$1 billion it is (sorry I read the figures wrong at the beginning). It seems my predictions were right on the money.
MS is doing fine. MS forced the industry to drop pricing by $50 US per unit. That's a LOT of money that Nintendo and Sony would have received otherwise. That's what I'm talking about. I realize that Sony and Nintendo are both profitable, but that's not the point.
Look at it this way (thought experiment, so relax everyone):
Imagine that MS gets so ruthless that they decide to take loses of $3 billion annually instead of $1 billion and that this forces both Sony and Nintendo into a situation where they each have to take $1 billion out of their own revenues to stay competitive. This would force both the PS2 and Cube divisions into a loss situation, which would force both Sony and Nintendo as companies into a loss situation. MS on the other hand would still be profiting $8 billion instead of $11 billion annually and shareholders would probably not pull the plug.
MS has the capacity to really hurt Sony and Nintendo if they chose to. The only reason they don't price the Xbox at $99 right now is that they wouldn't be able to capitalize completely on the price difference. There aren't enough Xbox games that appeal to prospective PS2 and Cube owners right now. The Xbox brand isn't strong enough for this move - YET.
Eventually, the Xbox brand will be strong enough that it will be comparable in the minds of the mass market to Playstation. This might take until 2005 or even 2006, which is why Sony doesn't want to allow Xbox any more time to acquire brand power, but it will eventually happen.
When this happens and consumers see PS3 and Xbox2 brands (hardware + software) as equivalent, then the hardware at the lower price point will sell better. It's that simple. So that gets into a bidding war (low price), where Sony can't win against a determined MS.
Right now it's easy for Sony, because casual gamers say: "Playstation rules, what's Xbox got?", but eventually enough people will learn to appreciate the Xbox as its library of titles expands and the genre coverage gets better.
The other thing is that as prices lower MS stands to gain more than Sony in the long run. Tons of gamers already have a PS2, but many PS2 owners are "interested" in an Xbox. At $99 and with the right games (some say that will be this year, some say that will be never, some say next year, etc...), MS would probably sell a lot of Xbox hardware to PS2 owners. This is bad for Sony because it would really hurt their attach rate in the later years of the PS2's life. Multiplatform third party games, with a few exceptions, have a better attach rate on Xbox than PS2, because of the additional power of the system.
Sony has won this generation. No doubt about it, but Xbox will be a strong enough brand by 2005 that MS can force Sony to take unbearable losses on PS3. Cell isn't going to save Sony for the simple reason stated by Marconnelly, Ben and others: All the consoles will be powerful enough and the content will be the only thing that matters. Hence the acquisition of Bungie, Climax, Rare, and others to bolster the Xbox 2 lineup.
