The Next-gen Situation discussion *spawn

[function]

The loss leading model has been succesful numerous times.

The loss leader model has also failed numerous times with companies lumbered with ever growing losses that killed the platform or even the company.

Wii is the only counter example, which IMO will be a very hard act to follow.

Pretty sure the NES, SNES, Gameboy, Gameboy Advance, DS, DSi, N64, GC and 3DS will all have launched at prices above or close to the manufacturing costs (no $150 ~ $300 losses that's for sure).

Consider this: A loss leading box with a BOM of $300 sold for $200 vs a box with a BOM of $200 sold for $200, which would sell the most ?

If the Saturn, Xbox or PS3 are the $300 console then I'll go with the $200 console.

You need to consider all the revenue streams when you talk about break-even. A loss on the hardware can be sustained as long as they have revenue form every software, media or service sold on the platform.

You also need to consider that not every revenue stream will grow (or grow proportionally) as a result of you losing more on the hardware. There's a point where growing hardware losses (or narrowing hardware profit margins) won't result in profits growing by a greater amount.

As for silicon cost reductions, even if the new, cutting edge, nodes won't see immidiate cost reductions, the older will. The bulk of silicon production costs are capital costs, as the equipment is amortized production costs are reduced.

But will that be enough to allow you to drop your BOM by 70% in 6 years? And in the market you will face in 6 years (or whenever) will whatever saving you can get be enough?

Will a maturing older process deliver the same cost savings as moving to newer nodes used to? It's not just cost per transistor, but the knock on costs like cooling, power supply, case, shipping and a sales boost from improved aesthetics of the slim model. Xbox 360 sales saw a sustained increase once the 360S was released - and so they should have because the 360S is a much nicer entertainment box than the big, noisy (very noisy) and unreliable older Xboxes (which were kind of shitty).

Once the core gamer market is hooked you need to be able to attract everyone else. The old style PS3 and Xbox were rubbish for that.

 

[almighty]

Apparently Wii U is packing an HD 6850!!

Link

Would it make it even faster then the next set of consoles from MS and Sony!

 

[Shifty Geezer]

If Live subscribers defect to a competing, more performant, platform, they lose the revenue. The more future revenue, the more viable a loss leading strategy is.

Of course. Then again, how many Live! subscribers would defect to PS when they have a lot invested in Live! already? What if the other platform isn't more capable because they aren't loss-leading? Then your $100 spent on ensuring prime performance is a bit of a waste when you could have got away with just spending $50 more to get more RAM and leave it at that. Or even spending no extra on the hardware and providing such and amazing subscription service that people will choose your platform over the other's less-capable service.

It would depend on the absolute price. Cutting $100 off a $1000 box wouldn't matter as much as cutting $100 off a $400 box.

We can all go on posting hypothetical scenarios til the cows come home. That doesn't really change things. We can't prove, even a higher probability if not certainty, that $100 more spent on the BOM will result in >$100 profit per box average.

 

[Gubbi]

Pretty sure the NES, SNES, Gameboy, Gameboy Advance, DS, DSi, N64, GC and 3DS

And what have all these in common ?

The five most succesful titles for Wii are: Sports, Mario Kart, Sports resort, Play and New Super Mario Bros.

The five most succesful titles for DS are: New Super Mario Bros, Nintendogs, Mario Kart, and two Pokemon games.

For 3DS it's: Super Mario 3D Land, Mario Kart 7, Nintendogs+cats, Legend of Zelda Ocarina of Time and Pokemon.

All Nintendo developed and published titles. The Nintendo software business dwarfs their hardware business. When Nintendo launches a platform it is with full backing of their many franchises.

You cannot compare that to Sony and MS. Ms in particular needs to attract 3rd party developers. They do that by having a platform which offers a compelling experience, having good tools and a longterm strategy.

Also, I would consider the N64 and GC failures compared to their contemporaries.

Will a maturing older process deliver the same cost savings as moving to newer nodes used to? It's not just cost per transistor, but the knock on costs like cooling, power supply, case, shipping and a sales boost from improved aesthetics of the slim model. Xbox 360 sales saw a sustained increase once the 360S was released - and so they should have because the 360S is a much nicer entertainment box than the big, noisy (very noisy) and unreliable older Xboxes (which were kind of shitty).

Bigger chips don't necessarily imply higher power consumption. Power consumption scales linearly with area, but cubed with clock speed. A big, slow chip can hit a given performance level at lower power consumption.

Cheers

 

[function]

And what have all these in common ?

The five most succesful titles for Wii are: Sports, Mario Kart, Sports resort, Play and New Super Mario Bros.

The five most succesful titles for DS are: New Super Mario Bros, Nintendogs, Mario Kart, and two Pokemon games.

For 3DS it's: Super Mario 3D Land, Mario Kart 7, Nintendogs+cats, Legend of Zelda Ocarina of Time and Pokemon.

All Nintendo developed and published titles. The Nintendo software business dwarfs their hardware business. When Nintendo launches a platform it is with full backing of their many franchises.

Well, yeah. It's just that you said the Wii was a one off, so I was pointing out that actually it's not. Only about 4 consoles ever have successfully followed the loss leader method (Megadrive, PS1, PS2, 360 off the top of my head) while far more have been ... Nintendo.

Actually the Master System was pretty successful in Europe, and I don't think that was sold at a big loss - it was quite expensive here. And in Europe the Megadrive might even have been sold at a profit (much higher price than in the US). And I don't think the Dreamcast was sold at a big loss in Europe either - Europe was the only place the Dreamcast was actually profitable (but it didn't sell all that many).

You cannot compare that to Sony and MS. Ms in particular needs to attract 3rd party developers. They do that by having a platform which offers a compelling experience, having good tools and a longterm strategy.

Yeah it's true that Nintendo are in a very different position. The ability to offer a compelling experience, provide good tools and have a long term strategy is not dictated by who loses the most money on hardware though. You also have to make a product that people consider good value and that they can afford. 3rd party developers will go wherever publishers tell them to.

Customers don't always chose the biggest loss leader or even the most powerful system.

Also, I would consider the N64 and GC failures compared to their contemporaries.

You may consider them failures but they were at least profitable. The real failures - the ones that lost huge amounts of money - were all loss leaders.

The N64 was not a failure compared to the Saturn (which crippled Sega financially), and the GC was not a failure compared to the Dreamcast or the Xbox.

Bigger chips don't necessarily imply higher power consumption. Power consumption scales linearly with area, but cubed with clock speed. A big, slow chip can hit a given performance level at lower power consumption.

That doesn't actually address any of the points I made in the section you quoted, unless you're advocating growing the size of your processors (and slowing them down) over the course of the generation in order to reduce costs and a do slim (small, cool and quiet) redesign.

The cost to manufacture the 360 has reduced dramatically over time - by something like 75%. In response to Shifty Geezer saying that node transitions may be becoming more difficult and less economical, you said that staying on the same node also offers advantages. No doubt it can, but my question is can it enable all the opportunities that were crucially important to the success of the 360?

Unless a maturing node can offer the same opportunities (not just cost per transistor, but the cost of the board, the cooler, the psu, the casing, the shipping) and also allow a physically smaller and nicer system for the 90% of owners MS want to attract who aren't core gamers, then choosing the same starting point as the 360 and expecting the same outcome may not work out so well.

And you do need to be able to drop the retail price of your system over its lifetime (and drop your manufacturing costs faster if you have a heavy loss leader). Unless you're going to pursue a different business model to PS360 of course, in which case maybe you can do something different.

 

[TheChefO]

.... If you could sell the same number of consoles with a $100 lower BOM, that's 1.5 billion a year more profit you're making....

"IF" indeed ...

I'm not advocating spending for the sake of spend, nor advocating spending beyond the moon.

Nor even advocating spending PS3 levels ...

I'm advocating the SAME level of spend as what MS already did with xb360a (+25% additional wafer cost for the silicon). A unit which retailed for $299.

Taking that same budget, and charging $399.

Now there are a plethora of ways to offset this sticker shock which I can go into if some people are hung up on it.


Bottom line, the BOM is far from unreasonable.
____________

Now looking at the converse concept of dropping in a $100 apu and wishing it well...

Going with underpowered (or perceived underpowered) hardware and a $200 pricepoint limited Dreamcast to sell 10million units worldwide over 3 years *ahem*.

But let's assume such a move only costs MS half their userbase.

That drops their annual non gaming revenue from $2B on 40Million xbl users to $1B annually.

Let's assume that MS Marketing get's their heads out of their asses and can start to monetize the viewership for advertising and they manage to net $2B for their 40M viewers which is now cut in half, so again $1B.

Then again, weak hardware AND paying for xblg AND having to watch ads? Scratch that, if they go weak hardware ads are off the table.

 

[DoctorFouad]

Going with underpowered (or perceived underpowered) hardware and a $200 pricepoint limited Dreamcast to sell 10million units worldwide over 3 years *ahem*.

.[/B]

Dreamcast was underpowered (or perceived underpowered) ? are you serious ? it was completely the opposit, it was OVERpowered at its time of release. Do you know that dreamacast has been released 27 november 1998 in japan ? have you ever played shenmue ?in 2000 ? or virtua tennis or crazy taxi or soul calibur in 1999 ?

the problem of Dreamcast was timing, it has been released TOO EARLY into the market, it was WAY AHEAD OF ITS TIME (an online console in 1998 with a screen into the controller a la WiiU, seriously sega ?) in a time when developers were going all crazy about developing low rez low poly games for PS1. that was the problem, neither developers, nor consumers were ready for next gen when dremcast released, they were all busy with PS1 and for lesser degree N64.

It was exactly as if Microsoft has released the nextxbox in 2007, instead of 2013, or if sony has released ps4 in 2008. whatever the quality of these consoles and their respective great games, developers and consumers alike wont be ready for next gen, gamers would have been busy playing GTA4....Sega did a crazy thing and paid the price....eventhough I consider the Dreamcast the best console ever released in history, I had more fun with my dreamcast than any of all consoles I ever played or purchased in my life....

 

[Shifty Geezer]

I'm advocating the SAME level of spend as what MS already did with xb360a (+25% additional wafer cost for the silicon). A unit which retailed for $299.

I know you are. But how do you know that spending the same budget as last gen will make MS more money than if they spent $50 or $100 less?

Bottom line, the BOM is far from unreasonable.

I agree, but the console companies aren't chasing the most reasonable pricepoint, but the most profitable one.

But let's assume such a move only costs MS half their userbase.

Why? That's a random assumption taken to support your argument. What if MS only lose 10% of their userbase? What if the very low entry price causes an explosion of adoption that snowballs into >200 million consoles worldwide? You can draw up all sorts of graphs for cost, possible consumer reactions, and end up being able to indentify a huge range of profitabilites from -billions to +billions. There's no reason to just take one scenario if one's wanting to get an idea of all the choices available.

 

[TheChefO]

If Live subscribers defect to a competing, more performant, platform, they lose the revenue. The more future revenue, the more viable a loss leading strategy is.

Exactly.

Revenue currently stands at $50/yr per person.

$100 console loss is made up in two years.

Factor in additional untapped ad revenue, and that figure stands to comfortably double to roughly $100 per customer, per year.

$100 loss is made up in 1 yr.

As soon as that year passes, that's all ADDITIONAL profit on top of games. In fact, MS could be so bold as to let games on the platform without charging the regular platform fee and still make a HEALTHY profit ... all while boosting their userbase.

The above would either net more exclusives, or cheaper games. Either of which would net more customers.

I still cannot fathom why anyone in their right mind would risk losing $500++, just so long as they don't spend $100.

 

[TheChefO]

I agree, but the console companies aren't chasing the most reasonable pricepoint, but the most profitable one.

Indeed. As am I.

If they introduce xb720 to a thud as everyone looks at the spec/games and see that they can get the same on a pc by swapping in a $100 apu, how many people will be chomping at the bit to pay MS $200+ for that console?

I know they will get some fools to jump in, but a small percentage of their core base will ... Remember, MS built their brand and reputation as a high-end console for hardcore gamers.

Yes, they softened this image this gen, but that core still bought in day-1 because the hardware was competent and sufficiently advanced for the asking price.

More users, more profit.

What if the very low entry price causes an explosion of adoption that snowballs into >200 million consoles worldwide? You can draw up all sorts of graphs for cost, possible consumer reactions, and end up being able to indentify a huge range of profitabilites from -billions to +billions. There's no reason to just take one scenario if one's wanting to get an idea of all the choices available.

Taking the low end of the market with a new machine is pointless.

They already have the low end of the market with xb360 and can exploit that further (as they are) by bundling a kinect.

This same old box still has access to live, xblg fees, ads, movies, etc ....

The concept is to take as much of the market as possible. Taking two shots at the low end doesn't help expand that market ...

In other words, if 200Million people globally were interested in weak/cheap hardware, they would have already bought a cheap xb360 ... or ps3.

 

[TheChefO]

Dreamcast was underpowered (or perceived underpowered) ? are you serious ?

The keyword in my sentence was "perceived".

Believe me, I'm a DC fan too.

 

[TheChefO]

Why? That's a random assumption taken to support your argument. What if MS only lose 10% of their userbase?

Ok let's evaluate potential profit generated by hardware and compare to loss leader:

Profitable from day 1:

bom	msrp	consoles/yr	console profit/yr
100	120	10,000,000	200,000,000
100	120	10,000,000	200,000,000
100	130	10,000,000	300,000,000
100	150	10,000,000	500,000,000
100	180	10,000,000	800,000,000
100	200	10,000,000	1,000,000,000
150	250	10,000,000	1,000,000,000
200	300	10,000,000	1,000,000,000

I think this is a good illustration of best case scenario. The console will at first reduce BOM roughly $50/yr until it gets to $100 which is rather difficult to get much below that (as we saw ps2 slim stuck at $130 for years).

MSRP sees regular pricedrops which are reasonable given the low tech starting point and consistent pressure from external competition.

This model nets $5 Billion (assuming sales remain at 10Million / year)

xb360a model:

bom	msrp	consoles/yr	console profit/yr
100	150	10,000,000	500,000,000
150	200	10,000,000	500,000,000
200	250	10,000,000	500,000,000
250	300	10,000,000	500,000,000
300	350	10,000,000	500,000,000
350	350	10,000,000	0
400	400	10,000,000	0
450	400	10,000,000	-500,000,000

We see the same cost reduction and regular price drop schedule but holding a bit more firm at launch as the spec is strong.

This model nets $2B.

A difference of $3B. Not unsubstantial, but I think it's safe to say the userbase numbers are a bit optimistic on the pfdo model and in the long run, the $3b is a drop in the bucket...

I'm projecting them to make more than that with ads (display+search) alone ... every year. Now if they go killing the golden goose, well all that profit goes away, along with xblg, zune, games, and in the long run, the hardware itself.

_____________

If you believe as I do that the shelf life of the console biz is inherently in danger of becoming extinct and will eventually be replaced by a cloud gaming service, then you know that at the point which these cloud services can provide a suitable alternative to consoles is when the jig is up. It's like musical chairs at that point. Whoever has the largest online community will likely be the one taking the largest piece of that cloud gaming service pie.

Short term vision would say: "We gotta do what Nintendo did, they got MONEY!" Long term would look to this point I've spoken of and say: "Ensure we do whatever it takes to keep our existing userbase loyal and expand it where possible."

 

[DoctorFouad]

The keyword in my sentence was "perceived".

Believe me, I'm a DC fan too.

the question is : perceived when ? we are talking about perception of performance the first days of release. the dreamcast was released in japan in 1998 and in US/europe 1999, it was perceived by consumers as the most powerful AVAILABLE console.

The problem was timing, the consumers preferred to WAIT A LOT for ps2 not only due to its perceived EXPECTED technical superiority, but because in 1999 gamers were busy playing metal gear solid, gran turismo and final fantasy, they werent ready for the dreamcast revolution, and in 2000 WHEN THEY BECAME READY, they preferred to wait for PS2.

the point is : most probably, the best timing for dreamcast release must have been in 2000, one year ahead of ps2, as microsoft did perfectly with xbox360, 1 year ahead of ps3 that way it is not too early, neither too late. XBox1 for example (and GC) were released too late compared to ps2. sony with ps2 did perfect timing compared to consumer preferences. with ps3 they did bad but not as bad as SEGA did with dreamcast.....

Timing is very important for a successful product into a market, it seems these last years, Apple did great job with timing their products...if apple enetered the console business, I bet they would release their next gen console exactly as Nintendo is doing now with wiiU, fall 2012, except apple would produce a more powerful hardware ..........

fortunately for sony and microsoft, they are dealing with nintendo not with the aggressive marketing professional Apple....

 

[liolio]

I do not agree the Dreamcast main issue was Sega financial shape. That's it.
Dreamcast never had a chance.

 

[TheChefO]

the question is : perceived when ? we are talking about perception of performance the first days of release. the dreamcast was released in japan in 1998 and in US/europe 1999, it was perceived by consumers as the most powerful AVAILABLE console.

The problem was timing, the consumers preferred to WAIT A LOT for ps2 not only due to its perceived EXPECTED technical superiority, but because in 1999 gamers were busy playing metal gear solid, gran turismo and final fantasy, they werent ready for the dreamcast revolution, and in 2000 WHEN THEY BECAME READY, they preferred to wait for PS2.

the point is : most probably, the best timing for dreamcast release must have been in 2000, one year ahead of ps2, as microsoft did perfectly with xbox360, 1 year ahead of ps3 that way it is not too early, neither too late. XBox1 for example (and GC) were released too late compared to ps2. sony with ps2 did perfect timing compared to consumer preferences. with ps3 they did bad but not as bad as SEGA did with dreamcast.....

Timing is very important for a successful product into a market, it seems these last years, Apple did great job with timing their products...if apple enetered the console business, I bet they would release their next gen console exactly as Nintendo is doing now with wiiU, fall 2012, except apple would produce a more powerful hardware ..........

fortunately for sony and microsoft, they are dealing with nintendo not with the aggressive marketing professional Apple....

I don't want to get too sidetracked with this (and banned in the process) but I'll say this as it relates to nextgen machines:

Perception of DC when it was released was that PS2 was significantly more powerful, and worth the wait. This perception was created by Sony and masterfully reinforced on numerous occasions. From that point it spread to PoP retailers and their employees. Etc.

Bottom line: Having a machine which is though of as "weak" doesn't spur sales. Granted, having an uber console doesn't guarantee sales, but nobody ever turned down a console because, "it was too powerful". The opposite has proven true.

 

[function]

Exactly.

Revenue currently stands at $50/yr per person.

Revenue for what exactly?

 

[bkilian]

Well I always assumed the xbl subscription netted MS a tidy sum (35m x $50/yr = 1.75B ... annually)
I also I guess foolishly assumed MS was actually making money on each xb360 now... as well as Kinect.
..long rant misunderstanding my point deleted...

No, see, when 360 launched, the XBox org was a "strategic bet" (Microsoft dumps tons of money into strategic bets - not all of them pan out). Now it's a profit center. It would be infeasible to reduce year over year profit growth. So selling hugely underpriced hardware now is going to be a tough sell.

But I wasn't referring to ancillary revenue. I was referring to direct hardware profits. The 360 launched with a roadmap to profitability using process shrinks and volume discounts. It's successor won't be so lucky. Process shrinks are getting harder to execute and energy efficiency is not linear with process size (much more leakage at smaller sizes).

Also, the customer focus has changed. People spend more time on 360 now consuming media than playing games. Sure, games are good, but what keeps that ancillary revenue coming in now is evenly split. You don't need a monster, power hungry, money losing superbox to provide streaming movies, and the games will adapt to the resources they have. A modest increase could be workable. Quadruple the memory, and even with no changes in CPU and GPU, the games would be significantly better.

If the rumors have any truth in them, both sides are aiming a lot lower this next generation that the previous.

So I was not saying MS is not currently making money on it's games business, I was just pointing out that your original statement overlooked the fact that the company may not be as willing to dump money into the ecosystem as it was last time around.

The original statement I was disputing:

I see nothing prohibitive for MS/Sony to dedicate this same silicon budget for xb720/ps4.

 

[RudeCurve]

I don't want to get too sidetracked with this (and banned in the process) but I'll say this as it relates to nextgen machines:

Perception of DC when it was released was that PS2 was significantly more powerful, and worth the wait. This perception was created by Sony and masterfully reinforced on numerous occasions. From that point it spread to PoP retailers and their employees. Etc.

I agree with this, PS2 could also play DVDs and do other stuff the DC couldn't...lots of particles, more polys, motion blur, more realistic lighting. This is only the hardware side of it. On the software side there were many exclusives from 3rd parties not to mention first party. I think if SEGA waited and released a NAOMI 2 version as a $299 DC with DVD playback instead of the NAOMI version it would've fared better. GC was a pretty good match for PS2 but it came late even then Nintendo still sold about 50 million of them.

 

[steviep]

Also, the customer focus has changed. People spend more time on 360 now consuming media than playing games. Sure, games are good, but what keeps that ancillary revenue coming in now is evenly split. You don't need a monster, power hungry, money losing superbox to provide streaming movies, and the games will adapt to the resources they have. A modest increase could be workable. Quadruple the memory, and even with no changes in CPU and GPU, the games would be significantly better.

*coughs* It's more than quadruple

 

[bkilian]

*coughs* It's more than quadruple

Eh, it was just an example 512MB to 2GB transition (which appears to be the favourite in the rumors of late), don't take it as any predictor of a real product . Pretty much every game I see suffers from texture pop-in and low draw distance, both of which could be helped by more memory. A lot of just pure rendering tasks could be sped up too by sacrificing memory for CPU/GPU (Bigger lookup tables, more caching, precalculation, etc)