NPD May 2005

[ERP]

Speaking of attach rates, with attach rates as low as 8 titles per unit, how do these companies make money?!

Money made per console = Profit on Hardware+License fees from games.
License fee is about $10 a game.

Profit = $80 + profit on hardware.

Profit on hardware is often a loss, and only slight when a profit. Consider an initial release, with a loss on nest-gen hardware at say $75, in that hardware's life it'll make the console company at best $5!

Two things they make the license fee on any manufactured game whether it sells or not.

And after the first 12 months hardware losses are usually very small if they exist at all. Since a very small portion of the total units are sold in the first 12 months it's more an investment than a loss (assuming you manage to get an good sized installed base).

 

[Sis]

Speaking of attach rates, with attach rates as low as 8 titles per unit, how do these companies make money?!

Money made per console = Profit on Hardware+License fees from games.
License fee is about $10 a game.

Profit = $80 + profit on hardware.

Profit on hardware is often a loss, and only slight when a profit. Consider an initial release, with a loss on nest-gen hardware at say $75, in that hardware's life it'll make the console company at best $5!

The $75 loss would be the initial loss and hopefully not the overall loss for the lifetime of the console. But looking at the PS2 numbers:

Assume a $5 profit (or $75 loss per unit):
Total profit * unit sold == total profit
(80-75) * 90,000,000 = 450,000,000

Or, half a billion dollars.

But, let's assume that the profit of the hardware, over it's life time, because a wash. Then we have:
(80-0) * 90,000,000 = 7,200,000,000

7.2 billion dollars . Now, since the console unit's overall loss/profit is unknown, we can just safely assume that it falls somewhere between these two values--both of which are very healthy numbers.

So it's a matter of scale. It also seems to illustrate exactly why Nintendo must focus on keeping costs down, since their attach may be the lowest compounded with their low total console units sold.

Finally, this excludes accessories, such as memory units, which from what I understand have a non-trivial impact on the console's bottom line.

.Sis

 

[Sis]

Two things they make the license fee on any manufactured game whether it sells or not.

WHAT??? Holy crap, how does that work? So if a publishers manufactures 100,000 units of a game they expect to be a moderate hit, and it only sells through 30,000, they still pay Sony 1 million instead of $300,000?

.Sis

 

[Tap In]

I don't think I would be wrong to say that gaming is not a priority for the vast majority of people. So called "hardcore" gamers would deride this segment as "casuals", but the fact is, they drive the industry because gaming cannot survive on the small segment of the population who's lives seem to revolve around gaming. I enjoy gaming immensely, but have never bought a console within the first year of its introduction except for PSP. When I was younger, I lacked the cash, as I get older, my priorities have changed.

I agree that the vast majority do not fit into the "gamer" mentality. My first game system was PONG (in 1976 iirc) I have bought every system since PS1 on launch day (except Saturn and Gamecube) and even I find it humorous to see how many people predict failure of a system based on having or not having the latest and greatest cutting edge technology. The masses are where the long term revenue is and the masses don't buy the latest and greatest, they buy the cheapest (or best bang for the buck).

MS, as much as many love to hate them has one thing right in their approach this gen that I like long term.

The games and services. LIVE, online casual play, the ability to get mom and sis and occasional gamers involved in games (simplistic & downloadable) with the new machine.

This approach may have a more long lasting effect on attracting the casual to a system and CHANGING their perception of games. Some have stated that MS is going to lose it's hardcore base and while I'll agree that hardcores can help to drive the market in a direction they do not make or break it.

Oh and FTR, I am old compared to most everyone I find online that I play with. I still find time and resources for this gaming thing because it is as fun a distraction as watching a movie.

I also greatly enjoy seeing the games and systems evolve and I still have plenty of time and resources leftover for my golf game.

 

[Tap In]

....
And after the first 12 months hardware losses are usually very small if they exist at all. Since a very small portion of the total units are sold in the first 12 months it's more an investment than a loss (assuming you manage to get an good sized installed base).

According to the TIME magazine article, MS has lost billions on Xbox hardware, not a dime of profit on the hardware.

Tht is one reason that they are ready to move to the next gen IMO with a smaller (shrinking) loss per unit and hopefully hit the model that you have outlined here, limiting their hardware exposure.

 

[ERP]

Two things they make the license fee on any manufactured game whether it sells or not.

WHAT??? Holy crap, how does that work? So if a publishers manufactures 100,000 units of a game they expect to be a moderate hit, and it only sells through 30,000, they still pay Sony 1 million instead of $300,000?

.Sis

Yup.

You manufacture what you expect to sell. You pay the license fee as part of the manufacturing cost. If you don't sell it you don't get a refund.

 

[Tap In]

Two things they make the license fee on any manufactured game whether it sells or not.

WHAT??? Holy crap, how does that work? So if a publishers manufactures 100,000 units of a game they expect to be a moderate hit, and it only sells through 30,000, they still pay Sony 1 million instead of $300,000?

.Sis

Yup.

You manufacture what you expect to sell. You pay the license fee as part of the manufacturing cost. If you don't sell it you don't get a refund.

that's crazy. No wonder they can take a hardware loss. So really, we have the developers to thank for allowing such cutting edge hardware in these systems at $300 prices.

 

[DigitalSoul]

Personally, I think Sony is absolutely crazy for releasing the PS3 next year, given the incredible sales of both games and PS2 console units. PS2 is crying out to be milked a lot longer, from a business perspective

When PS2 came out, PSone was in its 6th year(including the time it was released on japan). Even with PS2 on the shelves, sony was still supporting PSone. The PSone had, like what, a ten year lifcycle? People who got the new PS2 were still able to play all their favorite PSone games.

So even with the PS3 out, Sony isn't going suddenly drop support PS2.

 

[Sis]

Personally, I think Sony is absolutely crazy for releasing the PS3 next year, given the incredible sales of both games and PS2 console units. PS2 is crying out to be milked a lot longer, from a business perspective

When PS2 came out, PSone was in its 6th year(including the time it was released on japan). Even with PS2 on the shelves, sony was still supporting PSone. The PSone had, like what, a ten year lifcycle? People who got the new PS2 were still able to play all their favorite PSone games.

So even with the PS3 out, Sony isn't going suddenly drop support PS2.

That misses the larger point, which is the expense of pushing out a new generation of a console and the effects it has, both psychological and financial, on the current generation. The cost of pushing out a new console is a fixed cost and the longer you are able to keep the console churning a profit, the lower that fixed cost amounts to.

I would argue that their are two reasons to release a new console:

1) your current generation sales are falling and you need to deliver something to drive sales back up again. This is obviously not the case of the PS2, for Sony.
2) To ensure leadership in the next generation, by not losing ground to competitors.

The first is a very natural trend, the second quite unnatural and ends up costing "potential revenues" that are never realized.

.Sis

 

[jvd]

They have to launch in the next year . They can't let ms have the market to themselves for 2 years . They would have the most powerfull system sure. But by then ms will have 10-20 million + units and they will be in the situation ms was in or worse . It would be hard to convince the average person to wait for the ps3 for 2 years when the x360 is on the market making the ps2 graphics look like a joke

 

[Sis]

They have to launch in the next year . They can't let ms have the market to themselves for 2 years . They would have the most powerfull system sure. But by then ms will have 10-20 million + units and they will be in the situation ms was in or worse . It would be hard to convince the average person to wait for the ps3 for 2 years when the x360 is on the market making the ps2 graphics look like a joke

Exactly my point tho. MS has forced their hand. What's left to be seen is exactly how this affects PS2 sales of consoles and game units.

.Sis

 

[mckmas8808]

Exactly my point tho. MS has forced their hand. What's left to be seen is exactly how this affects PS2 sales of consoles and game units.

.Sis

Sis you seem to be a very well thought out person so listen. The PS2 hardware sales and software sells are pretty much a sure thing. Think about this.

1. The Xbox will not be on store shelves next year due to Nvidia not making any more GPUs for it.

2. The GC sales are already bad enough. And comparing the GC titles being released to the PS2 games there is no comparison. The PS2 will crush the GC sales in 2006.

3. With the Xbox1 out of the picture in 2006 the PS2's only real good competition in the U.S. will not be challenged against another console of this gen.

4. A price drop will keep its sells high. Some casual gamers will rather pay $129 or $99 for a PS2 than pay $299 for a X360 or PS3.

5. The prices of games will continue to fall therefore keeping the PS2 game sells pretty solid for a number of years.

 

[randycat99]

mckmas8808 speaks the truth. On top of that, XB2 may live a difficult life with PS2 low-balling it in price on the low end and the spectre of PS3 clobbering it on technology and graphics on the highend. There won't be a period in time for XB2 where it won't be running up against a significant sales rival- not in its introduction, not in its midlife, not in its senior life.

 

[Fafalada]

What's left to be seen is exactly how this affects PS2 sales of consoles and game units.

IMO not at all. People shopping for 100$ consoles aren't gonna be looking at 360 for next few years, price brackets are too different.
PS1 had less momentum going into the nextgen, and still came out as second best selling console over last 5 years, by a margin of nearly 10Milion over the 3rd XBox - all courtesy of 100$ and lower price range.

 

[Qroach]

The real question is, how many PS2 owners out there are ready for a new console. Of course PS2 is going to sell really well, there's always late adopters/casuals that will pick it up due to a cheap price. However there's many current PS2 owners that had thier consles anywhere from 2 - 5 years that are going to want a new machine.

 

[Sis]

What's left to be seen is exactly how this affects PS2 sales of consoles and game units.

IMO not at all. People shopping for 100$ consoles aren't gonna be looking at 360 for next few years, price brackets are too different.
PS1 had less momentum going into the nextgen, and still came out as second best selling console over last 5 years, by a margin of nearly 10Milion over the 3rd XBox - all courtesy of 100$ and lower price range.

So I'll state it more directly, since I don't think my point is coming across. the PS2 does not lose sales to the Xbox 360--they are different brands, different companies, different loyalties, and most importantly, different price brackets.

What the PS2 is competing against will be the PS3. Psychologically, I would believe, a consumer is harder pressed to spend money on something considered outdated, then if the PS2 lived in a vacuum by itself.

So the question is, all things being equal, would Sony be releasing the PS3 next year? That is, absent a competitor releasing a product early, would it? Or, the more appealing mental masturbation excercise, should it?

I'm looking at the 2005 PS2 console sales (month to month) for NA, and I see significant increase over 2003. Now, this could be due to the 4th quarter shortage from 2004, or it could just be that the PS2 has long legs. Or maybe everyone is just enamored with the slim re-design.

Bottom line is, I gotta expect that releasing the next generation of a product has GOT to negatively impact the sales of a current product, regardless of whether it is a video game console or cell phone or automobile.

You do get consumers who take advantage of the reduced price point that happens on the tail end of a product's life cycle. So what I'm talking about is the whether the PS2 is having it's end game introduced prematurely. I base this on the sales figures I have available, and with knowledge that the PS3 was probably announced in reaction to the Xbox 360.

In other words, a LOT of flimsy info.

.Sis

 

[Tap In]

My opinion is...going forward I think we can throw out almost everything that happened in the past 10 years in console sales.

The more realistic the games become (as they will in the next 2 gens) the more widely accepted gaming will become and no longer seen as a kiddie toy. The perception of it will become more of a cinematic experience akin to watching a DVD at home.

That along with the aforementioned shift in high speed online gaming (I predict a huge increase) will continue to allow gaming to grow even bigger than ever causing people who never would have been an early adopter to now look at next gen (or at least next, next gen).

Seeing games running in a Samsung High-def X360 or PS3 kiosks in Target/Wal-Marts is going to be the beginning of a shift in thinking IMO.

 

[SanGreal]

If anyone is interested, as of March 31, 2005 Sony had manufactured 87.7 Million PS2s and 824 million games.

Microsoft still loses money on Xbox hardware. Also, as of March 31, 2005 their attach rate is 8.0 games per console, no clue about Sony.

 

[Shifty Geezer]

Profit = $80 + profit on hardware.
loss for the lifetime of the console. But looking at the PS2 numbers:

7.2 billion dollars . Now, since the console unit's overall loss/profit is unknown, we can just safely assume that it falls somewhere between these two values--both of which are very healthy numbers.

So it's a matter of scale.

Further thoughts. At the moment PS2 has approaching 100 million units sold, but it's taken a while. GC and XB are around 20 million. That's looking at 1/5th Sony's takings on software. Now add RND costs and marketting and advertising...

With Sony spending perhaps $2 billion in total on PS3 (though that include other areas of technology so it's not a clear figure), attaining the same attach ratio, it'll be what...40 million consoles sold to break even? Likewise what's the minimum number of XB360s needed to be sold before MS are looking at a profit (recovered costs)? We don't know what part microtransactions will play, but it seems to me anything less than 30+ million units isn't going to be making the parent company money. Nintendo aren't in the same boat as they earn perhaps 3x as much for attach ratio as many of those games are 1st party with larger profit margins.

Which shows that producing a console is a HUGE investment and not something to be taken lightly! Also explains why Sony and Nintendo were keen to delay next-gen - it's only once the installed base is there you start to make money, and providing new hardware is going to eat into that period of profitability.

 

[jvd]

The ps2 sales will most likely peak this year or next year and start falling as more people adopt the ps3 and x360s . Its what happened with the psone. Its software sold very well till about a year after the ps2 came out. After that it was a slow drop off