be more profitable for MS (probably in the long run), but with this kind of plan I think they can attract more people to buy their console.

 

[upnorthsox]

Including the console manufacturer who has to shell out $800 at launch to make the box?

Assuming it costs $800, they lose $200 no matter what if they can only ask $600 for it.

The question comes when you're looking at it costing you $600 or slightly less and then the lease model gives you a chance to gain market share early from those who might otherwise wait.

 

[Blazkowicz]

It makes me immediately think of the DSL set top boxes : they do are leased, included in your ISP monthly fees. Here in France that's 30€ per month for the service, box included (does tv, phone, dsl, wifi router)

we're on Free, with the wifi router/DSL/phone box in use, and a dedicated TV box collecting dust (because we don't watch TV and it would be leeching bandwith from the internet connection) : it's an actual PC based on a VIA C7 CPU.. property of the ISP no matter what.

a similar fee for a leased console + online "gold" access would sound similar (more hardware and less network service, comparatively)

though, in the end, many people won't want to add yet another automatic monthly bill, especially in those times
I did a better deal anyway.. a 59€ CPU upgrade that lets me run recent games, run virtual machines better or run firefox faster.

 

[Shifty Geezer]

Assuming it costs $800, they lose $200 no matter what if they can only ask $600 for it.

The question comes when you're looking at it costing you $600 or slightly less and then the lease model gives you a chance to gain market share early from those who might otherwise wait.

You're missing the point about requiring large amounts of cash up front.

Let's consider a hypothetical situation where FunToys inc. produces the FunBox at $800 a unit (getting it to the shops, so that includes marketing, distribution etc.).

Case A : At launch it is sold for $600. At this high price point only 1 million customers a month buy it. Over a period of 5 months, 5 million are sold. The first month, FunToys inc. needs to spend $800 million up front to produce and distribute the console. It makes back that month $600 million, so is spending $200 million a month. For 5 months that's a $1 billion. they are a big company so can afford that.

Case B : At launch it is leased for $200 up front and $400 over a 3 year contract at $11 a month. At this low price point 2 million customers a month want one. Over a period of 5 months, 10 million are sold. The first month, FunToys inc. needs to spend $1600 million up front to produce and distribute the console. It makes back that month $400 million, so has spent $800 million which it won't see back completely for 3 years. The next month costs another $1600 million to produce the next 2 million FunBoxes, for which they make back $400 million from sales and $22 million subscription charge. So they're now ~$1600 million down in two months. After 5 months they'll have needed about $4 billion ready capital to produce and sell the boxes. Even though it costs them no more in the long run, it's a harder bill to pay. I mean, would you like to pay 5 years worth of electricity bills in 3 months?! Plus the slower FunToys inc. sell the boxes, the lower the cost to them becomes, so the losses reduce and later boxes become more profitable, which wouldn't be the case if those same customers buy earlier on.

The reason for suggesting an alternative payment option in the first place was to make the consoles cheaper and more readily adopted, but I don't think that's a priority. Sales have to be balanced with costs. Once the costs are low enough to support mass adoption, the entry level price will actually be reduced to be pretty palatable anyway.

 

[DuckThor Evil]

500+200 over two years (assuming 100$) is equivalent with 600 up front if discount rate is 61,8% per year. Obviously, since discounts rates are not that high, a 500+200 option would be the best. Sony can just sell the 100+100 future payments on the bond market today, and recieve whatever the PV value of that is in cash today.

Hmm I'm tired and slightly confused here, but is that really the right way to do that calculation. In order for 1 to turn in to 2 in two years you need the yearly interest rate to be about 41.5% and also if your two years into the future 200$ is 100$ today, then the discount rate is also 41.5%. 200/(1+0.415)^2=99.88

I realize that 100/(1+0.618)+100/(1+0.618)^2=100, but then the 61.8% is calculated from 61.8 as 61.8*1.618=100

edit: Hmm I got it now my example was only counting one cash flow, when there is actually two so your calculation is definitely correct.

 

[upnorthsox]

You're missing the point about requiring large amounts of cash up front.

Let's consider a hypothetical situation where FunToys inc. produces the FunBox at $800 a unit (getting it to the shops, so that includes marketing, distribution etc.).

Case A : At launch it is sold for $600. At this high price point only 1 million customers a month buy it. Over a period of 5 months, 5 million are sold. The first month, FunToys inc. needs to spend $800 million up front to produce and distribute the console. It makes back that month $600 million, so is spending $200 million a month. For 5 months that's a $1 billion. they are a big company so can afford that.

Case B : At launch it is leased for $200 up front and $400 over a 3 year contract at $11 a month. At this low price point 2 million customers a month want one. Over a period of 5 months, 10 million are sold. The first month, FunToys inc. needs to spend $1600 million up front to produce and distribute the console. It makes back that month $400 million, so has spent $800 million which it won't see back completely for 3 years. The next month costs another $1600 million to produce the next 2 million FunBoxes, for which they make back $400 million from sales and $22 million subscription charge. So they're now ~$1600 million down in two months. After 5 months they'll have needed about $4 billion ready capital to produce and sell the boxes. Even though it costs them no more in the long run, it's a harder bill to pay. I mean, would you like to pay 5 years worth of electricity bills in 3 months?! Plus the slower FunToys inc. sell the boxes, the lower the cost to them becomes, so the losses reduce and later boxes become more profitable, which wouldn't be the case if those same customers buy earlier on.

The reason for suggesting an alternative payment option in the first place was to make the consoles cheaper and more readily adopted, but I don't think that's a priority. Sales have to be balanced with costs. Once the costs are low enough to support mass adoption, the entry level price will actually be reduced to be pretty palatable anyway.

Again, at $800 you are losing 25-30% per unit so it's almost impossible to come up with a scenerio favorable to the manufacturer and no way can you justify it with only 5 months worth of data.

Case B IS A financing plan, not a lease plan. Either way, you'd need either a financing arm or financing partner to consider it.

I'm not advocating a lease plan, I'm only pointing out that there are scenerios where it can't be dismissed out of hand.

 

[Silenti]

Well, seems I stepped in it. First, thanks to Shift for explaining people and their purchasing habits and thought patterns (even the educated) in a fashion which made sense, where as mine was apparently muddled. Second, please don't get lost in the numbers I used or the terminology. Perhaps I should not have used the term "lease", or simply chose bad examples to make my point.

Whether ones calls it a lease, a service package (Box and Live for x/month) or a financing plan doesn't make much difference to the layman. I apologize for my lack of proper economic vocabulary. My background is history, politics and law, with a large side order of various hobbies that do not include economic terms at the level under discussion (I'm rather all over the map there.) I am not a financier.

Speaking directly to the numbers used. They were not meant to be specific, real world examples. Use whatever speculative numbers equal the following - enough up front charge w/ long term monthly payments to make up for the higher initial manufacturing costs which will have to include the additional revenue from extra software, accessories and mass production/ cost reduction that goes alongside it. I do NOT know what those numbers would look like. Obviously, those numbers would have to slide with time.

Maybe they pair themselves with ISP's/Telco/Cable etc. Maybe they just do it over their own network. Whatever works. In the same way that other examples here showed, people purchased laptops with service plans (hell it has been done with cell phones for some time) and ended up paying more in the long run. There is obviously a lot more to consider here when trying to actually set the parameters. I don't have the math, or enough real world figures I would expect, to actually calculate what would be workable.

2 More areas to take into consideration. Momentum a company gains from a larger install base (with consumers and developers/publishers) and a chance to be closer to the break even point on the overall cost of manufacturing the hardware than just selling it at a fixed cash price. These things are damned expensive on both ends these days. Something like this, on a wide enough scale, may help a manufacturer justify keeping the tech closer to the cutting edge at launch rather than going closer to the Wii route.

More to come, working here.

 

[Cheezdoodles]

I think you're overestimating the average consumer's financial sense. Peole do borrow money they can't afford, and pay more for things wihtout factoring in whether they can afford it or not. Which many end up not being able to do. I know several people (all university graduates, so not typical thickos ) who have got credit cards without understanding what credit is....

Thus I think Silenti's idea has merit, as, by your choice of words, there are a lot of 'retards' who wouldn't comprehend the budget and would impulse-buy a thing they want at a monthly expense they can afford. It be very bad for the console companies though.

Yeah, absolutely there are a lot of retards who one could possibly exploit, i just dont think its a necessary smart or feasible way of doing console business.

The credit risk alone would be very substatial, and sooner or later these retards will go bankrupt, at that point all your future promised cash flows are worth zero.

Also, considering how the costs of the consoles are made up, where the first generation consoles cost the company insane amounts of money, i dont think a lease plan would suit this industry, unless you create a Wii-type console that you can put huge margins on from day one.

If your taking losses on the consoles initially, there really is not point in offering any "lease" plan initially. The manufacturer is not at all interested in gaining marked share. Consoles are typically supply constrained the first year or so anyway. Your not really interesting in getting big marked penetration from day 1, your mainly just interested in developing cheaper versions from which you can profit. Better to just get the highest possible cash now, since your most likely going to be supply constrained and unless your microsoft, cash upfront is quite valued during this phase.

Once you move into the phase when consoles actually start making you money, a lease plan could benefit the company, as you can sell more consoles to the retards. And in this phase, its sales amount really starts to matter.

At the same time, this lease plan will create significant credit risk exposure, and not normal credit risk exposure, your credit risk exposure is coming from people who are financially retarded, which in the current economic situations is not exactly the risk exposure you want to have.

 

[fearsomepirate]

You're all missing a very important point: If you can't figure out a way to scrounge up $300 for a toy, your credit is probably so horrible that anyone who would loan money to you at below 20% interest is a complete idiot.

 

[Shifty Geezer]

...your credit is probably so horrible that anyone who would loan money to you at below 20% interest is a complete idiot.

You've missed the whole Credit Crunch because 'complete idiots' lent money to people who couldn't pay it back, right?