Sony Blu-Ray Mistake FAQ
this is from a comment over on a previous post about channel conflict with blu-ray drives in the ps3. responding to waiting4PS3HDTV.
i’ll try to distill what your saying down to a few points here and address them. it probably warrants an entire post all to itself.
making money back via:
currently, the royalties console manufacturers collect floats between 20% and 30% of the wholesale price, depending on the clout of the developer. so, that goes quite a ways towards making up the loss on the console. for easy math, we’ll say $10 per game goes back to the console maker per game. (i think it’s closer to $9, but, who’s counting, right?)
anyway, we’ll just make a big assumption that current and previous generation (successful) consoles have made a profit. so, we’ll just assume they need similar attach rates for their software in order to do so.
typical consoles lose usually less than $200 (unless your nintendo — i believe they actually profit on their consoles from the beginning!) right out of the gate.
so, that puts some numbers to things. $200 + current attach rates make a console manufacturer profitable.
that being the case, sony, if they put a standard dvd drive in their console, should lose about $200 per unit. unless you are saying that it is much, much less advanced than anything the xbox 360 is using, which it’s not. they are spending their money on a crazy-powerful graphics chip and a wild cell processor. so, it stands to reason that with similar (or more advanced, depending on who you believe) hardware, meaning no blu-ray added and using a standard dvd-9 drive, the systems should be approximately comparably priced.
now, instead of a standard dvd drive, they have this monster of a blu-ray drive. considering the prices announced at ces, we’ll assume your average stand alone blu-ray player is $1200. maybe 1/3 of that is fluff. 2/3 of it is the actual player. hell. let’s get crazy. 1/2 of the cost is blu-ray with their fancy cone-shaped, incredibly tiny laser head.
so, let’s say putting that drive into a ps3 adds 1/2 of that cost, or $600, to the cost of sony manufacturing the console.
so, give or take (since we removed the standard dvd) their net loss per console should be in the neighborhood of $700. and, that’s if they price it at $400 on shelves. since $700 is 3.5 times the standard loss for a console we can assume they need to sell 3.5 times the games to make up the difference.
that’s over 3 times the attach rate of any previous console. that means, on launch, your average gamer needs to buy more than 12 titles.
to put it into perspective, the xbox 360 has the record with lauch attach rates at just shy of 4.
now, based on math and economics, how exactly is sony NOT going to take a monsterous loss? they won’t. the first year of the hardware, they are going to lose triple what any console in history has ever lost.
while sony does own a movie studio, the movie business does not really mirror the video game industry. music is actually much closer in model.
that being said, sony blu-ray movies have a lot of money to make up for their initial investment in blu-ray. that’s a whole ‘nuther article altogether.
accessories don’t typically get subsidized by game sales. in fact, that’s why they report in through a different silo than the actual consoles. hardware accessories run about a 3% margin, so they are profitable all in themselves, but there’s not enough there to go around. not like software.
make it up in volume
this sounds like the jeff bezos theory of sales. take the largest loss in history, but make it up in volume! that doesn’t make any sense at all. sure, in volume of games sales, but, to achieve a 12 game attach rate, we are looking at 5 years into the consoles life cycle.
can sony survive the first 4 years of selling (similar to the ps2, maybe?) 60 million units? over 4 years (let me get out my calculator) that’s a net loss of $42 billion. granted, they can probably cut that in half with falling hardware prices, so it would only be $21 billion — or roughly 1/2 of sony’s market cap.
whoops. doesn’t sound like such a good idea now, eh? know any sony investors? you might want to tip them off, if they’re your friends.
the bare bones player
we’ve basically accounted for this by only putting half of a stand alone player’s value in the ps3. so, instead of a $1200 player, we’d have a $600 player.
of course, this still doesn’t take into effect the channel conflict. $1200 player vs. $400 player? even if they are going to count it as a base, featureless model (kind of contradicting, huh? buy our terrible implementation of blu-ray!) blu-ray player, people will still buy them and not the high-end, triple the price players at best buy.
for the exact same reasons the windows pc is more popular than the mac. the mac is arguably easier to use, but people buy pc’s because of price.
the early adopter crowd, tho willing to blow money on new stuff, isn’t stupid. if the ps3 was only 30% less than a stand alone player, i can see them opting for the ‘high-end’ option.
however, at 1/3 the price of traditional blu-ray players, it’s a steal! they will sell out to the early adopter, high-def afficianados.
that brings us back to my whole channel conflict thing. at such a discount, the early adopters aren’t going to buy the early blu-ray only players.
that is exactly why previous innovations have been initially priced for early adopters and not mainstream. that’s why, when consoles have put optical drives into their machines, the drives were based on a proven generation of technology. not something straight out of the gate targeting both general consumer electronics, who can’t take a loss on hardware, and game consoles, who can.