Merrill Lynch's Next-Gen console prediction

[wco81]

Even if MS could and was inclined to cut the price of the X360 more than $100 within a year of its launch, would it be a good idea to do so?

It would alienate a lot of people who paid $400.

It might also lower the comparative value of the X360 compared to the PS3. Lower price doesn't always win a market, as companies which tried to undercut the iPod found out. People might think a much lower price implies the older product isn't as powerful as the new one, although I don't think Sony would want to be more than $50 higher in price.

It would also depreciate the value of all those accessories where MS expects to make up some margins. Think about cutting the Premium price to under $300 within a year. After such a big price cut, could they still charge $100 for the 20 GB HDD or $50 for the wireless controller? Or $80 for the wireless adapter? If they didn't cut the accessory prices, they would comprise a much higher percentage of the console price. Two or three accessories might come out to the price of the Core under that scenario.

And what about games? Third-party publishers are the ones pushing the $60 price point. But they also want lower console prices to maximize the installed base. Will $60 games sell for a $200 console?

The price cuts would have to increase volume a lot to offset the big decreases in margins. If MS still wants to make money on this generation, a big price cut so early would not be the way to do it.

 

[pakpassion]

Even if MS could and was inclined to cut the price of the X360 more than $100 within a year of its launch, would it be a good idea to do so?

It would alienate a lot of people who paid $400.

It might also lower the comparative value of the X360 compared to the PS3. Lower price doesn't always win a market, as companies which tried to undercut the iPod found out. People might think a much lower price implies the older product isn't as powerful as the new one, although I don't think Sony would want to be more than $50 higher in price.

It would also depreciate the value of all those accessories where MS expects to make up some margins. Think about cutting the Premium price to under $300 within a year. After such a big price cut, could they still charge $100 for the 20 GB HDD or $50 for the wireless controller? Or $80 for the wireless adapter? If they didn't cut the accessory prices, they would comprise a much higher percentage of the console price. Two or three accessories might come out to the price of the Core under that scenario.

And what about games? Third-party publishers are the ones pushing the $60 price point. But they also want lower console prices to maximize the installed base. Will $60 games sell for a $200 console?

The price cuts would have to increase volume a lot to offset the big decreases in margins. If MS still wants to make money on this generation, a big price cut so early would not be the way to do it.

In the first year mostly hardcore gamers and medium hardcore gamers will buy the system, by second year the casual gamers number start to outnumber the hardcore gamers, thus the price drops

 

[Carl B]

anyone seen this from merryll

Ah finally, onetimeposter something useful!

Yeah, you see that Cell figure is just way to high - I don't buy that price for a second, especially with one of the SPE's disabled. RSX should have the larger die-size anyway; what kind of analysis is this? Plus, the blu-ray drive is just a shot in the dark. Whatever model the PS3 will use has in all liklihood not yet been conceived yet, let alone placed into production for accurate costs assesment. Hell - there *is* no blu-ray drive production to speak of at the moment.

Well, I like seeing the numbers, but it just confirms for me that ML's being overly conservative on Sony's BOC.

EDIT: Not to mention they seem obsessed with numbers divisible by $5 - not that that doesn't describe me as well, but how arbitrary does $50 PS3 A/V & I/O costs seem compared to $25 for MS?

PLUS, not to mention as far as price drops go, it shouldbe from a fixed date, not from each respective consoles launch date. Sony's Nagasaki and East Fishkill stake will likely be coming online with 65nm before or at the same time as Microsoft gets there, for example - not some arbitrary '1 year' after launch.

 

[ban25]

They estimate $5 for the 802.11 a/b/g accessory on the X360 with a retail price of $100.

 

[Mmmkay]

To be fair, assuming "HDD-enabled" means the core system and will be priced at $250 at end of 2006 is much more reasonable, even if the wording is poor. The report mentions both HDD-enabled and HDD-equipped, but does not use the term interchangeably.

.Sis

Well, each term is only used once so there's no precedence for either. Its almost a certainty that the core pack will be priced less than the PS3 at launch, such things don't need saying. A 2x the price comparison is a marketing hook, something which they were quick to pass off on when discussing the relative performance.

Just because I'm a little curious why only one site on the whole internet is reporting this right now, has anyone actually verified the authenticity of this report?

 

[seismologist]

These would strengthen their current weaknesses and change the analysis that ML has done. It does not mean they will come out ahead.

The article is reasonable in stating that the Cell chip was expensive to develop and will probably be expensive to produce. This is not the same as saying "Sony is doomed".

Cell is a modular design meant to be used across a wide range of product. It's not just for the PS3. It was expensive to develop but there's a reason behind that. The net effect will be cost savings across Sony's product line.

The article is reasonable in stating that Howard Stringer has given guidance saying Sony will not take heavy losses into 2007 (or something to this effect) thus we should expect a huge discount on the PS3. This is not the same as saying "Sony is doomed".

Sony's revenue stream isn't dictated by the launch price for PS3.
speculating a $499 PS3 at the end of 2006 doesn't sound reasonable to me.

The article is reasonable in stating that MS may have a significant price advantage, given their cash position and their year to year profits, and the apparently cheaper to manufacture Xbox 360. This is not the same as saying "MS for the win!" (Also, I disagree with this one; I don't believe MS can really afford to throw another billion or two into Xbox.)

.Sis

I agree but this article implies that MS has unlimited flexibility in pricing for the 360 yet they are expected to break even in 06? I dont get how that works.

 

[blakjedi]

#1 depending on when Sony launches in the same regions as Xbox360, don't expect to see any significant cost differences between the premium xbox360 and PS3

From all indications PS3 will be more expensive than x360... even the premium bundle. Sony could price similarly if MS doesn't price drop in response but all indications do not point to that being true/possible for Sony to be able to do (except in April in Japan.)

#2 how much do you want to bet that there are more (and higher caliber) games [that interest current PS2 owners] in development for PS3 than there are for Xbox360?

This statement with the first set of parentheses is a clearly subjective statement. Without those parentheses its less clear but markedly biased. I would disagree with both.

Also got to love your emphasis on what will hurt Sony and what not without knowing their financial details nor their strategic plans for PS3 - above all without knowing when they will launch, at what cost for the consumer, at what cost to Sony etc...

I guarantee you that ML knows more than we do about Sony's plans and financial capabilities.

 

[Sis]

Cell is a modular design meant to be used across a wide range of product. It's not just for the PS3. It was expensive to develop but there's a reason behind that. The net effect will be cost savings across Sony's product line.



Sony's revenue stream isn't dictated by the launch price for PS3.
speculating a $499 PS3 at the end of 2006 doesn't sound reasonable to me.



I agree but this article implies that MS has unlimited flexibility in pricing for the 360 yet they are expected to break even in 06? I dont get how that works.

The report speaks to all three of your arguments and list out why they believe otherwise.

1) Cell is only a revenue stream outside of the PS3 is other devices license it and use it. The ML report thinks this is unlikely. Many people find this unlikely, myself included.
2) Sony's profit is directly impacted by the launch price of the PS3 for that fiscal year in which the launch occurs. According to ML, the CEO has given guidance that they won't take a loss (as large a loss) in '07 [note: I do not know what the guidance is here; I'm taking the reports' observation about the guidance at face value.]
3) MS is inarguably in a better financial position than Sony. It is debatable whether this has real impact on their console division (that is, they could decide that they will no longer tolerate Xbox losses). It is also arguable which console is cheaper to produce, though I find ML conclusion--that the Xbox 360 is cheaper--to be reasonable. I do not agree that it's as large a difference as they seem to think.

.Sis

 

[pakpassion]

i would thank that Merill Lynch which IS the largest financial management and advisory company in the world with financial analysers who have done thier degrees in esteemed colleges around the world would have more knowledge about cost and estimates and wont release FUD to investors. thier investors depend on them to know where they need to invest and where to sell thier shares. I assume none in beyond3d or any gaming forum would know more about cost and finances than these professionals.

 

[Shifty Geezer]

EDIT: Not to mention they seem obsessed with numbers divisible by $5 - not that that doesn't describe me as well, but how arbitrary does $50 PS3 A/V & I/O costs seem compared to $25 for MS?

The $5 roundings are just ballpark figures. Whether it's $3, $5 or $7 doesn't make much difference. You'll see they have XB360's 3 USB ports costing as much as PS3's 6 USB ports, so they're obviously not trying to be accurate.

Not at all sure about processor costs. $160 for a Cell seems an awful lot. I'm assuming they're factoring in the RnD and fab investments which need to be recooperated, in their mind solely on PS3. As for $50 IO etc. on PS3 and $25 for XB360, is that things like dual HDMI? Dunno how much these cost. Perhaps the analysts don't know either?

 

[Carl B]

i would thank that Merill Lynch which IS the largest financial management and advisory company in the world with financial analysers who have done thier degrees in esteemed colleges around the world would have more knowledge about cost and estimates and wont release FUD to investors. thier investors depend on them to know where they need to invest and where to sell thier shares. I assume none in beyond3d or any gaming forum would know more about cost and finances than these professionals.

Well, I strongly disagree with you there. And for more on that, read my post here.

In my opinion, all these numbers do is show how bogus it all was to begin with.

 

[Mythos]

Even if MS could and was inclined to cut the price of the X360 more than $100 within a year of its launch, would it be a good idea to do so?

It would alienate a lot of people who paid $400.

It might also lower the comparative value of the X360 compared to the PS3. Lower price doesn't always win a market, as companies which tried to undercut the iPod found out. People might think a much lower price implies the older product isn't as powerful as the new one, although I don't think Sony would want to be more than $50 higher in price.

It would also depreciate the value of all those accessories where MS expects to make up some margins. Think about cutting the Premium price to under $300 within a year. After such a big price cut, could they still charge $100 for the 20 GB HDD or $50 for the wireless controller? Or $80 for the wireless adapter? If they didn't cut the accessory prices, they would comprise a much higher percentage of the console price. Two or three accessories might come out to the price of the Core under that scenario.

And what about games? Third-party publishers are the ones pushing the $60 price point. But they also want lower console prices to maximize the installed base. Will $60 games sell for a $200 console?

The price cuts would have to increase volume a lot to offset the big decreases in margins. If MS still wants to make money on this generation, a big price cut so early would not be the way to do it.

Imagine that....

Xbox360 cuts their price lower than Sony and the PS3 continues to outsell.

Did'nt it happen with the PS2.

 

[Serenity Painted Death]

Actually, that statement is just a reflection of current realities.

PS2 has more "high caliber = big seller" franchises than Xbox or Gamecube. Do I have to trot out the sales data to prove it to you? Yes, PS2 has twice the combined installed base of GC and Xbox (guess why, those games!), so don 't bother reminding me. They won with these games with the PS1, nurtured the PS2 with them while creating new ones, and the same people who have been buying them will expect them to be on the PS3 which they for the most part will. PS2 sold 16 million units in 2004 alone (almost as many Xboxs total in its lifespan), and sales have been promising this year... why? Games!

It would be entirely reasonable to assume there are more current Playstation owner's interested in games they believe will only be on Sony's console /than there are Xbox users total/.

Furthermore, ML probably does know MORE, but the key question is /how much/? If analyst reports from ML and other firms on this subject are any indicaiton... NOT MUCH.

 

[Phil]

i would thank that Merill Lynch which IS the largest financial management and advisory company in the world with financial analysers who have done thier degrees in esteemed colleges around the world would have more knowledge about cost and estimates and wont release FUD to investors. thier investors depend on them to know where they need to invest and where to sell thier shares. I assume none in beyond3d or any gaming forum would know more about cost and finances than these professionals.

I would think Sony's investors are taking numbers directly from Sony and not from some investors somewhere around the globe that has absolutely no fricking idea about Sony's internal risk management, financials, fab-cost, investment, product strategy. Ever heard of the word *speculation*?

 

[Carl B]

The $5 roundings are just ballpark figures. Whether it's $3, $5 or $7 doesn't make much difference. You'll see they have XB360's 3 USB ports costing as much as PS3's 6 USB ports, so they're obviously not trying to be accurate.

Not at all sure about processor costs. $160 for a Cell seems an awful lot. I'm assuming they're factoring in the RnD and fab investments which need to be recooperated, in their mind solely on PS3. As for $50 IO etc. on PS3 and $25 for XB360, is that things like dual HDMI? Dunno how much these cost. Perhaps the analysts don't know either?

Well yeah, the $5 prices don't bother me so much, but the blu-ray, RSX, Xenos, and XeCPU *all* at $100 - that does bother me. Not to mention, yes that Cell price seems *way* too high. Just incredibly high. It's almost as ridiculous to the opposite extreme as that analyst report a while back saying they'd be able to fab them at $20 or something.

Not to mention, the fab and R&D costs shouldnt be factored in to the price. Those should go on the books as assets on Sony's balance sheet and not play a role in a BOC analysis.

 

[AzBat]

The same server has the following PDF from Banc of America Securities' Equity Research...

"Research Brief: Microsoft Corporation - Xbox 360 Supply Chain, A Closer Look"

http://webpages.charter.net/spartan85/MSFT_BAC_SChain.pdf

More fuel for the fire.

Tommy McClain

 

[pakpassion]

I would think Sony's investors are taking numbers directly from Sony and not from some investors somewhere around the globe that has absolutely no fricking idea about Sony's internal risk management, financials, fab-cost, investment, product strategy. Ever heard of the word *speculation*?

i assume a company which was founded in 1914 knows alot about accurate speculation, there IS a reason they are very successful isnt there? market is all about speculation, if there was none and based only when company actually posted reports, it would be a dead market

 

[AzBat]

Here's another PDF on that same server:

http://webpages.charter.net/spartan85/MSFT_UBS.pdf

This time it's from UBS Securities. It's titled "UBS Investment Research: Xbox 360 Update".

Somebody on that site has access to some nice reports.

Tommy McClain

 

[dukmahsik]

imagine if premium came in at 299 next year and ps3 debuts at 399 or 450

 

[Carl B]

i assume a company which was founded in 1914 knows alot about accurate speculation, there IS a reason they are very successful isnt there? market is all about speculation, if there was none and based only when company actually posted reports, it would be a dead market

Bad assumption Pak. How about this, I dare you to invest your money based soley on the buy/sell recomendations of the analysts, and we'll see how much money you end up making or losing when all is said and done.

Either that or logically explain why Cell would cost so much more - being fabbed in three seperate places with the ability to withstand certain die defects - than those other chips mentioned?

Arthur Anderson (though not financial services) was founded in 1913. What's age got to do with it?