With sales sharply down this year for all gaming consoles, even the surprisingly successful Wii, I’m starting to wonder if the market for consoles is fundamentally changing again, and whether folks are, like they did about a decade and a half ago, simply shifting their interests elsewhere.
One of the ways to restore excitement in a hardware market is to refresh the hardware and come up with something new and sexy. But game consoles aren’t like traditional hardware. They historically exist in a razor-blade-thin segment where the software (games) subsidizes most of the hardware. The Wii was the exception, in that it actually wasn’t a loss leader. Even at its aggressive retail price, it actually made money for Nintendo, which appeared to generate more profit than Sony and Microsoft combined. This really makes me wonder if the old model is dead.
Let’s look at the game console market this week, and ask whether the PlayStation 3 Slim will take the market back.
Aging Consoles
Of the three consoles, Sony’s PS3 was always the most expensive, both in terms of manufacturing cost (which initially was placed north of $800 by some analysts) and in terms of retail price (which has consistently been between $400 and $600 depending on configuration).
The Wii, with an estimated hardware cost of around $150 and a retail price typically around half of the PS3, arrived within the same timeframe, but has outsold the Sony flagship by a significant margin. Nintendo largely did this by focusing on the TV gaming experience, remembering that the market has always preferred a $200 price range for this kind of thing (parents just seem to have a problem spending over $300 for a game system), and differentiating itself well.
Playstation 3, Nintendo Wii, and Xbox 360
Microsoft beat the other two systems to market by a year, generally had a wider game selection and more blockbuster games, fell between the two in terms of profit, and had the least reliable of the products. If you factor in the economic drag the Xbox has on Windows (by pulling resources off PC gaming and helping create the Vista drag on PC gaming), I still believe that Microsoft’s economic cost for this system set records, but the company now has a larger market share in the current generation than Sony (though it still lags behind the Wii).
In all cases, going into the critical second half, all three systems are aging, and the interest in them is a fraction of what it once was.
Sony’s Gambit
Of the three vendors, Sony is the only one currently operating at a significant loss. With near legendary losses, it simply could not afford the costs associated with a lagging console, which cost the vendor around twice what they could sell it for. Sony bean counters had to bring costs in line with revenues, and estimates suggest they will still lose about $100 on each PS3 sold. Even so, that is substantially reduced from the $200 to $400 Sony was losing, and the company gets a new, more affordable, $299 price. This should result in a healthier Sony.
The new Playstation 3 Slim goes for only $299
The gambit is to hold or improve sales volume, while reducing dramatically per-unit cost. The problem is that folks don’t get that excited about cost-reduced products. You typically lose something, in this case the ability to run Linux (which I doubt many cared much about), and you get a cheaper-looking product that actually could be more reliable in use. One of the ironies in the tech industry is that you can actually cost reduce a product and increase its reliability at the same time, because part of the cost reduction is to eliminate the causes for premature failure and related support costs. I’m not sure if improved reliability will mean much though, as the PS3 has always been, compared to the Xbox, very reliable.
Can Sony Build Excitement?
Amazon has stepped up and announced that it will only sell one PS3 Slim per family, creating the impression of scarcity, with the goal of creating a feeding frenzy. It isn’t a bad idea, but I still wonder, for those who already own a PS3, whether many will want the new one. If they don’t, which would indicate they aren’t all that interested in PS3 games, I wonder whether anything can be reasonably done to get them interested.
Fortunately, for parents recalling the Wii and previous feeding frenzies, this may not matter, and they still may want to get ahead of the game and order a PS3 Slim early to ensure a good gift for Christmas. This is iffy though, as there will be a number of hot tech gifts competing aggressively for these dollars, including Windows 7 and Snow Leopard computers, new iPods, and possibly the new iPad.
Will Apple have an "iPad" out in time for the holiday season?
One of the initial benefits of the PS3 was that it served as a cheap Blu-Ray player, but with the drop in Blu-ray player price (below $190 at places like Costco), this is no longer the case.
Sony will be better off with the price cut, but I don’t think it will fix, at least not alone, the company’s lagging performance in this troubling class of products.
Wrapping Up: Is It Time to Rethink Consoles?
As we watch Apple, cell phone manufacturers, and most CE companies refresh their products at least annually to win back customers, and with all of the console manufacturers now operating with profitable consoles, I wonder if it isn’t time for the industry to rethink how they compete here.
The trend is to also increase the amount of downloadable content, improve media distribution capabilities, and generally make consoles more useful for tasks beyond gaming going forward. This way, they could be sold more like traditional consumer electronics devices, be refreshed every year to both increase demand for them annually, and keep the technology more current.
I think the PS3 Slim is an indicator of the industry, starting with Sony, rethinking just how long a console remains untouched. It forecasts a future where console changes will come more regularly, and often.
