Thoughts on the expense of PS3

[scooby_dooby]

I think it's obvious what Sony needs to do, they need to drop the price of the console by $300 in 2 years. That's really the bottom line.

Can it be done? I don't see why not.

 

[Npl]

Forget me, dont you think console gamers are going to put the cost of a HDD-less 360 against the PS3 at some point?

I think theres plenty of gamers where it will be something like "Ok how much to play Halo 3 $379 (or $329 if theres a price drop by the time it launches). How much to play MGS4, $550" When you distill the whole thing down to just playing games i think that scenario comes up quite a bit in 2007.

AFAIK the core XBox360 is outsold significantly by the premium pack. I cant and dont want to predict how the "casual gamers" will react once the price hits a cheaper point, but for now it seems buyers are quite aware that they need to fork out cash for either the Memcard or HDD. And you can get a 2,5" 40GB HDD for less than 50 Euro retail. A Memcard for XBox360 costs what?

Price will play a big role, but I doubt HDD will acount for a big part of it.

 

[Sis]

+ Since PS3 is now a consolidated Sony group effort, it is also positioned as the beach-head for their digital distribution and media thrust. Without PS3, they will have to spend some of their money to further their objectives on PCs (e.g., stupid rootkit investments). Here, PS3 allows Sony to focus their effort better. And it's on their platform where they have total control. So part of the loss should be seen as an investment.

+ Once the PS Online and the number of PS3 exceeds certain critical mass, there will be multiple revenue streams for Sony (More than just licensing), so it's possible that PS3 will drop its price faster than PS2.

The thing with digital distribution is that no company has yet to prove that it's a profitable business to be in today. Apple makes their money on hardware and, AFAIK, is break-even on the distribution side. The distribution side is there to drive consumers to buy the hardware. If Sony is losing money on the hardware, the benefit is still there, since more consumers buying more hardware would hopefully generate a higher video game or Blu-ray attach rate. But the end goal of the PS3 is probably not driving consumers to their digital distribution.

 

[expletive]

AFAIK the core XBox360 is outsold significantly by the premium pack. I cant and dont want to predict how the "casual gamers" will react once the price hits a cheaper point, but for now it seems buyers are quite aware that they need to fork out cash for either the Memcard or HDD. And you can get a 2,5" 40GB HDD for less than 50 Euro retail. A Memcard for XBox360 costs what?

Price will play a big role, but I doubt HDD will acount for a big part of it.

Sure, just a little. However, whatever its cost, it was enough for MS to change course on their strategy of standardization on it.

I think you can figure for about $20 for the HD?

After that, the only other uptick i can really see may be the delta between the DVD drive and the BR drive as time goes on. That BR drive cost today, and projected, would be great to know.

 

[Npl]

Sure, just a little. However, whatever its cost, it was enough for MS to change course on their strategy of standardization on it.

The HDD certainly bit them against the PS2, and they dint knew Sonys plan with PS3 then. My gut tells me that they played safe and would reconsider their choice today

After that, the only other uptick i can really see may be the delta between the DVD drive and the BR drive as time goes on. That BR drive cost today, and projected, would be great to know.

Yeah, would be interesting. Also Sony dint say very much how they solved Backwards-compatibility, there could be a whole PStwo buried inside for all we know.

 

[expletive]

The HDD certainly bit them against the PS2, and they dint knew Sonys plan with PS3 then. My gut tells me that they played safe and would reconsider their choice today

Possibly. The Peter Moore PR-speak was something along the lines of wishing they could have put out a $79 xbox for people, and the deals with Intel, Nvidia, and the standard HD, made that impossible.

I dont know how realistic $79 ever would be but i see his point how even a $99 360, with the games and services it will have by then, would be a very compelling mainstream purchase. And not just for MS, for any of these manufacturers.

When you start talking in prices of $149, $129, and $99, these fixed $20 costs really throw a spanner in the works, at least it seems so to me.

 

[RobertR1]

As this console cycle moves along I wonder now if Sony has to hit 299-399, or if they need to be price competitive with the 360/Wii.

Thats really 2 different questions and in the past the consoles were always comparably priced so we never viewed it in these terms before. For example, in 2 years if the PS3 is 299 is that good enough regardless, or is it only good enough if the 360 isnt 199? We're talking about the PS3 getting to a certain price as if then they would have the price issue 'solved' but it may only really be solved if their pricing is competitive.

Also, the undelying question here is really not about price for Sony its about cost. What is their cost going to be in 2 years? 3 Years? We know it will be at least a Hard Drive more expensive than the 360. If theyre at a cost disadvantage theyll have to choose between: 1) Not competing on price or 2)Matching price and losing money on the hardware for a LONG time.

In 2 years if the PS3 is at $399 then the 360 will already have been out for 3years, likely around $199 and you'd start hearing rumors of the next console from MS. The lack of sales during these 2 years would also deal a major blow to their Blu Ray campagin which is already looking bad seeing that the Toshiba HD DVD players picture is as every bit as good as the Sony Blu Ray player, at half the cost, with a wider selection and actually available for purchase.

Sony promised too much in 2005 and yet their presentation was as silent as it could be which asks the question "what can we expect from the PS3!?"

Is the PS3, a whole year behind and $200 more with a much smaller game library, worth the price of admission on day 1? or are there better options out on the market already. This is something that Sony has not had to deal with and I think it's hitting them and shaking them up a bit.

Idealy, I'd like to see this gen split as evenly as possible between MS and Sony. Why? because they'll try to one up each other again on the next console and we'll get the benefit.

 

[Shifty Geezer]

I think it's obvious what Sony needs to do, they need to drop the price of the console by $300 in 2 years. That's really the bottom line.

Can it be done? I don't see why not.

How's about they drop the price $25 every quarter? Keeping it regular like that, each price drop isn't that much that previous buyers will be disgruntled, unlike a $100 plummet each year, and it'll let buyers pick their price weighed against delay. For some people that extra $25 more is worth it to get the console now instead of in a month's time when it gets the price drop. IT's also a small enough amount that buyers will likely say 'well, I can wait a couple more months, but it's only 25 bucks'. Potentially Sony would see more customers at inbetween pricepoints who otherwise would pay less. That is, if the price drops from $500 to $450, there's some buyers at $450 who'd have paid $475. More likely as the price drops to $350, $325, £300.

 

[patsu]

The thing with digital distribution is that no company has yet to prove that it's a profitable business to be in today. Apple makes their money on hardware and, AFAIK, is break-even on the distribution side. The distribution side is there to drive consumers to buy the hardware. If Sony is losing money on the hardware, the benefit is still there, since more consumers buying more hardware would hopefully generate a higher video game or Blu-ray attach rate. But the end goal of the PS3 is probably not driving consumers to their digital distribution.

The power of digital distribution lies more than just revenue number. It is many things to many people, mostly strategic. e.g., direct and efficient access to customers, better and faster understanding of their preferences and buying habits, openning up new channel/buying opportunities, simplifying business operations and supply chain. Its importance, in theory, cannot be under-estimated.

At the beginning, Steve Jobs keep sending the message that Apple is losing money on the infrastructure. This is not wrong but also not the complete picture. Based on MBA case studies, Apple will start to make money on the distribution side after 5 years from launch (i.e., when the critical mass of players are able to sustain a buy-rate that exceeds the running cost, increased power of servers like Sun's Niagara lowers op costs). Apple has been quiet on their digital distribution business since then. We can only guess.

 

[scooby_dooby]

How's about they drop the price $25 every quarter? Keeping it regular like that, each price drop isn't that much that previous buyers will be disgruntled, unlike a $100 plummet each year, and it'll let buyers pick their price weighed against delay. For some people that extra $25 more is worth it to get the console now instead of in a month's time when it gets the price drop. IT's also a small enough amount that buyers will likely say 'well, I can wait a couple more months, but it's only 25 bucks'. Potentially Sony would see more customers at inbetween pricepoints who otherwise would pay less. That is, if the price drops from $500 to $450, there's some buyers at $450 who'd have paid $475. More likely as the price drops to $350, $325, £300.

No I don't like that idea at all. I think larger, less frequent drops are a much better idea.

Constantly dropping price just drives the 'wait for it to drop again' mentality, and in general just creates confusion, I think it's an unnecessary gamble. Sure it's a small drop, but still I think you should have a much greater focus on pleasing future buyers, rather than soothing 'disgruntled' previous buyers. These small drops would only confuse potential purchasers.

Sony would be better served IMO to do something like a $100 pricedrop at E3 next year, and then another $100 at the end of 07, and that would put them in fine standing and the early adopters can just suck it up, what're they going to do about it anyways??

 

[Shifty Geezer]

the early adopters can just suck it up, what're they going to do about it anyways??

In my case I'd delay buying for 4-5 months if I knew there was a substantial price drop coming. I'd have thought there'd be plenty of people similar. But I guess for mainstream buyers they just look in the shop and see what the price is, so they wouldn't know. There'd just be that few, maybe 10%, who walk into the shop to see the console's just dropped $100 and whinge and moan!

 

[scooby_dooby]

In my case I'd delay buying for 4-5 months if I knew there was a substantial price drop coming. I'd have thought there'd be plenty of people similar. But I guess for mainstream buyers they just look in the shop and see what the price is, so they wouldn't know. There'd just be that few, maybe 10%, who walk into the shop to see the console's just dropped $100 and whinge and moan!

How would you know?? You wouldn't.

 

[Sis]

The power of digital distribution lies more than just revenue number. It is many things to many people, mostly strategic. e.g., direct and efficient access to customers, better and faster understanding of their preferences and buying habits, openning up new channel/buying opportunities, simplifying business operations and supply chain. Its importance, in theory, cannot be under-estimated.

At the beginning, Steve Jobs keep sending the message that Apple is losing money on the infrastructure. This is not wrong but also not the complete picture. Based on MBA case studies, Apple will start to make money on the distribution side after 5 years from launch (i.e., when the critical mass of players are able to sustain a buy-rate that exceeds the running cost, increased power of servers like Sun's Niagara lowers op costs). Apple has been quiet on their digital distribution business since then. We can only guess.

I agree with the strategic importance of the digital distribution, but at a certain point a business requires focus, and adding "establish Sony digital distribution" on top of "continue 3rd dominant game console" and "establish Blu-ray" seems to be stretching it. As well, Sony lacks (I believe) the asset that Apple had: they made money on the hardware.

So the question is: if the hardware loses money and the digital distribution loses money, where's the upside? Long term strategy? It seems iffy, which is why I think Sony is using digital distribution as a weak carrot for driving their games strategy (along with a couple other things, such as the lack of a viable, built-in wireless card for streaming video content).

 

[patsu]

So the question is: if the hardware loses money and the digital distribution loses money, where's the upside? Long term strategy?

With so many capabilities built-in, the business model for PS3 is complex. I don't think we can look at them piece-meal and conclude that Sony loses money on both hardware and digital distribution _today_ and hence it's not a worthwhile exercise. The possible upside for PS3 are:
* Traditional game business revenue, including XBL Arcade like services to improve cashflow for title businesses
* Premium content sales (Movie, music) at marginally zero cost. Also to improve back catalog sales further.
* Transaction fee from user-to-user and partner-to-user sales
* Interactive marketing to user base
Remember the uptake for online gaming is only 5% thus far. It can be improved with proper marketing.

The cost savings for PS3 are:
* Cell chip for media appliances (e.g., HD TV)
* Pool technical, logistics, marketing and ops resources from other investments (e.g, Blu-ray, content) to PS3 since it's a guaranteed sales for a large group of people

The marketing reasons for PS3 network platform are:
* Loyalty building
* Match up with competitors' offerings. It's only a matter of time before MS consolidates MSN into Xbox 360 where it makes sense.

As I mentioned many posts before, it is a risky move on Sony's part (due to the high entry price). However there seem to be compelling corporate reasons to do it. Not to mention a positive turn in some of these upcoming trends will make people see PS3's value in different light.

If Sony does not start digital distribution now, Apple, Microsoft, Google or even Yahoo may replace their publishing units as a more efficient and effective mechanism (for certain large segment of the population).

It seems iffy, which is why I think Sony is using digital distribution as a weak carrot for driving their games strategy (along with a couple other things, such as the lack of a viable, built-in wireless card for streaming video content).

If it's a weak carrot, why will it help PS3 sales since we know the latter will sell nonetheless ? If PS3 can sell Blu-ray, why can't it sell digital distribution given that certain media sold increasingly better over the net.

A large part of the PS3 strategy seem to lie in its flexibility (like a PC), and complementary content sales. Ken Kutaragi talked about different PS3 configurations, it's more likely that Sony is using its economy of scale in PS3 to deploy next gen Sony appliances and services.

Just my 2 cents worth.

 

[Archgamer]

I'm curious to see what the manufacturing cost for the PS3 is. With this ridiculous price I think Sony is looking to break even and probably will, quicker then MS. Kaz Hira always mentions that they are going into a three pillar strategy with the PS3, PS2 and PSP. With the PS2 already a proven market and Sony flow of cash cow it would only help them absorb some of the major losses that they will incur on their first year.

I have no doubt that the PS3 will sell out at launch. But then it gets tricky. How are the casual going to respond? Will the "PlayStation" brand name convince these people?

I would agree that the PS3 has better value then their competitors. Once you fork down the 600 dollar unit there is not much else to buy in terms of peripherals. But it's just not price realistically. And I think the consumers first awarness is the price before the talk on value.

The first year is going to be interesting for Sony. But if they can at least come close or even match the XBox 360 in month to month sales, then it will pay off big time in the near future where Sony can look at the possibilities of redesigning their console at half price. They did that with the PSOne and slim PS2. Not sure, but I think redesign consoles is a smarter, faster way to bring down the cost then soley relying on how many unit you can produce in a time frame.

Just my two cent.

 

[Simon Templar]

I too am concerned about pricing but from a slightly different angle that puts Sony in a real bind.

First a little bit of history (to the best on my memory) when the PS2 lauched at $299 it was approximately equal in price to a comparable dvd player (that was offered by a variety of companies). This offered an excellent value for the consumer and did not directly alienate DVD player manufactures who had already recouped their development cost on players by then with early adopter sales.

This time Sony is trying not only to launch a console but also a disc format. Unfortunately before any other manufacturers can get blu-ray players on the market at price points near or below the PS3's anticipated lauch price. (According to blu-ray.com players are expected to lauch in June for between $1000 to $1500). Now this seems really good for Sony as they will have a product at a much lower price point than other blu-ray players.

But how long do you think other manufactures will continue to fund Sony's format when they are unable to recover their r&d cost? If Sony lowers the price of the PS3 aggressively as some had earlier mentioned they risk alienating Samsung and Panasonic (+ others ?)who I don' t believe would be too broken up about a Sony Failure.

I think money rules this decision not tech specs or percieved superiority, Add to this a viable competitor that is set on having a lower cost product and I have serious concerns that pushing the Blu-ray feature of the PS3 will result in the sales that Sony is hoping for as they did when bundled DVD with the PS2.

Just my thoughts.

 

[patsu]

I too am concerned about pricing but from a slightly different angle that puts Sony in a real bind.

First a little bit of history (to the best on my memory) when the PS2 lauched at $299 it was approximately equal in price to a comparable dvd player (that was offered by a variety of companies). This offered an excellent value for the consumer and did not directly alienate DVD player manufactures who had already recouped their development cost on players by then with early adopter sales.

This time Sony is trying not only to launch a console but also a disc format. Unfortunately before any other manufacturers can get blu-ray players on the market at price points near or below the PS3's anticipated lauch price. (According to blu-ray.com players are expected to lauch in June for between $1000 to $1500). Now this seems really good for Sony as they will have a product at a much lower price point than other blu-ray players.

But how long do you think other manufactures will continue to fund Sony's format when they are unable to recover their r&d cost? If Sony lowers the price of the PS3 aggressively as some had earlier mentioned they risk alienating Samsung and Panasonic (+ others ?)who I don' t believe would be too broken up about a Sony Failure.

I think money rules this decision not tech specs or percieved superiority, Add to this a viable competitor that is set on having a lower cost product and I have serious concerns that pushing the Blu-ray feature of the PS3 will result in the sales that Sony is hoping for as they did when bundled DVD with the PS2.

Just my thoughts.

Right. Something inside tells me that to address all the items I mentioned above, the optimal solution for Sony is to release a family of products, rather than 1 product. These products can share the same underlying platform/technologies. They can brand the product family Playstation (if they want to). That way they fit better into the users' needs and budget.

Then optionally, after this step is Sony's current "1-box" strategy.

Right now, Sony seems to play on the bundling economics + economy of scale (skewed by manufacturing dynamics and technologies instead of marketing). They will pay in losing marketshare. Perhaps they will earn back in margin in the long term, but may be not. Time will tell.

As for antagonizing other Blu-ray manufacturers, it's a real possibility. I'd classify it as a love-hate relationship. Without PS3, Blu-ray may have a harder/longer time to take off. Once the various Blu-ray component costs decline due to PS3's initial investment and larger volume. Other manufacturers should be able to take advantage of it too.

I admire Ken's gutsy moves but with the latest price info, I think even some Sony executives must be sweating inside.

 

[wco81]

Those manufacturers realize that PS3 will get Blu-Ray players out into a lot of homes quickly, which will get them software support (some of which has materialized already with Paramount at least citing the advantage of the PS3).

They also are vendors of HDTV displays so if the PS3 gets HDTV playback hardware and software out there, it helps other facets of their business too.

That said, who knows, maybe Sony had to price it higher than they otherwise might have to placate these other vendors.

 

[Fox5]

I'm curious to see what the manufacturing cost for the PS3 is. With this ridiculous price I think Sony is looking to break even and probably will, quicker then MS. Kaz Hira always mentions that they are going into a three pillar strategy with the PS3, PS2 and PSP. With the PS2 already a proven market and Sony flow of cash cow it would only help them absorb some of the major losses that they will incur on their first year.

Maybe they plan to keep the PS2 (and game development) going as a low cost console. Afterall, Nintendo seems to contend that last gen graphics are sufficient for most people, so it's definetely possible. The GBA still sells games despite being last gen handheld, though primarily in Japan.
However, if Sony were to go that route, I think making a PSP with video out would be a better option, that way the low cost market and the handheld market could augment each other and the production of games, as opposed to trying to goad developers into making games for an outdated system.

 

[Sis]

With so many capabilities built-in...

Excellent post, Patsu, and I appreciate you taking the time. I will humbly suggest, however, that I believe you and I are in agreement. All of your bullets point to a long term strategy, an investment in platform, both hardware and software. While I still consider online distribution a "fool's gold" in terms of revenue, I certainly don't disagree with your comment about building it for the future.

If we define "short term" as the next 5 years, would you agree that Sony's short term revenue is almost entirely generated from gaming related functions? I believe this to be true, which is why I view the initial price of the PS3 so negatively (and related, the inclusion of the Blu-ray drive). However, if they were to accomplish significant price reductions year after year, then it truly would be remarkable; even more so if their multipronged strategy of Blu-ray, online distribution, and gaming make great headways.