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

[patsu]

Uh.. and? The Cell and BD associated BOM costs aren't even close to what we're talking about.

Kaz Hirai highlighted the cost of PS3 as one of the key reasons for the huge loss when Sony was able to shrink Cell to 65nm. I'll take his word for it. Granted, the SKU also contains the GPU, advanced cooling and power supply.

Hell, the BOM costs of BD aren't even paid for by stand alone players at this point.

What exactly is your point?

I don't know anything about the standalone players.

 

[RancidLunchmeat]

First, I'd like to say.. ACK! Sorry, to everybody who participated in or just attempted to read this thread and was presented with my last couple of messages consisting of one sentence paragraphs, CAPS usage, italics and bold use as well. Combine all those things together, and you get an epic fail at interweb usage. I could make excuses for it, but that would just be a waste of time, so to everybody, please just accept my apologies for doing so.

Also, I've re-read the last three pages of this thread, and I realize that there is one point I misunderstood and I honestly have no idea what I was thinking about when I made my statement. Patsu: Clearly, the BOM costs of cell and BD are essential to the losses that Sony has sustained on the PS3. I don't know why I made the statement that they weren't related. I think I was replacing BOM cost with R&D cost in my mind. Clearly, your points about the BOM costs of Cell and BD influencing the loss on the PS3 are factual and a large part of the discussion.

As this thread appears to be winding down, I'm left wondering if Carl is an accountant too (and a more experienced one at that) because he is once again able to nail down specifically not only the accounting issues in common vernacular but also address the issues that I think sparked this debate which was the knowledge of both MS and Sony of the potential pitfalls and provide some insight into their motivation in going forward with the knowledge of those potential pitfalls.

Unless there is any specific cause for further debate/discussion (and I welcome it from anybody if it exists), I'm going to conclude here with the same summary I've said previously. MS's write-offs are no different than Sony's. Not only "accounting-wise" but also motivationally (apparently not a real word). MS's write-offs were a result of launching early due to manufacturing problems that they were aware of. It was only the extent of the problem that was unknown. Sony's losses were due to misjudging the market for their product at the initial price, and also due to the high BOM costs of the PS3 that includes the costs for cell and BD.

Yet, MS made their decision to take their losses because they felt the benefit of launching first outweighed the cost, and Sony made their decision to take their losses because they felt the benefit of pushing cell and BD tech outweighed the cost.

Both manufacturers made decisions motivated by what they perceived to be the ultimate goal. I think this discussion essentially boils down to what I've been harping on since Day One: Neither MS nor Sony are manufacturing consoles because they want to 'win' the video game market. MS knows that eventually digital distribution will be King and wants to position itself to get a portion of the licensing/servicing fees. Sony wants to establish BD as the physical media standard to replace DVD so they can get a portion of the licensing fees.

Anyway, the end result is that the losses are the same, unless there's factual evidence that suggests that MS's hardware failures took them completely by surprise (and we actually have evidence to the contrary), then it's not a matter of MS being 'stupid' and Sony making a calculated gamble which is what it appeared to me that Patsu was trying to champion with his repeated comments about how Sony's $4B loss was somehow 'better' than MS's $1B write off. Sony's $4B loss is in large part due to MS's $1B loss for ignoring QA and coming to market sooner. Had the 360 not existed or not launched a year earlier than the PS3, that $4B loss for Sony would probably be significantly less.

 

[Mintmaster]

The hardware failures of the 360 were evident almost IMMEDIATELY upon launch.

Where do you get the idea that it required a YEAR in order to determine the design flaws?

Because they would be fixed earlier if they were so evident and they wouldn't have stuffed the retail channels early on either.

Not having a design fix for a year and half and having millions of defective units produced and sitting in warehouses/retailers cost MS a truckload of money. There's no way in hell that they knew the extent of the problem early on. Better cooling or a new GPU spin or better solder or whatever the solution was would cost a fraction as much as the $1B hit they took as it was.

The only logical explanation is that MS found out way after launch.

Had the 360 not existed or not launched a year earlier than the PS3, that $4B loss for Sony would probably be significantly less.

How? You think Sony would have sold fewer units? You think they would have sold at a higher price? Hell no.

The only excuse Sony could possibly have is being overly optimistic about cost reduction, but that's just lame. For every PS3 they sold, they knew how much it cost and how much they were losing. The same is not true for MS due to the return rate.

 

[one]

These expenses didn't take MS by surprise. They EXPECTED them. The only surprise was the EXTENT of the expenses.

Please... Let's all get real.

MS KNEW they were launching early with NEXT-GEN tech. They KNEW they were going to suffer problems as a result of that.

MS did NOT expect the problems to be as significant as they were.

If MS had been really aware of it and still had forced the 360 release, shareholders would be able to start a class action...

 

[Carl B]

If MS had been really aware of it and still had forced the 360 release, shareholders would be able to start a class action...

Not if MS can make the case that launching with corrected hardware would have cost them potentially more though, in terms both monetary and market position wise. Personally I think to the extent that the problem could not be remedied prior to launch, they likely made the right decision.

Also I don't think MS' shareholders are a class that is quick to sue over market growth efforts, an area where they are always wanting MS to give a go. The class action risk was always from the owners of the console, a move which the $1 billion charge was designed in part to stem.

 

[Carl B]

The charges it doesn't account for are charges related to consoles that were serviced for the issue in-warranty during that first year. Those charges would already have been on the books, and to whatever extent they proved a monetary drain, that is a drain above and beyond the $1 billion set aside.

The 'charges' you're thinking about are the service fees that were charged consumers.

 

[one]

Not if MS can make the case that launching with corrected hardware would have cost them potentially more though, in terms both monetary and market position wise. Personally I think to the extent that the problem could not be remedied prior to launch, they likely made the right decision.

Also I don't think MS' shareholders are a class that is quick to sue over market growth efforts, an area where they are always wanting MS to give a go. The class action risk was always from the owners of the console, a move which the $1 billion charge was designed in part to stem.

I was tempted to mention how lenient MS shareholders are toward incomplete software releases but I leave it out for now :smile: But one difference is, incomplete software is still making truckloads of money in a monopoly while incomplete hardware cost them money and brand reputation which affects future growth.

 

[Carl B]

I was tempted to mention how lenient MS shareholders are toward incomplete software releases but I leave it out for now :smile: But one difference is, incomplete software is still making truckloads of money in a monopoly while incomplete hardware cost them money and brand reputation which affects future growth.

Future growth is exactly the point here though; do you feel XBox would have been better off launching later with less fault-prone hardware? IMO the correct business move was to go ahead in Fall of '05. A delay would ironically have been more likely to bring a shareholder suit IMO. Not that I think either situation would have brought one on however.

EDIT: Well, going over the story from the time, MS is maintaining the line that they were unaware of the issue until further into the 360 launch. So I guess the discussion in that sense from a legal perspective is moot.

 

[Carl B]

I will see if I can find the conference call but I was under the impression that it did account for the in-warranty as well.

Well, going back in time again here's an excerpt from the story back in July '07:

...An issue that has gained increased traction with the press over the past several weeks, it was disclosed by Microsoft that the reported rate of hardware failure has seen a marked increase over the last several months relative to the first twelve. Without giving hard figures when asked - which Microsoft has been reticent to discuss for some time - Robbie Bach stated that the failure rate "has been unacceptable," while saying also that the issue "wasn't on our radar screen" for the first year post-launch. Increased call volumes, repair requests, and press coverage triggered an investigation of the 360 hardware within Microsoft that has led to the identification of several problem areas within the design of the console.

Microsoft went further by indicating that the problems have not been local to their suppliers, but rather a failure of design that has been corrected and addressed via a revision of the fundamental hardware. Though not explicitly described, such a change will likely take the form of a motherboard revision, as well as possible component placement changes - both factors that have been fingered in the past as probable causes for the ''red ring'' failures.

In terms of the ~$1 billion charge, roughly half will be taken up front to account for existing consoles in the consumer space affected by the issue, as well as to absorb losses due to existing inventory Microsoft will write-off as a result of the failures. As Microsoft is providing their warranty retroactively, an important aspect of the extended coverage will take the form of a refund given to all 360 owners who have paid to have their ''red ring'' issues corrected while out of warranty. Beyond the regular accounting that has reflected warranty coverage expenses quarter-to-quarter, this one-time effort towards resolving current issues will result in a roughly $40/console cost for all units shipped thus far by Microsoft.

The second half of the ~$1 billion charge covers what Microsoft feels will be liability exposure over the next 18 months or so as a result of the extension, and will be drawn against cash on hand on an incremental basis, as that liability is realized going forward...

http://beyond3d.com/content/news/331

The first two paragraphs above I included simply for color in terms of the "was Microsoft aware" situation we're discussing; it basically goes on record as their not having known. Well, that would be a different situation than the one I was assuming earlier in the thread, but I can't argue with the past. Scary how quickly people (I) forget things.

The second two paragraphs are the ones I think are along the lines of what you were thinking. But again, for any money paid out of MS' pocket prior to the 4th quarter of that fiscal year to service the console warranties, that would already have been on their books and cannot be retroactively bundled into the $1 billion charge. What's being done retroactively there is that fees collected for shipping/servicing were being returned to the consumers. Part of it was also a charge from existing inventory console refurbishment and 'beyond repair' inventory write-offs.

 

[Carl B]

pfft...naturally your link leads me to something SONY related

Sorry my bad!

I had that page up also from being linked to earlier in the thread. I put the right link up now.

 

[one]

Future growth is exactly the point here though; do you feel XBox would have been better off launching later with less fault-prone hardware? IMO the correct business move was to go ahead in Fall of '05.

Actually I have a different view on the problem. I think they could avoid it and could still make it in Fall 2005 if they didn't try to spare money as the recent analysis (the one which was criticized as it said Microsoft designed the GPU instead of ATI) claimed.

 

[Tap In]

Future growth is exactly the point here though; do you feel XBox would have been better off launching later with less fault-prone hardware? IMO the correct business move was to go ahead in Fall of '05. A delay would ironically have been more likely to bring a shareholder suit IMO. Not that I think either situation would have brought one on however.

EDIT: Well, going over the story from the time, MS is maintaining the line that they were unaware of the issue until further into the 360 launch. So I guess the discussion in that sense from a legal perspective is moot.

absolutely agree. launching in 05 was not only prudent it is the only way they are even IN this game at the level they are today. sony would have steamrolled any momentum and taken the lion's share of the dev surpport. As it stands, the early launch (which was RIGHT on time by MS's schedule) was perfect for the moment.


I also agree that based on all the info I have read that MS had no idea of the ramifications of their design until 2006.

 

[JPT]

Somewhat related

http://www.tgdaily.com/html_tmp/content-view-38213-113.html

The Entertainment Merchants Association (EMA) released its 2008 annual report with a wealth of data revealing the most trends in TV, home video and video gaming segments. The flood of data reveals that video game publishers are closing in on the revenue of stagnating home video sales, Blu-ray looked like the losing HD format in 2006, but was able to reverse the trend thanks to the PS3 in 2007, Microsoft has sold 316,000 now useless HD DVD add-ons for its Xbox 360 console and the average person now spends $310 on movie and game entertainment per year.

 

[standing ovation]

absolutely agree. launching in 05 was not only prudent it is the only way they are even IN this game at the level they are today. sony would have steamrolled any momentum and taken the lion's share of the dev surpport. As it stands, the early launch (which was RIGHT on time by MS's schedule) was perfect for the moment.

Sure. An early launch helped, but I do not think it would have affected the outcome.

When it all comes down to it Sony and Microsoft seem to be circling over the same digital distribution carcass. Sony is trying to be first in the buffet line by virtue of context (hardware), whereas with Microsoft it is all about content (software and services). Given that both are dealing with programmable devices, Redmond's strategy seems more plausible.

Sony's strategy does not appear as feasible simply because, at the end of the day, they too have to worry about content -- a reality that may be even harder than it sounds for Sony:

Phil Wiser, the former CTO of Sony's US operations, reached a similar conclusion after he was tapped to salvage Sony Connect. "With digital entertainment, you have to think about hardware, software, and services that tie them all together," says Wiser, who managed to heave Sony onto the MP3 bandwagon before leaving earlier this year for a Silicon Valley startup. "But it's very hard to quantify the advantage of good software. If you're in a hardware company and you analyze it from a financial perspective, you just want to do it as cheaply as you can. Software and services are an afterthought."

Source: Wired Magazine, September 2006

Besides, the electronics industry is filled with specialists who can manufacture reasonable alternatives faster than Sony can develop new technologies.

 

[standing ovation]

I also agree that based on all the info I have read that MS had no idea of the ramifications of their design until 2006.

Of course Microsoft had an idea something could go wrong, as they were still trying to iron out wrinkles in design while the supply chain began mass production. I agree with you. They had no idea what would go wrong or they would have attempted to correct it. But within a matter of months disparate (RRoD) data should have begun to make sense; and by the time Robbie Batch spoke on the matter Redmond knew exactly what was going on:

Responding more rapidly to manufacturing glitches is just one benefit of the new business process solution that Microsoft developed to assist with the launch of the dynamic new Xbox 360. Overall, the new system is expected to boost on-time deliveries, slash inventory costs, improve productivity, and reduce development time. The Microsoft solution also helps overcome handicaps encountered during production of the first-generation Xbox system (for example, the inability to gather real-time visibility into the supply chain, leading to supplier inefficiencies and inventory write-downs).

Source: Microsoft

 

[patsu]

Phil Wiser, the former CTO of Sony's US operations, reached a similar conclusion after he was tapped to salvage Sony Connect. "With digital entertainment, you have to think about hardware, software, and services that tie them all together," says Wiser, who managed to heave Sony onto the MP3 bandwagon before leaving earlier this year for a Silicon Valley startup. "But it's very hard to quantify the advantage of good software. If you're in a hardware company and you analyze it from a financial perspective, you just want to do it as cheaply as you can. Software and services are an afterthought."

YES !!! I finally see someone in the hardware business admit it. This was the problem that caused Creative to abandon its interactive media player software R&D in the early 90s. Speaking to "scarred" ex-members in the team, I believe they were splitted into 2 camps: Nickel-n-dime the BOM cost; or throw in extra hardware and other investments so that software side has more room to flourish as they laid the foundation. The hardware side won after the founder stepped in.

When it all comes down to it Sony and Microsoft seem to be circling over the same digital distribution carcass. Sony is trying to be first in the buffet line by virtue of context (hardware), whereas with Microsoft it is all about content (software and services). Given that both are dealing with programmable devices, Redmond's strategy seems more plausible.

Sony's strategy does not appear as feasible simply because, at the end of the day, they too have to worry about content -- a reality that may be even harder than it sounds for Sony:

I read the situation differently. The gap we see now is mainly due to (i) split personalities within the Sony conglomerate, (ii) unfocused Playstation marketing, (iii) Sony's delay in learning and putting together their software on a brand new Cell architecture, and (iv) Sony's content vision is more complex and ambitious -- because it needed to serve multiple internal interests (Looking at Marlin DRM).

The fact that PS3 has a very large Flash implied that they were/are prepared to invest in software from the get go. Secondly, they also sank in large sum of money building their own first party IPs. Third, they won the HDM war by roping in the content owners early. All these activities indicate that their management know content is king. Afterall, they are already in the content business.

I would wait for their video service to be launched first to see what they have been up to for the past few years.

Besides, the electronics industry is filled with specialists who can manufacture reasonable alternatives faster than Sony can develop new technologies.

I think so too, but Sony does have its brand and innovative edge.

 

[Shifty Geezer]

I read the situation differently. The gap we see now is mainly due to (i) split personalities within the Sony conglomerate, (ii) unfocused Playstation marketing...

This is perhaps a step in the right direction :

"I am moving my base from the US to Japan later this year, because one of the roles that I feel myself and Worldwide Studios will play for the future of PlayStation is not only to create games, but to participate in the overall direction-setting of our company and our future platforms," said Yoshida, speaking to Threespeech.
...
"Our tech people in Worldwide Studios are in constant meetings with tech people in Tokyo on the hardware side. So I feel I have to be in Tokyo – to participate in the top management group of SCEI and really achieve the vision that Kaz has in terms of how this company should work going forward," he detailed.

 

[-tkf-]

Somewhat related

http://www.tgdaily.com/html_tmp/content-view-38213-113.html

Some more stuff from that report:

From your link:

Blu-ray title was priced at $33.03, while HD DVD movies cost an average of $31.77. Contrary to common belief, these prices were not much higher than new theatrical releases on DVD, which were priced at an average of $27.13, the EMA said.

6 dollars more for a brand new technology that just looks so much better, nice.

More from: http://www.cepro.com/article/87_of_ps3_owners_watch_blu_ray_on_console_study_finds/

The PlayStation 3 appears to be the Blu-ray player of choice, as 87 percent of PS3 owners watch Blu-ray movies on their console, says a report from the Entertainment Merchants Association.

And from: http://www.entmerch.org/annual_reports.html

It is estimated that, in 2012, sales of Blu-ray Discs will exceed those of standard DVDs and will generate sales of $9.5 billion.

 

[eastmen]

thats nice estimates. however how are they doing now in 2008 ?

For a while in 2007 i couldn't find new releases at my local best buy . they would order about 10 of each new bluray movie. Now however I can find them easily and they are only ordreing about 20.

I was a big hd dvd supporter but now that its dead (sadly ) i want something better than dvd to take over , however i don't see that happening with bluray so far

 

[AlphaWolf]

Some more stuff from that report:

From your link:
6 dollars more for a brand new technology that just looks so much better, nice.

More from: http://www.cepro.com/article/87_of_ps3_owners_watch_blu_ray_on_console_study_finds/


And from: http://www.entmerch.org/annual_reports.html

too bad they canned all the 2 for 1 deals