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

[Panajev2001a]

The splitting of revenue/profit over divisions is a bit difficult to penetrate.
For fiscal year 07 the electronics division (that supply the games division with the parts necessary to build the PS3) had an operating profit of 356 billion yen, an increase of 121.8% over the previous year(!).
So while one Sony unit makes a loss from the PS3, another makes a profit. Unless you have better info than this (which is open to shareholders,) it is very hard to pin a number on PS3 costs up until now. And once you start to consider the intangibles of how much the PS3 helped their BR effort and what that will mean in royalties and associated sales of TV-sets, video players et cetera, even Sony internally will have difficulties making a solid assessment.

However, unlike Carl, I'd say that now that we have seen sales, and how their PS1, PS2 console dominance has been completely wiped out (along with associated software revenues), I would be very surprised if Sony in retrospect feels that the high cost of the PS3 was worth it. A cheaper, less ambitious console, released earlier may well have been a better play, that would have helped them maintain their console market position and as Shifty pointed out, allowed them to spend a LOT of money promoting BR directly.

You make some valid points, but still I do feel that Blu-Ray would have lost to HD-DVD if PS3 weren't able to launch with a Blu-Ray drive in it.

Using Blu-Ray in PS3 was the only way to make sure (and many people at Sony had the same idea obviously) that Blu-Ray had a good chance to beat HD-DVD in the shortest period of time possible.

 

[V3]

Lucky for the PS3 owners, Sony didnt do anything of what you suggest and the product is alot better thanks to that.

They did eventually drop hardware BC to software to no PS2 BC. And lucky PS3 owners for having to juggle PS3 games install size on that small 80 GB HDD (shudder to those still with 20GB) or for Sony to limit install game size causing developers to juggle their install. The hefty price tag making it hard for unit to move off the shelf, making PS3 second priority for multi platform developers which produce inferior ports.

PS3 is good as a subsidized BR player but lousy game machine given the price tag and the lost Sony took on each unit. They should have done better period.

 

[V3]

You make some valid points, but still I do feel that Blu-Ray would have lost to HD-DVD if PS3 weren't able to launch with a Blu-Ray drive in it.

Using Blu-Ray in PS3 was the only way to make sure (and many people at Sony had the same idea obviously) that Blu-Ray had a good chance to beat HD-DVD in the shortest period of time possible.

With 3.1 billion dollar they could have just bought off the support of the remaining studios in the HD-DVD camp.

 

[liolio]

If the PS3 took one more year, then GTA4 would've been an x360 exclusive and you guys would be playing MGS4 on the xbox today as well.

And Sony wouldn't have included more hardware in there in any case; they'd just be happy to build it a bit cheaper and loose less money with it.

I absolutely agree.
A lot of editors couldn't have afford to wait another year before releasing some huge titles.
Nor they would have spent another year working without an opportunity get get some cash back from theirs efforts.

 

[Shifty Geezer]

What are the net earnings for XB360 so far, for comparison? Seems to me both companies have had to lose truckloads of dough this gen, perhaps because MS rushed into it, and Sony felt forced to follow ahead of schedule.

 

[Scott_Arm]

What are the net earnings for XB360 so far, for comparison? Seems to me both companies have had to lose truckloads of dough this gen, perhaps because MS rushed into it, and Sony felt forced to follow ahead of schedule.

Is there any other industry where two competitors are going head to head and losing money on that scale? It seems kind of insane that the gaming market could be so strategic and valuable that they're willing to lose so much money to enter or keep the market advantage.

 

[Shifty Geezer]

At the moment they haven't lost money, only invested it. If by the end of the product lifecycle they still have big, red figures, it was bad. If the companies turn around the market and take in $10 billion over the next 4 years, the investment will have been worth it With reports like Global games industry sales $68.3 billion by 2012, ignoring potential for extended media revenue streams (Sony still haven't rolled out their downloads service yet), a few billion over a couple of years doesn't look set to amount to much if the long-term visions pan out.

 

[joker454]

It seems kind of insane that the gaming market could be so strategic and valuable that they're willing to lose so much money to enter or keep the market advantage.

I think it's because they aren't going after the gaming market, they want to control your tv and the staggering amount of recurring revenue that can be derived from it. Games are a piece of the pie, but at this point they are mostly a means to long term end.

The PS3's design is a perfect example. No one in their right mind would put out a $600 machine that loses so much money on each sale if they were only interested in games. They can only make back so much with games, and its relatively predictable how much that will be. If games were the only goal, then they could have cut blu-ray, hdd, gigabit, etc and launched at $299. The life span of a game machine simply isn't long enough to lose money like they are year after year, just to sell some games.

Both Microsoft and Sony are competing against the likes of DirecTV and cable to control your tv, that's where the big money is. But they are at a huge disadvantage because DirecTV/cable boxes are given away and hence are so ubiquitous. So, they leverage their superior hardware with games to get your attention.

Take movies for example, you can rent tons of them on both DirecTV and XBLive. Which one will you use and who gets that cash? The more Microsoft can get your attention, and the slicker the service they can provide makes it more likely that you will rent your movie from them. Movies of course are just the start, there will be numerous more examples going forward as more and more tech friendly youngsters start buying everything and anything online.

I mean c'mon, do you guys really think Sony is losing billions just so you don't have to wait a few seconds extra on a game loading screen?

 

[-tkf-]

They did eventually drop hardware BC to software to no PS2 BC. And lucky PS3 owners for having to juggle PS3 games install size on that small 80 GB HDD (shudder to those still with 20GB) or for Sony to limit install game size causing developers to juggle their install. The hefty price tag making it hard for unit to move off the shelf, making PS3 second priority for multi platform developers which produce inferior ports.

PS3 is good as a subsidized BR player but lousy game machine given the price tag and the lost Sony took on each unit. They should have done better period.

It´s 50 dollars more than a 20 GB 360, how is that expensive? It´s dirt cheap considering the free PSN.

Apart from the BR drive the mandatory harddrive was the 2nd best move they made. It´s perfect for games and it´s perfect for nickle and dime..

 

[-tkf-]

With 3.1 billion dollar they could have just bought off the support of the remaining studios in the HD-DVD camp.

I dont think they expected to lose so much money, but unlike Microsoft with the XBOX they have made an effort to change that pattern.

 

[betan]

Both Microsoft and Sony are competing against the likes of DirecTV and cable to control your tv, that's where the big money is.

For a company competing against the likes of DirectTV, Sony are surely taking their time, considering they don't even have a video service after what 20 months or so.

I mean c'mon, do you guys really think Sony is losing billions just so you don't have to wait a few seconds extra on a game loading screen?

I'd think they lost money to penetrate new potential markets (like on demand video service, BD manufacturing), to have a console with long life and a clear difference, to be able to potentially drive HDTV sales and well, also because of bad engineering management among other things.

 

[Panajev2001a]

With 3.1 billion dollar they could have just bought off the support of the remaining studios in the HD-DVD camp.

It might not have been enough, it might have been matched by industry players interested to kill both formats, and you would have still had to spend money developing, manufacturing, and marketing PS3 on top of that.

 

[Mintmaster]

You make some valid points, but still I do feel that Blu-Ray would have lost to HD-DVD if PS3 weren't able to launch with a Blu-Ray drive in it.

Using Blu-Ray in PS3 was the only way to make sure (and many people at Sony had the same idea obviously) that Blu-Ray had a good chance to beat HD-DVD in the shortest period of time possible.

You really think so?

Say Sony devotes $1B to BR standalones. They could sink a whopping $300 subsidy into over 3 million players. As it played out, Toshiba could barely crack 1M players without any competition below $400, so I don't see how Toshiba could have done better in this scenario.

The only unknown is how initial studio support would have been affected. I don't see how that would have been a problem if Sony pledged $1B in hardware subsidies.

 

[dobwal]

Spending 3.1 billion to help win a format war which is probably worth triple to quadtruple that figure over the next decade is well worth it for Sony.

The problem is that Sony's loss will end up extending past 3.1 billion dollars. We won't know for a few years but Sony has forfeited market domination of this and may have potentially forfeited domination of future console generations and the billions of profits that comes with market domination.

I seriously doubt that Sony will catch up to the Wii and I doubt it will even get close. Sony may have or may not have retained market leadership this generation under more friendlier circumstances such as not having the PS3 deal with the burden of winning a format war. The $250 Wii may not have exploded in popularity with a $350-299.00 PS3 launching right beside it. Sony has not only lost 3 billion dollars but billion of dollars of potential revenue and profits were also lost with the PS3's high price and lackluster sales and Wii becoming a steroid engorged world class track star in terms of sales.

Next gen becomes problematic for Sony as it won't come in the number one brand in the console market nor will it have a head start on its major competitors. Unless this generation undergoes a drastic change in favor of the PS3. Next generation will begin with Nintendo in the driver seat with a half mile head start on a 1.5 mile track.

All in all, including BluRay with the PS3 will end up costing Sony more than just 3.1 billion with the potential of Sony's BluRay inclusion becoming one of the greatest blunders in the history of gaming consoles. Or Sony may dust its shoulder off and return to former glory making the BluRay inclusion seem like genius. We will know in a few years.

 

[Carl B]

...if you believe that it was their secondary mission...which I sure don't

Well, I think we need to remember that PS3's actual development arc probably shifted a couple of times in the run-up to launch. There's no doubt that the PS3 being developed while Kutaragi was head not only of SCEI, electronics, and semiconductors... but the heir apparent to the entire corporation... is likely different than the product that began to take shape in the post-Stringer world when Kutaragi found himself marginalized, adrift with a product that he had been coordinating across several divisions he no longer controlled.

It's hard to say how things would have been different, but for one, I think that the format war between Sony and Toshiba would have been resolved pre-launch. Kutaragi has always had a good relationship with Toshiba top brass (seemingly), and all his quotes from the time leading up to the war were around the theme "get this solved."

If the format war had not been a war at all, suddenly the economics surrounding the PS3 would have changed significantly.

I think for Stringer's part, not being overly familiar with the industry, he took PS3's dominance as a given this gen when nobody should have (granted so did the entirety of the SCEI staff it seemed), and probably put a little too much faith in BD's ability to "win on the merits" as it were.

But I don't think that BD was a primary focus of the PS3 until after the format war seemed irreconcilable; before that it seemed more about Kutaragi's 'digital world' vision, with the idea that it would include the next-gen optical format sort of a given rather than a point of active consideration.

 

[patsu]

You really think so?

Say Sony devotes $1B to BR standalones. They could sink a whopping $300 subsidy into over 3 million players. As it played out, Toshiba could barely crack 1M players without any competition below $400, so I don't see how Toshiba could have done better in this scenario.

The only unknown is how initial studio support would have been affected. I don't see how that would have been a problem if Sony pledged $1B in hardware subsidies.

Both sides have compelling arguments but I don't think things are that simple and clear cut.

Should Sony spent $1b to buy the studios, it will have negative impact on Sony. The anti-trust guys may come looking due to HD DVD Promotion Group's complains (They have already looked twice since BDA was formed). The studio buyout will likely cause severe consumer backlash since Toshiba was selling HD DVD player for as low as $199 while Blu-ray players cost at least $200 more.

If they use the $1B to subsidize player cost instead (like Toshiba), then it will be similar to subsidizing PS3, the game console. Might as well combine the Blu-ray player and game console into one and save logistic + manufacturing costs for 2 SKUs. The other way is to decouple the console and the player so that people can get the PS3 without the subsidized Blu-ray add-on. Then again, if they do that... they subsdize fewer players (due to added cost in making a separate Blu-ray addon, and additional DVD drive on PS3).



I see the $3.1b figure attributed to Blu-ray. Does that figure include Cell R&D and production facility in real life ?

 

[RancidLunchmeat]

There's no doubt that the PS3 being developed while Kutaragi was head not only of SCEI, electronics, and semiconductors... but the heir apparent to the entire corporation... is likely different than the product that began to take shape in the post-Stringer world when Kutaragi found himself marginalized, adrift with a product that he had been coordinating across several divisions he no longer controlled.

It's hard to say how things would have been different...

Honestly, I don't know how any of that is important (and again, I'm not sure why the desire to continue such a narrow focus on BR as the key contributor to the PS3's cost), considering Kutaragi made the statements himself that the PS3 was a luxury item, one that not everybody could immediately afford, one that needed to be 'saved' for.

If anything, Kutaragi's vision of a machine was one that would have been more expensive and likely to have lost Sony even more money at this point.

 

[Carl B]

Honestly, I don't know how any of that is important (and again, I'm not sure why the desire to continue such a narrow focus on BR as the key contributor to the PS3's cost), considering Kutaragi made the statements himself that the PS3 was a luxury item, one that not everybody could immediately afford, one that needed to be 'saved' for.

If anything, Kutaragi's vision of a machine was one that would have been more expensive and likely to have lost Sony even more money at this point.

The focus isn't on BD as the key contributor to PS3's costs... but as the key justifier to PS3's costs. Obviously the costs came from everywhere (though BD still likely the greatest one). And on Kutaragi, remember that what he says and what he does aren't always the same. He was talking about the need to save up for the system - something the Western media took way out of context by the way - but pre-launch he unilaterally reduced the price of the system in Japan, for example. So he was obviously keyed into the idea that it was too expensive for public consumption, and was willing to cut the price without Stringer's assent.

But my response is in the context of Joker's saying that BD was likely the primary focus, so certainly whether you feel BD is important here or not, you can understand a reply to such centering on that theme.

However, I do maintain that there wouldn't have been a separate standard period if he had had his way.

 

[Carl B]

I see the $3.1b figure attributed to Blu-ray. Does that figure include Cell R&D and production facility in real life ?

The $3.1 billion (actually greater) isn't being attributed to Blu-ray, so much as it's being quoted as the 'price paid' by Sony to win the format war. Plenty of those losses stem from sourcing Cell, B/C inclusion, and other miscellaneous IC expenses.

R&D costs are in there for sure in the general sense, but I'm not sure to what extent the 'Cell R&D' we consider when we talk about the ~$400 million to develop the chip would be in there... and probably even less of the billions spent on fab capacity. Those would have likely have been silo'd off under semiconductors, (since Kutaragi controlled both it was no big deal), accounted for under cap-ex, and remain on the books as assets while they were steadily depreciated. Nagasaki 2's 65nm SOI line was recently sold to Toshiba of course, so who knows what the net loss on that ultimately was. But Sony and SCE have had strange expense sharing deals in the past when it came to SCEI-related processor investment, so I would just view the R&D costs of PS3 from the software and system architecting standpoint, and the remainder/majority of the costs as coming from actual component sourcing.

I'm sure Archie or someone else with familiarity on that aspect of the business would be able to shed some light.

 

[dobwal]

Honestly, I don't know how any of that is important (and again, I'm not sure why the desire to continue such a narrow focus on BR as the key contributor to the PS3's cost), considering Kutaragi made the statements himself that the PS3 was a luxury item, one that not everybody could immediately afford, one that needed to be 'saved' for.

If anything, Kutaragi's vision of a machine was one that would have been more expensive and likely to have lost Sony even more money at this point.

Do you think that Kutaragi's PR talk was a product of his vision or a product of knowing he had a product that was well past the typical launch cost for a console.

Kutaragi's talk of the PS3 is not unlike all his early talk of the PS2 in terms of granduer. Notice that neither console has come close to what Kutaragi had envison for each consoles and yet the PS2 debut at a much cheaper price. Right now the PS3 is all that the PS2 was suppose to be based on Kutaragi's vision of the PS2.