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November 26, 2005
Razorblades and Video Games
I mentioned last time that I thought Microsoft lost a lot of money with the launch of the Xbox, the logic being that they could easily have sold it for more. Much more if sales figures on eBay are at all indicative of the market. The question is whether or not that would be a good idea and if so how exactly should they have done it.
(Entirely irrelevant, but rather interesting, is this research by iSuppli saying that Microsoft is losing roughly $150 on each unit they sell. It's irrelevant because even if they weren't they would still be losing money since they could have sold them for a higher price. But it's interesting to see that Microsoft feels that it is worth taking that big of a hit to get those units out there. And, if that big of a hit were at all necessary, I would have to agree.)
So, the question to ask is "why didn’t Microsoft raise the price on the Xbox 360?" Or, more appropriately, should they have? Anyone who's spent any time at all monitoring prices on eBay will agree that they could have easily fetched $200 more per unit and still sold out. They probably could have gone as high as $800 for a bundle with a premium system and a game or two (Amazon rapidly sold out of $999 bundles) and could easily have gotten $400 for the core system alone. There are only two reasons that I can think of for them selling as low as they did, habit and public perception.
The first reason, habit, simply means that console makers are accustomed to selling units at or below what it costs to make them. Their industry works on the razorblade business model, give away the razor and make a fortune on the blades. It makes sense. Microsoft, Sony, and Nintendo each get a licensing fee for every game sold for one of their consoles. Many games are available for two or more different consoles, and because of that many customers' console buying decision is determined by price. Therefore a console that sells for the lowest price can expect to sell more units, and therefore more video games, than a higher priced model.
With three major players in the industry taking a loss on the console makes sense. There is a constant console cost-cutting campaign in order to attract buyers, off of whom they will make far more in game licensing fees than they would off of adding a few dollars to the price of the system. However in the case of the Xbox 360, which would certainly sell out at double the price there is effectively no competition. In that case your strategy is just to set the highest price at which you will sell all units. As soon as units remain on store shelves, then begin the price reductions.
The second reason I mentioned is public perception. Customers don't want to feel as if they are being gouged, and Microsoft is rather prone to accusations of that sort. They probably don't want to be the company who sold their unit for $800 until the PS3 came out, then dropped it to $200. Gamers are a very social group, if only on the internet, and resentment might last a long time and end up costing a lot.
Nonetheless I think Microsoft could have charged more without any such worries. They could have easily charged $200 more ($600 total) for the system they called premium with one game added in, not sold any cores, and had a "bundle" for $750 which included everything in the premium plus a wireless internet adapter, a second game (maybe there could be a couple different bundles with different games), and a few month's worth of membership for Xbox Live Gold. This would have allowed them to charge more without people feeling they were gouged since they got more too. And an extra $100-$200 per unit times the 5 million units they hope to sell in the next 9 months equals a lot of money.
A lot of people think that Microsoft is holding quantities in reserve to generate hype. That seems fairly ludicrous to me. For one they could have maybe sold three times as many as they did at the price at which they sold for. So for this hype-generating plan to be of any benefit at all they would have had to have sold only a small percentage of their overall available units and have some way to get the rest to market by Christmas (and preferably even sooner so people can buy games for it) without people realizing what they did. And they would have to do it in a non-obvious way since they have publicly and officially stated that they were not holding any units in reserve.
Microsoft has a huge advantage with the 360 in that anyone who owns it and other consoles is going to choose to buy games for the 360 if they are available. Since many of the largest titles, such as Madden 2006, are available for every console this is a big deal. If you own the original Xbox and a PS2, you're probably slightly more likely to buy your Madden for the PS2, or at best you're 50/50. If you own an Xbox 360 and a PS2 you're almost 100% likely to buy it for the 360. If you have an HDTV you'll buy it for that reason, if not you'll buy it because you someday may have an HDTV. And, for now at least, you want to show it off to your friends, who all want to play on the 360, not the lame old PS2.
Therefore if they had large quantities of them they would want them out now. They would want customers buying Madden 2006 for the 360, not the PS2 or Gamecube. Now is, of course, prime video game selling season. They sell the console at a loss hoping to sell a lot of video games for it and make a good profit. It would make no sense at all to sell it at a loss, hold some in reserve until well after Christmas (missing out on holiday sales and allowing Sony and Nintendo to steal their potential profits) and then slowly releasing them while continuing to sell them at a loss. In the razorblade business model it makes no sense at all to hype the razor in a way that prevents you from selling blades.
Also, I just can't believe that they could have produced many of them this quickly. Remember when the PS2 came out? It was many months before the wait lists were gone. The PS3 is possibly an entire year off, and it will probably be at least another 6 months after that before quantities are readily available. Could Microsoft really be 15-18 months ahead? It would seem unlikely. If it weren't for the fact that they launched with 400k units (compared to 1 million for the PS2) they wouldn't even be the 9-12 months ahead that they are. For them to be holding out a significant quantity, which would be stupid, they would have had to stockpile for months. And they are in a business where stockpiling is foolish and costly.
So, if I were Bill Gates I would retire and spend the rest of my life on a yacht. But if I were Bill Gates and was for some reason still running the show at Microsoft I would have priced the Xbox 360 higher, or at least bundled the hell out of it. But maybe that's why he is Bill Gates and I'm not. I'm sure he knows much that I don't about the video game industry, but I just don't see what there is to know that could change that at all.
I am very curious to see a few things. When will the PS3 come out and how many units will they launch with. Will it outsell the 360? And when will the 360 supply outstrip the demand. I'm placing the over/under on that one at 9 months.
Next up, my review of the system. Sorry, but who could play poker when there is Call of Duty 2 in high def? I can last a few years with no income, and I'm suddenly tempted to try.
Posted by themaroon at November 26, 2005 2:10 AM
Comments
[I started following Matt’s Play Poker, Live Large plan in September, 2005. With Matt’s permission, I’m posting updates on my progress.]
Play Poker, Live Large: The Psychology of Success (LOL)
Getting fired a few days before Thanksgiving is no fun at all, but I’m amazed by how well I’ve taken it. I thought that I would be completely dysfunctional for a week or two, but I’ve impressed myself. In fact, the day after I got fired I did a bit of programming. Not a lot, but enough to prove that my mind hasn’t shut down.
I once read an article about a very successful person who said that the difference between those who are successful and those who are not is not that those who are successful encounter no difficulties while those who are not successful do, but rather that the successful overcome adversity while those who are not successful do not. I’ll be thinking about that as I walk down to the unemployment office. ;)
I’ve read several articles by professional poker players who discussing the challenges of the poker life. However, I’ve rarely seen articles that discuss how difficult it is to *work for someone else.* The simple fact is that virtually all bosses are incompetent and inhumane. If you have a normal job then for eight hours a day this mini-dictator tells you what to do and controls your life. That really, really sucks.
BTW…I’m in the market for a really, really cheap laptop. No more than $600. The only requirement is that it have at least 512M RAM. Screen size, battery life, etc. don’t matter. Right now the best deals I’ve found are on eBay. Is there something better? Does anyone have a magic code that gives me a $300 discount on a Dell? A tablet PC would be even better. Any and all advice is appreciated.
Up next: Moving on up
Posted by: Paul at November 26, 2005 3:46 AM
Only time will tell how successful MS' stategy has been. In my eyes, Bill Gates managed to do something really smart a long time ago in pushing MS products to the business world. This obviously created instant brand recognition and led to their success in the home market since people were familiar with their computers at the office. There is also little doubt about how successfully he handled MS during the computer boom. However, I really question Bill Gates' long term decision making process and how he anticipates trends. If you ever read an original (i believe there is now an updated reprint) of his book "The Road Ahead" you'll see what I mean. He really had no clue about what type of impact the internet would have...
It will be very interesting to see what happens once the PS3 is out and both consoles are established. I'm still questioning MS' ability to overcome Sony...
Posted by: scott at November 26, 2005 12:00 PM