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TiKiMaN1
02-21-07, 04:01 PM
Now I'm not saying the PS3 is doomed, but what I am saying is this is a very interesting read. I agree with Charlie that the three points of the triangle are cost, installed base and games. Whether or not you believe TheInq you should at least read what he has to say this time. It makes sense in a lot of ways IMO.;)

Read On!:D

http://www.theinq.com/default.aspx?article=37771
THE CONSOLE MARKET is a virtuous circle with three main points, a virtual virtuous triangle. If you don't do well on all three points, you end up out of the market, and Sony is on the verge of just that.
The three points of the triangle are cost, installed base and games. If you don't have two of them, the third will never happen, and if you do have two, the third will come for free. Basically it is a feedback loop, you will excel at all three and ramp up the numbers or you will be in a death spiral quicker than you can say comprehensive Blu-Ray crack. There is no middle ground.

Let's look at these things individually starting with cost, you can use price somewhat interchangeably however. Cost is what a console maker has to shell out to get the box on the shelves, price is what you have to shell out to get it off the shelf.

Cost is the more interesting one of the two mainly because price is artificial, almost every console maker subsidizes the initial cost of a console in order to sell more. The PS3 was stupidly expensive at $600, but even at that, Sony was eating about $200 putting the cost at around $800. They plan to make it up by getting a kickback of $10-15 per game sold, so if the buyer buys 15 or so games over the life of the console, Sony will break even.

As time goes on, parts get cheaper, chips get shrunk, and technology marches on, so the cost to the console makers goes down, which can either be reflected in the price you pay or the profit they make. It usually ends up as a little of both.

That brings us to installed base. The cheaper the consoles are, the more they sell. A $99 Xbox360 would probably have sold 25 times as much as a $400 one in 2006, but I doubt MS would be willing to eat the $420 per unit that it would have taken to do that. If MS sold 10 million units in calendar 2006, a $420 loss per unit would be a hit of just over $ 4 billlion. Not bad, but you probably would be buying $99 games to go with the $99 console to make the numbers work at the accounting department in Redmond.

The first bit of the virtuous circle is that when the installed base, IE the number of units sold climbs, the cost goes down. If you want to make a grand total of 10 Xbox360s, the development costs, tooling, advertising and other costs are going to make each one cost tens of millions of dollars, possibly hundreds.

At a million units, the cost goes down a lot, to the humanly affordable range, and by the time you hit tens of millions of units, the fixed costs go down even more per unit. You can also negotiate better pricing with suppliers, and in general things get cheaper. Take home message, higher the number sold, the cheaper each one is.

So the more MS or Sony sell, the more money they make, or at least the less they lose, and the quicker they can drop the price. The more they drop the price, the more they sell. Conversely the less they sell, the longer it takes to drop costs and the longer they have to eat money on each console. The death spiral comes in when they can't drop prices enough to stop the initial eating of cash. Two $100 bills effectively tacked to each PS3 box times 10 million units is a lot of money.

The only thing that could be worse than the continual loss of $200 per unit is not eventually making up for it in software sales. This where our third point of the circle (yeah, I know) comes in, software. For every game sold, the console maker gets a cut, usually a pretty hefty cut, but the exact amount is a closely guarded secret. When I was writing for the Atari Jaguar, it was about $5 per cartridge, and the grapevine tells me the number now is about $10-15 per disk sold.

This number is highly negotiable, if you are a big name dev house and you are willing to put out your app exclusively for one console, this fee can be negotiated down or even away in rare cases. The little guys, well, they get shafted. In any case, for the sake of argument, I will assume the console makers get $10 per game sold, and zero for big name exclusive games.

One more tidbit to toss at you, I have been told by a bunch of people that dev costs are painful on the new consoles, the 360 and PS3 specifically. If a game for the older XBox1 or PS2 cost $5 million to make, the 360 is about double that or theoretically $10 million. The killer here is that the PS3 dev costs are between 2-3 times that of the 360 and about 5x that of the Xbox1 or PS2. Ouch.

Now, getting back to the feedback part of the circle, if you are a dev, you want to write your game for a large potential audience of paying customers. Assuming you get $20 per game sold, and a game costs $10 million to develop, you need to sell half a million copies to break even. If you don't, well, you won't be in this business for long.

If your new game, Killer Death Robots 999 appeals enough to 10% of the people out there who eventually buy it, you can work out the numbers pretty quickly. If the console has a million units in circulation, you will sell about 100K copies and lose your shirt. If it has 10 million units out there, you stand to make a lot of cash, and at 100 million units, well, call me, I am more than willing to be adopted at this stage in my life.

Basically what it comes down to is the more units a console maker has out on the market, the more willing game companies are going to be to write for it. Even if you make a stinker, if there are 100 million consoles out there, you will probably make a profit, there are a percentage of people who will buy anything. Conversely, if you make the best game in the world that everyone buys, if there are 100K consoles out there, you will still not make any net profit.

There is a big mushy middle ground here, and that has to do with how much effort you expend on each version of a game written for multiple platforms. If the 360 has 10 million units and the PS3 1 million, you can do the math. Write it for the 360 and spend $10 million, but only port it to the PS3 if you can do the port for under $1 million.

This is where a lot of the death spiral side of things comes in. If you don't have enough consoles out there, people will not write games for your super 31337 system, or at best do a crappy port to it. This means the console with the most units will get the better games. It will sell more units allowing them to lower costs, make up the money they initially ate faster, and in general be happy camper.

The company with the lower number of units gets the shaft. They become less and less desirable to write for, and less and less desirable to buy, and less able to lower costs. Higher costs means fewer sales means worse games. Negative feedback, and it hurts.

One note here is that there does not have to be a winner and a loser, there can be multiple winners or losers. If all of the consoles reach a critical mass, they will all win. If none sell enough, they will all lose, so don't assume that one winner means another loser.

Apparently there will be a new article tomorrow.

zoomy942
02-21-07, 04:08 PM
i read it this morning. i dont think s0rny is doomed, but whats sad is that tomorrow they will have a press release saying they pwned the competition

TiKiMaN1
02-21-07, 04:10 PM
i read it this morning. i dont think s0rny is doomed, but whats sad is that tomorrow they will have a press release saying they pwned the competition

Hooray! More marketing bull crap like the PC vs Mac commercials.:(

Imbroglio
02-21-07, 04:23 PM
that's very interesting, as i remember back to the sega saturn days where the console really didn't have the user base, there were quite a few games, but many people including myself didn't buy one because of the price and we see where that headed.

i don't think the general public is ready to have BR forced into a console, nor do they care. they see the xbox360 with equal performance and think why should i pay 200 more for something i don't care about/need.

|MaguS|
02-21-07, 04:25 PM
i read it this morning. i dont think s0rny is doomed, but whats sad is that tomorrow they will have a press release saying they pwned the competition

While they are not owning the compeition they are proving the critics wrong, for the sales of Jan the PS3 was very close to the X360 in sales, only 50K off or so which is suprising when you consider the price difference and the extreme lack of titles for the PS3. If anything its proving Sony correct that people will pay the price for the PS3 even if the games aren't there, now imagine the sales once the AAA titles release...

superklye
02-21-07, 04:33 PM
That may be the best article the Inq has ever written.

OWA
02-21-07, 04:36 PM
I think they'll do okay once they have more content out there.



i don't think the general public is ready to have BR forced into a console, nor do they care. they see the xbox360 with equal performance and think why should i pay 200 more for something i don't care about/need.
I think the blu-ray is a big plus though. While some would rather have a cheaper console, many seem to buying the HD DVD addon so it looks like it's indeed a desired feature. In that regard, the PS3 is a much nicer/cleaner solution.

TiKiMaN1
02-21-07, 04:42 PM
That may be the best article the Inq has ever written.

I agree.:D It is one of ther better articles. Although I must admit that Fuad says some really funny things sometimes.

S.I.N
02-21-07, 05:45 PM
And in other news a few hundred more 360's just died.

saturnotaku
02-21-07, 06:56 PM
I had no problem sending my 360 in that I bought on eBay. There is an ongoing issue of it getting back to me, but that's a long story for another thread.

TiKiMaN1
02-21-07, 07:26 PM
So anyway....Sony risks falling out of console battle and this is true IMO if AAA titles don't start flooding the gates and the user base does not increase.

They have already lost some exclusives to the 360 like UT3 and Assasins Creed.:p For the love of Sony they better not ever lose MGS4.:lol:

Apollo 13
02-21-07, 07:54 PM
so now the TheInq is right about something just because they are saying something negative about Sony?

Quickstar
02-21-07, 08:00 PM
Keep in mind that Japanese game developers have little to no desire to create games for the 360 due to its terrible adoption rate in Japan. The Wii and PS3 dominate the console market there, so I wouldn't count on any of the consoles "losing" this race.

360 and Wii own North America
PS3 and Wii own Japan
And based on preorders for the PS3 in Europe, I imagine it will be the Wii and PS3 dominating there as well.

Keep in mind that Japanese developers can sell games in the US thanks to something called globalization. I mean look at Lost Planet and Resident Evil 5....

Mr. Hunt
02-21-07, 09:10 PM
In other news, batboy saved ratface woman from a burning cave that contained the Arc of the Covenant.

Bad_Boy
02-22-07, 02:08 AM
so now the TheInq is right about something just because they are saying something negative about Sony?
Tell me about it. The double standards here are amazing. If the article was about the 360 the inq would of been wrong on so many levels to them.

hazindu
02-22-07, 07:58 AM
so now the TheInq is right about something just because they are saying something negative about Sony?No, they're right for a change because they're stating the obvious about the business. If they claim that rain is wet, they are right because rain is liquid which is often described as wet, not because they're anti sunshine.

Badboy_12345
02-22-07, 08:49 AM
And based on preorders for the PS3 in Europe, I imagine it will be the Wii and PS3 dominating there as well.

hah no way in hell :p
ps3 will never dominate europe
at least not sweden every magazine that writes about it says the x360 and wii are a better buy and its true

and the x360 prem costs half the price of a ps3 60gb
hmm which to choose...

thor1182
02-22-07, 09:01 AM
you did see this site right?
http://www.thisiswaiting.com/

yeah I would say a decent sized group is rather pissed that they got the shaft when it came to the PS3 launch.

H3avyM3tal
02-22-07, 09:26 AM
you did see this site right?
http://www.thisiswaiting.com/

yeah I would say a decent sized group is rather pissed that they got the shaft when it came to the PS3 launch.

Wow, someone(s) really put time and work into that huh (some are funny though. Or were actually)?

thor1182
02-22-07, 10:29 AM
its amazing what irritation and spare time will do. I did not make that site, I saw the link off of THG's site awhile back... I think...

nemecb
02-22-07, 10:32 AM
so now the TheInq is right about something just because they are saying something negative about Sony?
Even a blind squirrel finds a nut once in a while.:D

And really they're not saying anything visionary. It's just a restatement of what everyone's already been saying: Sony needs more games to drive more sales so people will make more games (rinse and repeat). The price is kind of incidental at the moment because the PS3 is going to be the most expensive, and that's just the way it is so they're going to have to compete on the other two points of the circle (wtf was that all about anyway? Why drop the triangle analogy?).

Lyme
02-22-07, 12:36 PM
As easy as it is to break down the issues that will make or break a console to make sense of them, doesn't mean that the deciding factor will make sense. The PS3 has quite a few things going for it including being a good blueray player, it can play ps1/ps2 games, good initial sales and Japanise developers support it. It also has a large number of things not going for it, including: high price, lack of ps3 games, console shortages.
Regardless of that, the PS3 still has not been out long enough to gauge the continued interest in the console. In the short time that it has been out it has sold reasonably well, and still is selling reasonably well. Are these still all the first adopters getting in? In the North america market we still have another four months to go before this will be evident.
As for the 360, it sells reasonably well, but has a unusually high failure rate. It is doing well in every market except for Japan, which is generally because the Japanise don't like foriegn products. However, in the interm this is hurting them because the PS3 doesn't have the market of the 360, but ps3 titles are still doing very well.

What I know for sure, is that if MS drops the price of the 360 by $100 it will sell alot more and that will hurt the sales of the PS3.

TiKiMaN1
02-22-07, 03:15 PM
Part II

http://www.theinq.com/default.aspx?article=37773

ONE WAY TO FEND OFF the death spiral for a console is to develop a exclusive killer app. If you have a game that will be a blockbuster, you can go to one of the console makers and say, "We will only put this out for your system if we get a bribe."
That bribe is usually lowered or no kickbacks per disk. If the studio that made Halo was not owned by MS, they could go to MS and say "We figure we will sell 10 million copies of the 360 version of Halo 3 and seven million of the PS3 version. We will not do a PS3 version if you make it worth our while not to, say no fee per disk so we can pocket that $10 per unit and an ad budget worth $5 million".

The virtuous part is that if five of those seven million potential PS3 customers buy a 360 because they really want to play Halo 3, MS can do the math and see if it is worth it or not to shell out the cash. Conversely, Sony could look at the 10 million potential 360 customers and figure that 6 million might buy a PS3 if Halo 3 was their exclusive. Here is where you get into a bidding war with a lot of zeros behind it.

In the end, the better the games, and the more exclusive the games, the more consoles you sell. The more consoles you sell, the less they cost to make, and the more people buy. Why do they buy? Good games and low cost. Why is the cost low? Good games and lots sold. Why are the games good? Lots of potential customers. It is a positively reinforcing feedback loop.

The flip side of this is that if the games are not there, you don't sell many consoles. This drives costs up and sales down. Why don't they buy? Bad games and high cost. Why is the cost high? Bad games and few sales. Why are the games bad? Few customers makes it not worth the effort. This is the classic death spiral.

If you look at the current console wars, 360 vs PS3, you can see where things are at. Last I heard, MS was closing out the year with a profit of about $75 per 360 sold and Sony was losing about $200 per. The exact numbers are not really all that important, but the general trend is. MS has a cost of about $325 for the high end 360 and Sony about $800 for the high end PS3, MS makes money, Sony loses.

Even if you assume both companies are bottomless money pits who see this as a long term struggle, there is a problem. The positive feedback loop will allow the consumer to win, cheaper consoles, better games, and lots of extra goodies that go along with it.

The death spiral means a company has to shell out more and more money to hold their ground. They have to buy more exclusives, subsidize consoles more, and basically bribe people into taking money from them with each console sold. Worse yet, if you buy a PS3 for $-200 as far as Sony is concerned, and then there are not 20 games you want to buy over the next few years, Sony eats that $200.

MS in the mean time can take that $75 they are making and drop the price to around $300, bundle in a couple of games and a controller, or just do something creative. Sony will have to match this and drop their price by $100, bundle games, or whatever else MS does. Instead of it being a zero sum game like it is for MS, Sony will have to sell 10 more games per console or eat the cash.

Sony is treading on some seriously dangerous ground here, dangerous enough to potentially break the company. Their reputation is pretty well mud among the geek set for the DRM infections, rootkit fiascos and general corporate ickyness of the past couple of years. This drove away some early adopters.

The $600 price tag drove away more making it a non-starter as an impulse buy. It was late to market, they couldn't supply the vastly lowered expectations they set weeks before Christmas, and in general failed miserably on execution. Net result, about half of the sales they were projecting six months before, possibly less than that. To add insult to injury, Nintendo blew by them and laughed.

This did not escape the notice of the software makers either. They are faced with optimistically twice the cost to write a game for the PS3 as the 360 and only a fifth the market to sell it in to. It doesn't take a genius to figure out that the second generation of PS3 games will have a lot more ROI calculations done on them before they get a green light. Many won't get that green light.

This is far more than a theoretical problem though, in talking to several game developers, the death spiral for Sony has already begun. Many are telling me they are not writing Cell code any more, just farming it out, the 360 is the development target now.

The problem there is that the 360 will be utilized fully and optimized for. If there are special features of the 360, they will get used, and every tweak and hack explored as well. This will then be shoveled off to some poor third party who has to make it work on the PS3, a very different architecture with a very different set of strengths and weaknesses.

What you end up with is a fully utilized 360 and the 'same' game on the PS3 with all the weaknesses of the 360 and all the weaknesses of the PS3. Add in very little budget to optimize the resultant PS3 code, and you get a B-list version of an A-list title. This will be readily apparent to even the most blatantly paid for game reviewer.

Can you guess the result? Slower software sales, slower hardware sales, and higher costs. Those dollars end up going somewhere, people want to play games. So they buy a 360, it has all the cool games. This drives up unit sales, lowers cost, and makes MS very happy.

Sony is on the verge of the death spiral. You can tell they are desperately spinning the rhetoric to keep hope alive, but private conversations with game devs tell me it is not flying behind closed doors. How long can Sony, or more to the point, will Sony keep up the money hose? Can they do it until the ugly duckling called PS3 turns into a swan, or will it stay ugly and die?

Meanwhile, MS is on the verge of a price cut (http://www.theinquirer.net/default.aspx?article=37711), is the primary development target for every console dev I talk to and is selling like hotcakes. PS3s are languishing on the shelves (http://www.penny-arcade.com/comic/2007/02/10) and getting the cold shoulder from the devs. One company is on the virtuous cycle, the other has their toes over the edge of the death spiral. Dire times indeed for Sony.

TiKiMaN1
02-22-07, 03:20 PM
so now the TheInq is right about something just because they are saying something negative about Sony?

Did you even read the article? :screwy: The author is simply pointed out what Sony has to have to stay on top. Otherwise they are any other console company could get the cold shoulder. Both of these were very well written IMO.:D

TiKiMaN1
02-22-07, 03:23 PM
ONE WAY TO FEND OFF the death spiral for a console is to develop a exclusive killer app. If you have a game that will be a blockbuster, you can go to one of the console makers and say, "We will only put this out for your system if we get a bribe."
That bribe is usually lowered or no kickbacks per disk. If the studio that made Halo was not owned by MS, they could go to MS and say "We figure we will sell 10 million copies of the 360 version of Halo 3 and seven million of the PS3 version. We will not do a PS3 version if you make it worth our while not to, say no fee per disk so we can pocket that $10 per unit and an ad budget worth $5 million".

The virtuous part is that if five of those seven million potential PS3 customers buy a 360 because they really want to play Halo 3, MS can do the math and see if it is worth it or not to shell out the cash. Conversely, Sony could look at the 10 million potential 360 customers and figure that 6 million might buy a PS3 if Halo 3 was their exclusive. Here is where you get into a bidding war with a lot of zeros behind it.

More good analysis by Charlie.