*Spin off* Bill of Materials and Cost/Price Reductions of Current Consoles

Consoles aren't normal retail. Stores can take anywhere close 50% of the total retail price on some products.

There is very little profit to made on an actual console sale this is why you don't see much disparity in retail pricing. Retail sells console for next to nothing in profits because consoles act as a leader in software and accessories sales where there are margins. From what I can gather whole sale prices on the PS3 is only slightly less than retail and again wholesalers see alot better margin on software and accessories.

 

10% is very little profit. Retails aren't a charity, and there is no way a chain like Walmart would be 'forced' to sell something at extremely low margins (although they may choose to do so on their own), they'd stop carrying the product, and what would Sony or MS or N do about it, nothing?

 

Retailers don't have to be charities to sell a console at a low margin. You ever heard of the term "loss leader".

Walmart or any other chain aren't forced to sell anything. (on a side note...have you ever seen a retail store that sells game software and accessories but no hardware) However, software and accessories sales are more than enough to encourage selling console for practically little profit margin.

Even though consoles aren't real loss leaders, they share very similar characteristics with products that are typically used as loss leaders.

You ever wonder why consoles aren't sold front and center in their displays. Consoles get less prominent space then memory cards or face plates. Half the time they are on the very bottom shelf, very top shelf or in the back.

Most retailers aren't worried about the margins on consoles because software and accessories are where the real profits exist.

Retailers sell consoles like gas stations in the US sell gas, where there only a few cents to be made per gallon and all the profits exist in selling groceries, snacks and cigarettes.

 

They could easily sell the software without the hassle of selling the hardware. I've already suggested the the margins on them are low at ~10% or so, there is no way in hell that Wal-mart is taking a loss on them ($5 or $10 would be losing money for them because of their costs). Manufacturers certainly don't dictate price policy to a company like wal-mart, its quite the other way around.

 

MS, Sony and Nintendo for one probably don't encourage selling software and accessories only. Retailers who sold hardware would probably get better wholesale pricing on software and accessories, which is probably the technique MS and Sony uses to get retailers to sell hardware at low margins. Sweeten the software end where everyone sees profits or the hardware end where at the beginning of the generation, manufacturers take it in the rear.

Plus, come holiday season your retail chain would sit at a major disadvantage at attracting the 10-15 million worldwide consumers who buy consoles at this time along with all that software and accessories that are bought when the console is purchased.

Even a 10% profit margin on a console is chump change. The 360 sold 180K-200k in the US during the slow months of this year. 180-200k with $40 dollar retail profit margins represent 7.2-8 million of profits in a month divided amongst every single retail store that sells the 360 console in the US. Even if you sold 50 units in a week, you're only talking $2000 in profits.

There is not much difference between $250/$500 and $2000 when software and accessory profits are trumping those numbers by a great margin.

 

That might make sense if you're talking about some fringe mom and pop shop not wanting to carry the hardware, but if wal-mart suggested they have a problem with selling your product at a loss you resolve their problem or you accept losing 20+% of the NA retail market. Wal-mart has never had a problem forcing companies to bend to their will, I doubt they'd make an exception for Sony or Nintendo or Microsoft.

While it may be a disadvantage for them not selling product x at certain times it would be a hell of a lot bigger disadvantage for the console manufacturers all of the time. If Wal-mart won't sell your product, your product is going to sell significantly less.

Doesn't matter. Manufacturers need retail more than the other way around. Wal-mart has ruined a number of companies with their penny pinching policies, no reason to think they would make exceptions for consoles.

 

Yet, even though street value of the Wii has been consistently above $250 and both the 360 and the PS3's street value was above MSRP at launch, you never saw Walmart break ranks and sell above MSRP without bundling software and accessories. The game market isn't dependent on a chain retailer. Most gamers won't go into Walmart and go...

"Or I guess I'll buy a console today since Walmart doesn't carry the Wii or the PS3, I guess I'll buy a 360"

Consumers might do that for shampoo or lotion, but it won't do that consistently for console and games. Walmart doesn't have the same leverage with MS, Sony or Nintendo like they do other manufacturers or else Walmart would have better pricing on the games and consoles.

Consoles are brand centric not product centric, so MS, Sony and Nintendo have a lot leverage. Consumers don't go to retail chains looking for consoles, they go looking for "xbox 360", "PS3" or "Wii".

 

BOM effects how you can price something right?

I think most still see it as just a console and won't much care for that $50 price premium vs. what X360 will have to offer on that front.

Goals can change and have done so in the past, if push comes to shove MS is in a much better position to play price war games than Sony is my whole point.

 

Sure they do, and it has nothing to do at all with other comparative offerings. I don't think Alpha ever suggested that was a key component.

His position is that if Walmart isn't making a profit (and as he stated, and you agreed with your phantom 50% profit margin, that even a 10% profit margin is extremely low) selling hardware they could simply stop selling the hardware and sell only software and accessories that they could profit on.

If MS, N, and Sony don't agree then Walmart simply wouldn't carry their software or accessories either. It would be MS, N, and Sony who would be hurt more in that scenario than Walmart.

For you to believe that retailers sell consoles at below 10% profit or even at a loss (as you mentioned earlier 'loss leader'), they'd have to have a simply huge profit margin on the software and accessories. We all know that's where MS and Sony recover their costs for selling the consoles at a loss to begin with, developers, publishers and the actual hardware fabs have to get paid as well, how big do you think the $60 software pie actually is?

 

FWIW initial retailer profits on consoles are horrible for the retailer close to 0% in some cases, but the early rush drives people through there doors.
It's one of the primary reasons that "bundling" has become so prevalant at console launches, retailers don't want you buying the shiny new PS3 from them then walking down the street and picking up the games.

As the product matures though I would imagine that the profit margins increase for the retailer, I have no idea what the current margins are on the various boxes for various retailers.

 

In absolute terms or in relative terms? The 50% profit margin that was presented earlier is a rather optimistic consumer oriented view of what the retailers make. In most cases, they make well over 100%. It's one thing to actually know that retailers only make 1% profit selling consoles, it's something else to know that as far as retailers are concerned 'We don't make anything off selling hardware'. Because to Walmart, making 10% from selling hardware really is 'nothing', because that 10% probably doesn't cover their overhead.

The difference is only relevant as this is a discussion related to BOM and cost/price of the consoles. Walmart might net next to nothing by selling hardware because the 10% doesn't cover their costs. As Sony (for example) lowers their price, if the profit margin doesn't increase for the retailer, then they'd begin to lose money after factoring in overhead.

Clearly, 10% (made up number that we're using) of $499 is greater than 10% of $399.

Because the retailer is unlikely to eat that additional cost, that means that Sony actually has to take the additional loss. Not only by lowering the price, but by increasing the profit margin to the retailers to at least remain constant.

Yet, I have difficulty seeing how this sliding scale is actually feasible based upon my statements above. As the product matures, the price lowers, so the margins to the retailer would have to increase exponentially and that cost would have to be absorbed by the manufacturer.

Ie: 10% of 499 is 49.99, we all get that. It's easy.

10% of 399 is 39.99. The margin has remained the same, yet the net to Walmart is now less while their overhead involved would remain the same. (Sales force, electric bill, rent, etc.. doesn't decrease when Sony drops the price of the PS3)

In order to make things 'fair' (HA!) if Sony dropped the price of a $499 console to $399, they'd have to increase the profit margin to Walmart from 10% to 13%.

So a $100 price drop doesn't cost Sony $100. It costs them $150.

 

First, a retailer can't exceed "well over 100%" profit margins. Explain how that happens? Do some manufacturers pay retailers to take products off their hands.

In Gamestop's fiscal year 2006 they recorded in 1.073 billion in hardware but only recorded 77 million in gross profits or a gross margin of 7.2%.

Hardware not only included consoles but controllers, memory cards, etc. Hardware accessories have higher profit margin than consoles and thus margins on consoles are less than 7.2% for Gamestop.

Even then the year before GameStop only had a 6.1% margin and 4.1% the year before that on hardware and they increase gross margin by..

"The gross profit on new hardware increased from 6.1% of sales in fiscal 2005 to 7.2% in fiscal 2006 due to an emphasis on selling product replacement plans along with hardware platforms."

You know why retailers are willing to except small margins on consoles. Here it is straight out the horse's mouth.

"We believe that selling video game hardware increases store traffic and promotes customer loyalty, leading to increased sales of video game software and accessories, which have higher gross margins than video game hardware."

"The gross profit on new hardware increased from 4.1% of sales in fiscal 2004 to 6.1% in fiscal 2005. Because new hardware platforms typically have lower margins than established hardware platforms, as expected, the launch of the Sony PSP and the Microsoft Xbox 360 had an offsetting effect on new hardware gross profit as a percentage of sales."

*All quotes come from GameStop annual report 2006

http://library.corporate-ir.net/library/13/130/130125/items/249838/GameStop_2006_annualreport.pdf

 

Here are numbers from an anonymous compusa employee.

http://www.joystiq.com/2006/10/16/explainer-wiis-push-xbox-360s-pull/
http://www.engadget.com/2006/10/07/wii-retail-details-markup-and-endcaps/2

"When we sell a game we make on average 8.3% gross margin. That does not take into account any of the cost to store the video game or labor to receive/ship an item. The only way we can make a profit on an item is to sell it over the MSRP, but unfortunately we are not allowed to do this. Take a $400 console; we only make $5 on the sale—that is a .01% gross margin (note the decimal point). The game companies make their profit selling to us. We make no profit selling to you."

DVD Empire

http://thexboxdomain.com/2007/02/01/dvd-empire-quits/

 

IIRC the 40GB version had been manufactured since this summer, I expect 1 quarter lag for it rather than over half a year. XDR is supplied by Elpida, Qimonda and Samsung, it's not like they are not competing at all. GDDR3 is supplied by these 3 companies too.

If you allow me to guess, PS3 40GB will be $349 and 360 Premium will be $349 too in this March for GTA4. Since I couldn't forecast the $400 price of the 40GB version last year, this time I try to be a little more bullish The 65nm RSX will bring it. It's in line with the "over 10 million PS3 in FY07" forecast by Sony.

 

The systems are usually priced wholesale a few bucks below retail. Not as bad as the compusa example, but it's not much. For example, I think a 360 premium costs 332 wholesale. Other systems are similar, usually about $15 profit. Very low for such an expensive item, yes.

 

From my own experience, profit on Console hardware is close to nothing. Games and addons is where the money is made.

 

Thought it was more like March 2007 for Cell? Dunno about the rest.

IIRC the avg. time to market from start of production is 6 months for most fabs...

I'm not sure that matters as there is still only 1 major buyer of XDR vs. many for GDDR3, volume vs. niche...

 

The IBM article is not clear about whether it was volume production or not.

Apparently Intel shipped a 45nm CPU 1 month after the first volume production, I think it depends on the volume.
http://www.intel.com/pressroom/archive/releases/20071025corp.htm

Since there are 3 suppliers for XDR, if one of them is cheaper it gets more orders. Unless they make a cartel it works to lower the price. Also, in a monopsony, SCE can say "if you are too expensive we don't buy from you" and manufacturers often have to yield since there are no other customer.

 

Based on what? The time to market do also depend on whether they want to clear out old stock and/or if they want to build up a certain stock before launching the model, which certainly was the case of the 40 GB which launched in the beginning of the holiday season world wide (not the same date). If you are launching a cheaper new model/new hardware revision of an existing console in a different time of the year you certainly don´t need to support the same volumes.

As it seems Sony has a production capacity of more than 1 million units/month I think a new model/revision could be introduced within just a couple of months from start of production in at least one market.

The Rambus memory of the PS2 certainly wasn´t a showstopper to the cost reduction of the PS2 if that means anything to you.