The console losses discussion thread (or 'how companies blow billions on products')*

[Shifty Geezer]

I've deleted the last two Disc Ratios posts. As Carl has pointed out, it's moot to the overall discussion, and not worth flogging over and over, especially when the subject is getting het up. Any further posts arguing over the sales rates of movie discs on consoles versus standalones will be chopped.

 

[Cheezdoodles]

Btw. when did the developers get their final machines with the RSX?

¨
March 2006. Prior to that they had 7800GTX devkits.

If Sony wanted to launch in dec 2005, RSX would could probably have been made ready for that aswell, but they had all the time in the world..

 

[standing ovation]

You missed Sony's heavy investments in first party game development. They also explore non-games like Home, Dress and Life. Even then, hardware is still a major R&D, logistic, inventory and support cost.

To the contrary, it seems like Sony can't throw away its IPs fast enough!

You only counted hardware R&D cost. Hardware business is (much) more than that. In general, hardware has longer lifecycle, and its entry price *is* important in drawing consumers in.

Apple gets it. Nintendo gets it. Microsoft is starting to get it. But Sony hasn't got a clue. You cannot put the cart before the horse.

What's pulling hardware is content so, logically, you will need to design a cart that can be driven. You cannot do it the other way around and expect success.

But Sony has made this huge cart only to find there aren't enough horses to pull it.

 

[patsu]

To the contrary, it seems like Sony can't throw away its IPs fast enough!

Huh ? Please give specific examples ?

Apple gets it. Nintendo gets it. Microsoft is starting to get it. But Sony hasn't got a clue. You cannot put the cart before the horse.

By now, everyone gets it already. The problem is who can execute better.

What's pulling hardware is content so, logically, you will need to design a cart that can be driven. You cannot do it the other way around and expect success.

But Sony has made this huge cart only to find there aren't enough horses to pull it.

Sure... but none of these say anything about hardware not being important. The most successful stories so far all have innovative, reliable hardware _and_ software for their intended audience (e.g., iPod, Wii, Walkman).

 

[-tkf-]

But Sony has made this huge cart only to find there aren't enough horses to pull it.

Well it looks like some are starting to ride the cart, so there must be some horses pulling it.

 

[standing ovation]

Huh ? Please give specific examples ?

• Eight Days And Getaway No Longer Going Concerns
• Formula 1 Gets Greedy, Sony Ditches License
• Heavenly Sword 2 Axed, Ninja Theory Moving

By now, everyone gets it already. The problem is who can execute better.

Well it's obvious: the company with "unrecoverable" losses isn't so great on execution.

Sure... but none of these say anything about hardware not being important. The most successful stories so far all have innovative, reliable hardware _and_ software for their intended audience (e.g., iPod, Wii, Walkman).

You're right. Hardware is important. But it is only a piece of the puzzle. Software and services comprise the rest of the jigsaw.

Hardware is worthless without content, so the latter must be the guiding factor.

 

[standing ovation]

Well it looks like some are starting to ride the cart, so there must be some horses pulling it.

Sony has hitched up a miniature pony to the PlayStation chuck wagon when what it really needs is a team of Anheuser-Busch Clydesdales. Sony needs the wherewithal to bring its highbrow promises into the present in a timely manner, and this can only happen by pouring considerably more resources into software and services.

You're right though. Consumers and content providers are more than welcome to ride. They just need to realize that getting to their destination may take awhile.

 

[Betanumerical]

• Eight Days And Getaway No Longer Going Concerns
• Formula 1 Gets Greedy, Sony Ditches License
• Heavenly Sword 2 Axed, Ninja Theory Moving

Well it's obvious: the company with "unrecoverable" losses isn't so great on execution.



You're right. Hardware is important. But it is only a piece of the puzzle. Software and services comprise the rest of the jigsaw.

Hardware is worthless without content, so the latter must be the guiding factor.

You forgot the Rumor: part in the front of the Formula 1 article.

 

[Jack_Tripper]

Sony has hitched up a miniature pony to the PlayStation chuck wagon when what it really needs is a team of Anheuser-Busch Clydesdales. Sony needs the wherewithal to bring its highbrow promises into the present in a timely manner, and this can only happen by pouring considerably more resources into software and services.
You're right though. Consumers and content providers are more than welcome to ride. They just need to realize that getting to their destination may take awhile.

I dunno that that's true - Sony's got great brand recognition, I think they can wholey sit on their ass and do nothing but let 3rd and 1st party dev's knock out another ring of new games based solely on the old iterations and still end up extroidinarily competitive. I'm not agreeing with this concept - but I don't have to agree with it for it to be true.

Hell - everyone knows at least one "Sony Loyalist" not even on the games front- just the Brand Name (guys like my dad who are still recalling the 80's and early 90's when Sony had clearly superior products, in a given segment, which costs tons more than the competition - will STILL go out and pay top dollar for the Sony name, even though they don't offer the same level of quality anymore - or at least, not leaps and bounds above the competiiton). That said, I can name like 2-MS loyalist - and their both egg-head geek types, i.e. not a huge cross-section of the buying populous

Jack

 

[patsu]

• Eight Days And Getaway No Longer Going Concerns
• Formula 1 Gets Greedy, Sony Ditches License
• Heavenly Sword 2 Axed, Ninja Theory Moving

That's business as usual though. Sony clearly is still heavily invested in first party games and non-games. Your 3 examples there do not prove that Sony is oblivious to the importance of software. It simply means that the management felt that the resources can be reinvested into other IPs for better results.

Well it's obvious: the company with "unrecoverable" losses isn't so great on execution.

Not so. Microsoft is top on that list with the string of XBox writeoffs. Sony's 3.1b losses are not writeoffs, they are more like investments. Both are heavily invested in content.
I don't think the losses say anything about their software strategies per se.

You're right. Hardware is important. But it is only a piece of the puzzle. Software and services comprise the rest of the jigsaw.

Hardware is worthless without content, so the latter must be the guiding factor.

Your original note only considered hardware R&D cost, and claimed that hardware cost is negligible. But Xbox's and Playstation's losses proved otherwise.

Hardware is important to set to entry price and also minimize customer support cost. Look at MS trying to cut price further to stimulate more sales. Clearly software alone may not form a strong enough draw to meet their growth expectation.

On top of that, both MS and Sony are also racing to lower their BOM costs. All these represent significant investments.

 

[RancidLunchmeat]

Not so. Microsoft is top on that list with the string of XBox writeoffs. Sony's 3.1b losses are not writeoffs, they are more like investments.

I had this discussion earlier with Carl.

Sony's 3.1B losses are just as much writeoffs as Microsoft's.

The only way you could attempt to argue differently is to say that Sony was prepared for these losses and therefore viewed them as an investment, where the losses surprised MS.

And that's a perspective that lacks factual foundation. I'm not saying it couldn't be true, only that if it were, the facts aren't readily available as public knowledge.

Who is to say that MS wasn't aware there was a cost involved in lowering their QA standards to insure they were first to market?

And who is to say that Sony didn't completely miscalculate the market for consumer electronics exceeding $600?

 

[patsu]

They have very different meaning accounting-wise. Some of Sony's losses/investments are depreciated or amortized over a few years. Besides investments, some of MS's losses were written off in the accounting sense. Both sell their consoles below cost to attract buyers. I think that gets categorized under cost of sales (Sales and Marketing cost). The rest are essentially operating overhead.

At the end of the day, they are just money. But they are different measurement/reporting-wise.

 

[Cheezdoodles]

Besides investments, some of MS's losses were written off in the accounting sense. .

Not anymore than sony. Pretty much all stock listed companies have an accounting department that does this...

 

[patsu]

Every business has their ups an downs, but I am referring explicitly to the $1b write off in the Xbox business since standing ovation is clearly comparing the game console business units. It is a large sum. I think they also did similar write-offs when they terminated Xbox 1 early.

http://blog.seattlepi.nwsource.com/microsoft/archives/118838.asp

Microsoft CEO Steve Ballmer addressed the topic on stage: "We have to learn from our mistakes. It was painful to announce the write-off that we had to announce, and yet we knew we had to take care of our customers," he said. He promised that Microsoft will be "world-class when we do hardware."

None of these losses say much about MS's content strategy (but they do highlight the perils of hardware cost). So standing ovation can't really use the amount of losses to gauge success/failure in their content businesses.

 

[RancidLunchmeat]

hmmm?

It's my understanding that all MS's 'write-offs' consisted of was moving the dollars from the balance sheet to the income statement and recognizing them as expenses.

Sony's $4B losses are already expenses, so I don't really see how they aren't the same?

 

[Cheezdoodles]

Patsu, no disrespect or anything, but could it by any chance be that your fairly inexperienced with accounting? Because about 35% of my classes are accounting based, and its fairly obvious that what MS is doing is completely normal and the same as everybody else is doing, including Sony.

Every business has their ups an downs, but I am referring explicitly to the $1b write off in the Xbox business since standing ovation is clearly comparing the game console business units. It is a large sum. I think they also did similar write-offs when they terminated Xbox 1 early.

What is your problem with this? They aren't hiding anything, its not like the 1b write off is somehow invisible now. The 1b write off means that MS is posting a 1b loss. Just like sony post their expenses. Their choice to write off 1b and set a side that cash for warranties (And make the next years spreads sheet look nicer) is their to make. Just like Sony "hides" the real PS3 cost in their books because the gaming division includes PSP and PS2 (+ they probably share a lot of the costs in between other divisions with bluray)

 

[patsu]

Ostepop, I have indeed returned most of my accounting knowledge back to my teachers

My point regarding MS's write-offs is not because they are abnormal practices, but that it is a large sum of money that are pure expense (referring to standing ovation's statement about 'bad execution' and hardware cost being negligible).

As for RancidLunchmeat's comments, how does the PS3 production cost factor in in Sony's losses for 2008 ? The resulting inventory can bring in returns for the company when sold.

 

[Cheezdoodles]

As for RancidLunchmeat's comments, how does the PS3 production cost factor in in Sony's losses for 2008 ? The resulting inventory can bring in returns for the company when sold.

Which is why warehouse stock has book value based on FIFO....

 

[patsu]

Right. These investment will fetch more revenue in a future FY if PS3 move games and movies. How long before they turn a profit is a separate question altogether.

Even if it can recoup its investment, Sony said, it's still possible to have lost large amounts of money on the platform's introductory period, and even a successful PS3 might take a while to replace what it cost to produce. These possible outcomes are currently a risk for the company, Sony said.

 

[RancidLunchmeat]

Right. These investment will fetch more revenue in a future FY if PS3 move games and movies. How long before they turn a profit is a separate question altogether.

So have we now come to a mutual understanding that MS's 'write-offs' are no different than Sony's $4B losses?