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:
1) games

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.

2) movies
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.

3) accessories
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.

early adopters
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.

m3mnoch.

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19 comments so far

  1. firerock on

    Great analysis. I wrote a similar paper when Xbox came out and compare how MS will get their money back. My conclusion, it is close to impossible. Xbox was simply a way for MS to get into gaming industry and X360 is their true vision. With the glowing reviews of their new Xbox Live functions, I think Sony will need to up their ante a bit this time than simply putting a BR drive to attract gamers.

  2. peteremcc on

    interesting idea but you miss a few points…

    the $1200 price for a blueray drive includes a profit margin and also such things as the box (yes it costs a little) all the inputs and outputs and also the cost to put the thing together.

    sony will only be buying the actualy drive and putting it in their own ‘box’ with its own inputs etc and the cost of putting it together will be practically zero (for the blueray part) as they are already putting together the rest of the console.

    Also there is the whole concept of bulk buying. $1200 is what is charged for a consumer when they go out to the store and buy 1.
    Sony will be buying millions upon millions of these, i think they might get a bit of a discount 🙂

    Peter
    http://peteremcc.wordpress.com

  3. m3mnoch on

    heh. very true. that’s why i called it $600. mostly just for the craziness of that cone shaped laser. wild stuff, that blu-ray. cool, but not something i’d put in my console yet.

    they should really wait for the third generation players to come out first.

    m3mnoch.

  4. m3mnoch on

    oh, and hardware profit margins site around 2-3% for consumer electronics.

    m3mnoch.

  5. MacAttack on

    Wow great analysis, not to mention even with current generation consoles (except nintendo), their profit margin was 0 to negative even after the 5 year life span. So why invest even more on a costly next gen media, beats me?

  6. […] meaning, with the cheap blu-ray player playstation 3 being the only blu-ray player on the market and every single other hardware manufacturer supporting hd-dvd — for the same price.  (because sony is undercutting every blu-ray player manufacturer but they can actually compete in high-definition dvds with the hd-dvd format because it’s priced similarly to the ps3 and they can make a profit.) what’s sony’s advantage?  oh, that’s right.  they can try to make up the loss with a 12 game attach rate. […]

  7. […] last time i checked, the ps3 wasn’t out yet. last time i checked, sony’s console has a brutal competitor already on the market. last time i checked sony was betting the farm on the playstation 3. […]

  8. Uhyve on

    Just thought that I would add that quite a large part of the price of the stand alone Blu-Ray drives is actually not the drive itself but the processor. Obviously, they are not the types of processors you’d get in a PC (or they may be, I have no idea but that’s not the point) bacially, they actually have to decode and display these really high definition movies. Ever tried to run a 1920×1080 move on a middle range computer? You would actually have a hard time. The stand alone players need to be able to do this. The PS3 however, has this equipment built in already. I don’t actually see the blu-ray drive having a massive impact on pricing. The cell processor is a different story though, I heard that Sony spent $100 million on R&D. That is what I would be worrying about if I was in Sony’s shoes.

  9. Opa on

    Uhyve, not sure where you got your facts from. You can watch hi def movies now in Windows Media player with a mid range pc and low end video card. Samsung and Toshiba already have inexpensive upconverting DVD players that easily handle the display you’re discussing. The image quality is nowhere near what an HD or BluRay disc would be of course, but it’s just to illustrate that it can be done and done cheaply.

    The stand alone blu ray players actually do cost over 1000 to build.

    The Cell cost anywhere from 400million to 2 billion to develop depending on who/what you read. This cost was split over 3 companies, not sure of the breakout, but lets assume everybody covered 33%. This means Sony has already spent 133 million just on proc dev alone. The yields on the cell are poor from what i’ve read, which increases the cost of actually manufacturing them.

    Recall that Apple kindly said no thanks and passed on the Cell and chose Intel. That should give you some kind of idea of the comparative lack of processing power the cell has.

    Also, the PS3 uses exotic GDDR3 memory which will be VERY expensive compared to the memory in the 360, and it has nowhere near the bandwidth the 360 has. The PS3 is bottlenecked right out of the gate by faulty design.

    Also, keep in mind Blu-Ray players are at first generation. 1x players actually read data slower than todays DVD drives, on the order of 30% of a current DVD drive.

    There are some SERIOUS problems with the PS3. The PS3 has the potential to be a boat anchor around their neck because NOWHERE on the price/production curve will sony ever make a profit on the physical console – which they did do with the ps2. In fact, the more PS3’s they sell, the worse off financially they will become. From a business standpoint they lost sight of what their market was and over designed/overbuilt the ps3. This may explain Sony’s total silence on the PS3 release/launch, etc. They’re trying to figure out a way out of this mess without letting down their fans.

  10. Bob on

    Opa, I agree with most of your statements except the part about the processing power of the cell.

    Referring to your example about Apple giving up on cell, my opinion on it is that Apple did not pass on cell because of processing power (lack of) but rather because if they had adopted it, yields would have been too low at this moment for them to profit from its implementation. On theinsider.net, there was an article discussing the reason why Apple did not partner with AMD instead for their next generation macs (which, if comparing processing power like you say, is vastly superior to Intel’s offerings). The reason being that AMD cannot keep up with the number of chip production that Apple needs and that Intel can provide.

    So from all reports, the Cell is still looking to be one bad ass mf-ing processor. However it will still be years before developers actually harness its true power and potential, due to its complexity (for current programming methods).

  11. Opa on

    Bob, thanks for the additional info. Everything i’ve seen online (and should be taken with a grain of salt) indicated Jobs was left unimpressed by the chip and Sony did offer to guarantee delivery of them for Apple. This would have been a HUGE win for Kutaragi and Sony. We’ll never know why Apple actually passed, but Kutargi DID offer. Also, consider the cell is not too far removed from the PowerPC chip and Apple still turned it down.

    AMD and Intel also seem non-plussed by it as well. Intel just announced quadcore server chips this week, btw. AMD cant be too far behind. There are plans for 4, 8, 12, 16 core procs in the future from both of them.

    Regardless, the PS3 is the real problem for Sony, and not the Cell. They clearly over reacted to the 360’s feautes and wanted to outdo them which is fine, but at what cost?

  12. m3mnoch on

    also, just to make a note on the need of a processor to decode streams. the hardware to decode hi-def mpeg2, h.262, etc. costs about $20. processor and buffer memory included.

    it’s hardware that’s been around for almost a decade now. unlike the triple wavelength, cone-shaped assembly in blu-ray drives that’s only existed for about 18 months.

    m3mnoch.

  13. Uhyve on

    Okay, sorry about that then, I heard that somewhere so I guess I was wrong.

  14. reality on

    opa that’s a bunch of bs.
    First of all, if ps3’s blu ray drive it won’t have the speed required to watch movies. It needs to be 2x. The xbox360 has 512 mb of GDDR3 ram. gddr3 ram is used on video cards. All high end video cards use them these days. The ps3, only has 256 of GDR3. However, unlike the xbox360, it is not shared with its GPU. The cell uses an ON-Die XDR on die ram for the cell processor in other words ram that works at the same speed as the CPU itself. The stand-alone blu-ray player does not cost over 1000 to build or else samsaunt wouldn’t sell it for 1000. The reason why pioneer is charging 1800 for their version is because it is part of the elite brand. If you don’t know an elite branded DVD player costs 1000$. Pioneer is also introducing another version at 1000$. A ps3’s blu ray player’s cost is the actual blu ray drive. The cell and the RSX will do the decoding that a typical optical disk player would do. The cell processor is having great yeilds right now. http://www.gamesindustry.biz/content_page.php?aid=14679
    Merril Lynch has estimated the price of the PS3 to be 499. I hope you realize that the PS3 does not need the bandwidth the 360 requires. Most of the 360 bandwidth is from the eDRAM. The eDRAM will be used for anti-alaising or rather free anti-alaising if you will.

  15. Pipes on

    Sony is relying almost completely on brand loyalty and uneducated consumers to buy their units. Adding a bluray player will kill them financially. It doesn’t really matter how much they’re able to subsadise the cost, it’s going to wind up losing them money. Add in the fact that the consumers are paying for a player that’s more than likely to be of far less quality than stand alone players, and I don’t think Sony will do as well as they’re hoping to.

    Why do you think MS didn’t add a HD-DVD drive to the 360? It costs too much. There’s a format war going on right now, and MS doesn’t want to take the risk of investing a bunch of money into a HD-DVD drive while the victor of that war is still undecided.

    What makes Sony think it’s any better? I have no idea. Crazy bastards… they want the DVD market. If all of the major Hollywood studios start supporting blu-ray, it’s only a matter of time before consumers start shopping around for bu-ray players to go with their blu-ray discs.

    It’ll take a few years before consumers start to take blu-ray seriously, assuming blu-ray wins. By that time, Sony should be able to decrease the cost of production enough so that the PS3 is at semi-bearable in the loss department… throw in the software sales of games and crap, and Sony probably figures they can pull it off. Problem is, Sony’s still eating the cost of the PS3 in the meantime… and that’ll probably wind up screwing them over in the end.

    But what about MS? They’re smart. They aren’t going to bother sucking up the cost on HD-DVD in their new console when they already have over 90% of the OS market on PC’s… they’ll just make sure that Vista releases with the neccessary codec built in so that users can install whatever kind of player they want (bluray and hddvd use the same codec, which was written by MS… so it’s free for MS to impliment it). Throw in a few years for MS to phase out the old OS’s… MS will be the first on the block with the capability to support whatever format the user wants to use. That’s gauranteed to sell a few million more PCs and OS’s for MS. Ultimately, MS stands to loose the least out of all of the companies that are involved in this, simply because they are investing the least amount into it.

    I think Sony is in for alot of financial trouble over the next few years. They might not go under completely, and they’ll definitely try and spin it so it looks like this was all part of the ‘master plan’, but ulitmately they’ll be losing.

    To put it all into perspective, how many people out there watch DVD’s on their Xbox’s or Playstations? Not many people compared to the sheer amount that have gone out and bought stand-alone players…. I sure hope Sony’s thinking of that while they’re setting this up.

  16. […] and, i’d also like to point you to the article where i am not even “trying to be believable in his rants.”  why, yes, “special member” richard paul.  you guessed correctly — kind of.  i’m not trying to be believable.  that’s the whole point of that post.  to illustrate how unbelievable their plan is. […]

  17. Opa on

    Reality,

    Wow you took to me task! But if I may correct a mistake I made, I meant to say XDR instead of GDDR3.

    Now on to the fun stuff:
    You clearly don’t understand the concept of 1x for different types of media. What’s faster a 52X CD-ROM or 1X DVD? The 52X CD-ROM by a LONG shot.

    What’s faster, 12X DVD or 1X Blu-Ray? 12X DVD by about 300% for data transfer. A 1x blu-ray drive will play blu-rays as designed. It will lag far behind a 12X DVD for data transfer.

    Decoding is cheap and can be done with software or hardware. The blu-ray drives ARE expensive to manufacture. The cost to Sony for each drive is estimated at 350 per 1x drive by none other than… Merrill Lynch. You are deluding yourself if you think there is no cost to Sony to manufacture these things. It’s basic economics. They have to pay for the plants, design, manufactur lines, defects, labor, insurance, warehousing, shipping, energy, etc to make these drives.

    Your illustration of the Pioneer elite model is pointless as best. You fail to disclose the cost or Bill of Materials for Pioneer to build said unit. Consumer electronics typically have very low margins during the early part of the life cycle, between 0-3%.

    Do you think the contents of the 1000 and 1800 blu ray players from Pioneer are the same? They aren’t. The 1800 player contains a much better decoding chip, and other features that wont be found in the 1000 dollar player. There are 1000 dollar DVD players still on the market that do cost hundreds to build.

    That being said you may want a reality check from one of your own sources:

    http://news.com.com/2061-10797_3-6041208.html?part=rss&tag=6041208&subj=news

    Merrill Lynch now estimates the cost at 900.00 per console.

    Also to correct you on another item. The XDR RAM is NOT on die. It is on the main board across the bus. Each CELL SPE can address up to 256 MB of RAM, but the RAM is NOT on the die. So yes, the CELL does NEED more bandwidth than it’s been given to be totally utilized.

    And finally, you or Rob Fahey is misinterpreting what IBM is saying. Yield increases can only occur if your initial production was not producing high yields. If your first wafer yields 100 Cells, and your 10000th wafer yields 1000 Cells, you your yield per wafer has not increased.

    If you go from 10 Cells per wafer to 100 that’s a 10x increase in yield. It’s a convenient stat for IBM to spin but it’s relatively meaningless without knowing actual numbers of chips per wafer and the delta seen during production.

    Enjoy, I’m going back to my 360 now.

  18. YOU FucKING SUX on

    STOP WASINT PEOPELS LIVES WITH BULLSHOT BAD FUCKING ARTICLES NO ONE LIKES YOU FUCKER

  19. m3mnoch on

    LEAERN 2 SPEEL ADN TYPE YOO STOOPID FUKCER1!1!!!

    and, duh. this was back in january that i wrote this. what’s that? it’s still true? what else? oh, i predicted the ps3 price down to the dollar? — again, back in january. weird!

    blu-ray will die on the vine. the ps3 will have only 20% market share by the time this next generation of consoles is done.

    they’ve forgotten the cardinal rule of ‘convergence’ devices. the convergence part has to be a trojan. you can’t sell a convergence device as that. nobody gives a shit. they’d rather buy a specific machine that performs a specific task.

    for the general public, you get 15 seconds for your pitch. ‘game console’ and $600 just don’t fly.

    done.

    m3mnoch.


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