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

[Carl B]

I think the core of Mintmaster's argument here is simply that in a world of mediocre BD standalones, a superior option already exists: the PS3 itself without the fluff. Even in the PSX days, the idea at play was that SCE hardware/software resources could be leveraged into something that would be superior to the norm in the CE industry. That thrust fell flat, but PS3 is very much its spiritual successor.

If instead of the PS3 launch at $500/600, Sony had launched the PS3 at $400 with a DVD drive, a BD-enabled version for the $600, and along side of it a Cell-based BD standalone for $500, the landscape for both BD uptake and PS brand protection may have been decently preserved. Something which Sony seems always to want to achieve but always has troubles with is the leveraging of the expertise across different divisions. If instead of dual development tracks across Electronics and Playstation the early BD players had all been essentially re-modeled PS3's lacking game-specific hardware and including an IR port and 'normal' CE form-factor, then BD Live, decode, upscaling... it all could have been concurrent (and shared) development as well.

Even to this day I'm curious why Sony didn't bring to market at least one high-end model based on such a design. It could even have some of the ancillary PS3 functionality still present such as photo viewing, MP3 playback, etc... while being fully networked.

As it stands I'm happy with the path PS3 took, and now that BD drives are not as expensive it's a moot point anyway. But there were definitely other - while just as aggressive - routes they could have taken.

 

[standing ovation]

Well, just to clarify for you, the company itself has been in its best financial shape in years recently, in spite of the PS3 losses. So, I question the logic that Microsoft could afford it, but Sony couldn't. It's simply a matter of scale. But a material effect, no doubt.

Microsoft can afford to take risks in the console industry because it is a niche that plays to their strengths. Videogame systems are all about software and services, an area where Microsoft has an overwhelming advantage.

As far as accounting goes, the biggest line item isn't hardware; it is providing software and services for the duration of the product's lifecycle. Hardware expenditures are just the tip of the iceberg.

 

[patsu]

Microsoft can afford to take risks in the console industry because it is a niche that plays to their strengths. Videogame systems are all about software and services, an area where Microsoft has an overwhelming advantage.

As far as accounting goes, the biggest line item isn't hardware; it is providing software and services for the duration of the product's lifecycle. Hardware expenditures are just the tip of the iceberg.

That explains why Microsoft's hardware had problems.

A significant weight to the console price is the BOM cost. No one can ignore the hardware logistics and the investment to get them right.

Software and services are on-going cost. They will earn their share per-title or per-month. It's just different math, but they are all important
(Hardware needs to be rev'ed too).

 

[Johnny Awesome]

I think the bottom line is that if you add a BR drive to the X360 Pro it would still be cheaper to make than a PS3 -> that means Sony messed up. Especially since they have their own fabs that they invested billions into.

I also don't believe the RSX was intended when they conceived of the PS3. They fully intended an internal GPU solution. It didn't pan -> paying big bucks to NVidia now.

MS made mistakes too. We all know that, but this thread isn't about any of that. It's about how Sony lost billions on the PS3.

The PS3 is a nice piece of kit. I'm not saying otherwise, but the mistakes Sony made to go from 70% marketshare down to 20% are legendary.

 

[patsu]

I think the bottom line is that if you add a BR drive to the X360 Pro it would still be cheaper to make than a PS3 -> that means Sony messed up.

You always need to look at both sides of the equation. In the above scenario, if PS3 sells on par with 360, it may mean Sony is losing less (or Sony has stronger brand). Depending on their corporate objectives, it may or may not be a bad/good thing.

 

[-tkf-]

I think the core of Mintmaster's argument here is simply that in a world of mediocre BD standalones, a superior option already exists: the PS3 itself without the fluff. Even in the PSX days, the idea at play was that SCE hardware/software resources could be leveraged into something that would be superior to the norm in the CE industry. That thrust fell flat, but PS3 is very much its spiritual successor.

If instead of the PS3 launch at $500/600, Sony had launched the PS3 at $400 with a DVD drive, a BD-enabled version for the $600, and along side of it a Cell-based BD standalone for $500, the landscape for both BD uptake and PS brand protection may have been decently preserved. Something which Sony seems always to want to achieve but always has troubles with is the leveraging of the expertise across different divisions. If instead of dual development tracks across Electronics and Playstation the early BD players had all been essentially re-modeled PS3's lacking game-specific hardware and including an IR port and 'normal' CE form-factor, then BD Live, decode, upscaling... it all could have been concurrent (and shared) development as well.

Even to this day I'm curious why Sony didn't bring to market at least one high-end model based on such a design. It could even have some of the ancillary PS3 functionality still present such as photo viewing, MP3 playback, etc... while being fully networked.

As it stands I'm happy with the path PS3 took, and now that BD drives are not as expensive it's a moot point anyway. But there were definitely other - while just as aggressive - routes they could have taken.

The PSX wasnt exactly cheap, and i doubt that the PSX3 Blu-Ray would be. There isnt a easy 500$ solution unless you packaged the 20GB PS3 in a Classic CE cabinet. The PSX3 would have to rely on what graphics chip? Maybe the Toshiba "superchip", but that would require a rewrite of some of the most important aspects of the PS3 software.

Today it might be a good idea to just repackage the PS3 and add a IR interface plus a 45% mark up

But Sony would have lost the "jokers" that buy the PS3 for movies and at some point end up buying MGS4, GT5 and games like that. Plus it wouldnt have placed a Trojan in the households for the coming PSN content. And finally a PS3 without a Harddrive would be half as exciting as it is now

 

[Carl B]

...

Johnny, I swear you're not reading any of my replies on the RSX matter...

 

[Mintmaster]

I'm confused. Does the "much cheaper machine" equal to the BD player they actually released for $1000 in 2006 in terms of hardware?

That was just Sony milking fools that didn't want to buy a PS3 for their BR needs.

Let's assume they subsidized it with the money saved by not including BD in PS3, and sold it for the same price as an HD DVD player with a similar spec. Do you think it would beat HD DVD in 2 years like PS3 did, or in less time?

Less time, because there's no way that Toshiba sells anywhere near ~1M HD-DVD's (or 700k, whatever the correct number is) when they have similarly priced, Sony-branded, better quality competition.

Sony doesn't have to sell 10M PS3's. 1M standalones would give them the same disc sale ratio as we saw currently, 2-3M would blow HD-DVD out of the water.

Then Sony had even more interests in keeping economies of scale. It's really weird if they were subsidizing it with no efforts to bleed less...

When did I say anything else? My point is that 2M and 20M are no different in "economies of scale", particularly when your plan is to reach the ~1B discs per year of DVD. Both provide ample incentive to cut costs ASAP.

Well maybe you read it like that?
I said that making the PS3 possible took billions of dollars, taking that and cramming it into a Blu-Ray player would be stupid considering they already had a Blu-Ray player called a PS3.

Are you not paying attention? Everything I am proposing is in the context of PS3 not having BR included.

The current PS3 cost what, $800 to build at launch? Take away RSX, 448MB RAM, HDD, WiFi, reduce the power/cooling, etc, subsidize $300, and what's the selling price? If PS3 did not have BR, this is the machine that Sony was fully capable of building to push BR instead with exactly the same movie performance as the current PS3 and far lower price. This is an upper bound on the hardware needed to make a "perfect" BR player, as they probably could make something even cheaper.

This is the machine that would make HD-DVD completely pointless.

Whats with the hate? you call One and idiot and "threaten" me with not answering my posts. Do you own an extensive HD-DVD collection? You seem very personally involved...

I didn't call him an idiot, I said he would be an idiot if he didn't think a CE device that was a heavily stripped down current PS3 is a lot cheaper than the current PS3.

As for you, what am I supposed to think? Fine, you think that without BR in PS3, most people wouldn't buy a BR standalone because they all suck. That's okay, but then I point out the obvious fact that Sony can build a BR player as good as - in fact better than - the current PS3 for a much lower cost. When I make that suggestion, you say it's stupid for Sony to build this non-sucky BR player!

 

[Carl B]

The PSX wasnt exactly cheap, and i doubt that the PSX3 Blu-Ray would be. There isnt a easy 500$ solution unless you packaged the 20GB PS3 in a Classic CE cabinet. The PSX3 would have to rely on what graphics chip? Maybe the Toshiba "superchip", but that would require a rewrite of some of the most important aspects of the PS3 software.

Today it might be a good idea to just repackage the PS3 and add a IR interface plus a 45% mark up

Tkf these designs you're talking about have nothing to do with the ones I suggested.

There's no PSX3 here I'm saying, just a Blu-ray player, we'll call it the Cell-X1, that utilize the same components as the PS3 sans: hard drive, B/C, RSX, GDDR3. Add in IR, change the cabinet.

The bottom line would be that here's a Blu-ray player no A/V aficionado could complain about - in fact it would be the perfect system everyone has been requesting - brought at much lower manufacturing costs than the PS3 itself.

But Sony would have lost the "jokers" that buy the PS3 for movies and at some point end up buying MGS4, GT5 and games like that. Plus it wouldnt have placed a Trojan in the households for the coming PSN content. And finally a PS3 without a Harddrive would be half as exciting as it is now

We're not talking about the PS3 the console here though, we're talking about the Cell-X1. The PS3 would still have a hard drive, and if you pay up, a BD drive as well. The only difference would be the idea that having launched at $400, it might be in substantially more households at the moment relative to its present footprint.

By the way I'm not saying that I believe such would automatically be the case, but it's a different angle to view things from, and the one I think Mintmaster was trying to illustrate.

 

[-tkf-]

When I make that suggestion, you say it's stupid for Sony to build this non-sucky BR player!

Of course i think it would be stupid, they had the PS3 that was already competitively priced, why waste time and money on a standalone that would still require some of the most expensive parts from the original plus some extras like a graphics chip and 1GB of memory. Rather subsidize the PS3 than a standalone Blu-Ray player which would annoy the Blu-Ray partners. I get your point i just dont see it working.

 

[Carl B]

Of course i think it would be stupid, they had the PS3 that was already competitively priced, why waste time and money on a standalone that would still require some of the most expensive parts from the original plus some extras like a graphics chip and 1GB of memory. Rather subsidize the PS3 than a standalone Blu-Ray player which would annoy the Blu-Ray partners. I get your point i just dont see it working.

Why does it need a graphics chip, isn't that one of the things we're doing away with in this scenario? And 1GB of flash memory is like $2. Believe me when I say if Sony released this product right now, they'd *still* have a great seller on their hands - it would be the pre-eminent standalone BD player. There's not even any real development to speak of which need be done for the device; it's a PS3 stripped down to XMB and media playback functionality.

 

[Mintmaster]

Carl B, thanks for helping me spell out this strategy.

If instead of the PS3 launch at $500/600, Sony had launched the PS3 at $400 with a DVD drive, a BD-enabled version for the $600, and along side of it a Cell-based BD standalone for $500, the landscape for both BD uptake and PS brand protection may have been decently preserved.

Actually, even cheaper than $500 for the standalone. Maybe only $50 or $100 more than Toshiba's low end players.

Remember, we're talking about a machine without an HDD, without RSX, without GDDR3, only 32-64MB of XDR, without WiFi, without PS2 EE/GS, with much smaller cooling, with much simpler PSU, and who know what else can be chopped out. No graphics chip is needed as the HDMI/component output chips are sufficient. 1 GB flash would be at most $10 in 2006. And, to top it all off, there's a $300 subsidy. I think a $400 price point at launch and $250-300 by the end of 2007 is very realistic. "Free" BR players with all Sony HDTV's over 40" help penetration, too (as usual, it's just a substitute for a $200 sale). It becomes the best DVD player money can buy, and it has the Sony brand.

Sell 1M of these, and HD-DVD is in no better shape than what we saw, as it doesn't reach 500K. Sell 2M and it's even more thoroughly trounced. Total subsidy costs are well under $1B.

The DVD-based PS3 does far better (it could even launch at $500 in 2005 if Sony planned for it, then drop to $400 a year later), 360 doesn't get as much initial momentum, and all is well for Sony. They get even more livingroom revenue due to having more consoles.

The only question is which strategy is better for the long term battle of taking out DVD. I don't think PS3 as it is will ever have a long term impact there. Cheap standalones are the only way to achieve that goal.

 

[Carl B]

Actually, even cheaper than $500 for the standalone. Maybe only $50 or $100 more than Toshiba's low end players.

$500 was basically the HD DVD price point though when the war began, which is why I pegged it there. When compared against the BD standalones at the time that were almost twice as much, I think it's a decent effort. Plus there is a legitimate concern about the BD hardware partners feeling burned if Sony undercut them so significantly in the standalone space that they were forced either to take a loss themselves or not be competitive in the least.

That situation existed(exists) with PS3 as well, but for some reason everyone was/is willing to ignore it due I guess to the fact that those SCE guys roll in different circles than the CE guys.

I know we're viewing this from the angle of shifting the subsidies around, but with the standalone I do think that it'd have to be more an 'at cost' model vs subsidized for Sony given the extensive depth of the BDA partnerships. Toshiba in fact was given a sort of ironic freedom in their lone-wolf status with HD DVD, free to play the game however they wished against the BDA.

 

[Mintmaster]

I know we're viewing this from the angle of shifting the subsidies around, but with the standalone I do think that it'd have to be more an 'at cost' model vs subsidized for Sony given the extensive depth of the BDA partnerships. Toshiba in fact was given a sort of ironic freedom in their lone-wolf status with HD DVD, free to play the game however they wished against the BDA.

Sony would have options if they pursued this strategy, though. If they didn't want to alienate BDA partners, they could subsidize the OPU or give them rebates and it would still serve to win the format war in a more cost effective manner than PS3. In the end, the fundamental point of the strategy I'm proposing is that $300 per BR standalone - no matter who makes it - would have been a far less costlier solution for Sony to win the war than PS3.

Even if Sony did make their partners mad, though, I don't see it hurting them much in the format war. It's not like they're going to run towards HD-DVD. The real money is in the future when volume ramps up, anyway.

 

[Shifty Geezer]

Again though, winning the war isn't the only thing that matters. The whole point to BluRay wasn't to stop Toshiba, but to sell people HD discs. If a $300 BRD player would have thwarted Toshiba and then created an install base of 1 or 2 million devices, while PS3 goes on to sell tens of millions, Sony's gain wasn't really worth bothering with. Getting HD movies out there being played on their console creates more exposure, people who wouldn't have chosen to buy a standalone movie player getting BRDs because PS3 gives them that option and then, showing those Blue Planet collections to friends, advertising the format. The install base of players is probably the best advert HD movies can have. I mean, you can't really show people what HD looks like in an SD TV ad People would have to see it to be impressed and consider buying into the platform, and for that you need large numbers of units, and the best option for that for Sony was to piggyback the format in PS3.

 

[Carl B]

Well I think one of the assumptions we're making here at the outset is that for point of comparison, one standalone player carries the weight of ten consoles, at least in terms of movies sold. So Mintmaster's equation stays movie neutral while aiding PS3's install base as a gaming platform.

Now all of that aside, I do imagine that as time goes on, owners of the PS3 will increasingly turn their console to active movie use, even if the majority of them refrained at the beginning. There's a lot of moving parts to all this, to be sure...

 

[one]

Less time, because there's no way that Toshiba sells anywhere near ~1M HD-DVD's (or 700k, whatever the correct number is) when they have similarly priced, Sony-branded, better quality competition.

Sony doesn't have to sell 10M PS3's. 1M standalones would give them the same disc sale ratio as we saw currently, 2-3M would blow HD-DVD out of the water.

I suppose there were not many people who bought PS3 only for movies, relatively speaking. We heard how terrible PS2 was as a DVD player and such, and it's unlikely that high-end AV enthusiasts bought it unless they are really well informed. Those people buy a high-end HDMI cable for $400. I don't deny some people in fact bought PS3 for Blu-ray, but the ratio between those who bought no games and those who bought at least 1 game would be like 1:9.

In this situation, if Sony had sold a BD player at the same price as a HD DVD player, it would have split the same user base as HD DVD player owners. In reality, Toshiba sold 1 million players and BDA sold far less. In a Blu-ray subsidized situation, it would have been like 500,000 HD DVD players and 500,000 Blu-ray players. Also, the only movie studio that supports Blu-ray exclusively would have been Sony Pictures. There would be more hardware supporters of HD DVD, and rumored Chinese manufacturers would have arrived sooner for HD DVD on the shared platform developed by Microsoft and Intel. And don't forget Xbox 360 add-on which is still there. It's Beta vs VHS all over again.

In other words, the achievement of PS3 in the format war was bringing new customers into the HD disc business. Some gamers knew it can play Blu-ray since a Spiderman 3 disc came with it. They picked up the BD version of Pirates of the Caribbean when it's ready. They wouldn't have bought Blu-ray software if PS3 didn't support it, let alone a Blu-ray player even though it was $500 instead of $1000.

 

[Mintmaster]

I suppose there were not many people who bought PS3 only for movies, relatively speaking. We heard how terrible PS2 was as a DVD player and such, and it's unlikely that high-end AV enthusiasts bought it unless they are really well informed. Those people buy a high-end HDMI cable for $400. I don't deny some people in fact bought PS3 for Blu-ray, but the ratio between those who bought no games and those who bought at least 1 game would be like 1:9.

Agreed, but 1:9 still means that there were plenty of people in the market for an HD player and saw the PS3 as the best solution. If Sony had an equally good player that didn't play games, I don't see why those same people wouldn't have bought it instead if PS3 didn't have BR.

In this situation, if Sony had sold a BD player at the same price as a HD DVD player, it would have split the same user base as HD DVD player owners. In reality, Toshiba sold 1 million players and BDA sold far less.

Well if we assume that those who bought a PS3 as a BR player (the 1:9) would have bought an equally good player for less in this alternate scenario (and there's no reason to think otherwise), then BDA definately would be well over 1M. Throw in the HD-DVD converts due to lack of $200-500 premium, and BD wins easily.

So I really doubt your 500K:500K suggestion. In fact, even when HD-DVD was on a high after the Paramount deal, there are reports that BDA standalones were right on par with HD-DVD. Toshiba's own slides only gave them a 49% marketshare for 2007, IIRC, and that doesn't include the ~1/10th of PS3 owners.

So BD standalones kept pace with HD-DVD even with a huge price premium. What do you think would happen if they were similar in cost, and the PS3-as-a-player sales were replaced by standalones on top? Clearly a crushing victory for BR.

In other words, the achievement of PS3 in the format war was bringing new customers into the HD disc business. Some gamers knew it can play Blu-ray since a Spiderman 3 disc came with it. They picked up the BD version of Pirates of the Caribbean when it's ready. They wouldn't have bought Blu-ray software if PS3 didn't support it, let alone a Blu-ray player even though it was $500 instead of $1000.

Those people accounted for a small number of sales, though. It doesn't matter if they lose those if they could have stolen so many of the movie fanatics that chose HD-DVD primarily for price.

 

[Mintmaster]

Well I think one of the assumptions we're making here at the outset is that for point of comparison, one standalone player carries the weight of ten consoles, at least in terms of movies sold. So Mintmaster's equation stays movie neutral while aiding PS3's install base as a gaming platform.

Exactly! Actually, I think on the BR side it's better than neutral.

Now all of that aside, I do imagine that as time goes on, owners of the PS3 will increasingly turn their console to active movie use, even if the majority of them refrained at the beginning. There's a lot of moving parts to all this, to be sure...

While I see that side of the coin, the reality is that it's more a mid-term thing than a long-term one. You need cheap standalones to really penetrate the market, particularly if you want to replace DVD. PS3 will never be that ubiquitous. PS2 likewise had little impact on the DVD market, IMO.

 

[eastmen]

If it wasn't for the fact that bluray was in the base ps3 sku , bluray would be dead by now.

Think back to what bluray was at the start of the format war. it was an incomplete spec. The players were also 1grand. A $500 bluray player would have helped alot , but they would never have had the millions of sales that convinced content holders to join up . Toshiba on the other hand would have launched first and would hae had a unit lead that most likely would have continued through and would have let them take the format war.

On the ohter hand a $400 ps3 would have played alot better against the then $400 xbox 360