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Old 02-21-07, 04:01 PM   #1
TiKiMaN1
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Exclamation Sony Risks Falling Out of Console Battle

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!

http://www.theinq.com/default.aspx?article=37771
Quote:
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.
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Old 02-21-07, 04:08 PM   #2
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Default Re: Sony Risks Falling Out of Console Battle

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
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Old 02-21-07, 04:10 PM   #3
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Default Re: Sony Risks Falling Out of Console Battle

Quote:
Originally Posted by zoomy942
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.
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Old 02-21-07, 04:23 PM   #4
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Default Re: Sony Risks Falling Out of Console Battle

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.
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Old 02-21-07, 04:25 PM   #5
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Default Re: Sony Risks Falling Out of Console Battle

Quote:
Originally Posted by zoomy942
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...
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Old 02-21-07, 04:33 PM   #6
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Default Re: Sony Risks Falling Out of Console Battle

That may be the best article the Inq has ever written.
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Old 02-21-07, 04:36 PM   #7
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Default Re: Sony Risks Falling Out of Console Battle

I think they'll do okay once they have more content out there.

Quote:
Originally Posted by Imbroglio

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.
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Old 02-21-07, 04:42 PM   #8
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Default Re: Sony Risks Falling Out of Console Battle

Quote:
Originally Posted by superklye
That may be the best article the Inq has ever written.
I agree. It is one of ther better articles. Although I must admit that Fuad says some really funny things sometimes.
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Old 02-21-07, 05:45 PM   #9
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Default Re: Sony Risks Falling Out of Console Battle

And in other news a few hundred more 360's just died.
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Old 02-21-07, 06:56 PM   #10
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Default Re: Sony Risks Falling Out of Console Battle

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.
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Old 02-21-07, 07:26 PM   #11
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Default Re: Sony Risks Falling Out of Console Battle

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. For the love of Sony they better not ever lose MGS4.
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Old 02-21-07, 07:54 PM   #12
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Default Re: Sony Risks Falling Out of Console Battle

so now the TheInq is right about something just because they are saying something negative about Sony?
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