It doesn't matter what business you are in, if you aren't turning a profit on each sale, you won't make it up in volume. In fact, volume will kill you fast.
I remember when Sony was selling the PS3 at like a $200+ loss at launch. I was surprised that Microsoft didn't take a couple billion dollars and buy PS3's. It would have cost Sony hundreds of millions of dollars and would have made the PS3 a money sink hole for even longer. Microsoft had enough money to probably put Sony out of business doing this.
Obviously, Microsoft could have got in a lot of trouble for attempting such a strategy, but the point is simple - an unprofitable business model makes you vulnerable, especially a growing unprofitable business.
This was covered in the post, but under the heading of "Undoing the effect of cancelations"
> Undo the effect of cancellations through up-sells/upgrades. Salesforce.com and ZenDesk charge more for every person you add, and more per person when you increase the features in your plan. Their customers grow (on average). Thus, their revenue over four years is not 4R, but rather it might be R on the first year, 1.5R on the second, 2R on the third, etc., so perhaps 7R in four years.
MS, Sony, and Nintendo hope that once you have the console, you will continue to buy games. And the console maker will collect a license fee from each game sold. If MS bought a ton of PS3 consoles, then the general public would have to buy a lot more games to make up for the loss. So the strategy does work, but it would work against any of the companies, not just Sony. But I think the PS3 had one of the biggest losses of any console at $240 - $300 depending on the version of the console purchased.
Also, somehow keeping your competitor's console from being available to real buyers will dramatically reduce the sales of actual games, since all of the sold-at-a-loss consoles will be sitting in a warehouse somewhere.
The really sneaky thing would be to figure out some non-game thing to do with the "enemy" consoles, like turning them into a supercomputer, or scrapping for parts, or whatever.
You are of course right. The problem is that software companies end up doing the exact opposite more often than one would expect. We do the equivalent of selling razors at a profit, and to make the deal sweeter throw in the commitment to provide "as many razors" as the customer can possibly demand, and replacement razors at heavy discounts... for as long as there's an entity called McRazors, Inc.
Same with ebook readers and ebooks. There are multiple examples of this. This is true even in software - sell the software for cheap, but charge heavily for maintenance and upgrades.
Sony didn't see the PS3 as a console. It was a heavily subsidized Blu-ray player, that also happened to play games. So they lost that generation's console war, even though they were losing money on every sale, but won the much more strategically important video format war.
Also, thankfully for them, the PS3/Xbox360/Wii generation lasted twice as long as previous generations, so they had plenty of time to recoup this initial loss.
Interestingly, now the roles are reversed, with Microsoft trying to push a post-disc content delivery system that plays games, and Sony releasing a console hardcore gamers are already raving about.
Did Sony lose the generation's console war? On a global basis it looks[1] like a stalemate between Xbox 360 and PS3. MS clearly won the US and maybe just about the UK but Sony won in many other markets. Sony burnt cash on it as an early loss leader and MS on warranty replacements. I haven't checked whether they both eventually reached profitability.
Of course the Wii was the sneak attack from the previous generation that made Nintendo possibly the real winner although they are looking vulnerable now.
If that's the case, then Microsoft isn't going to be very happy with how this generation is going to turn out for them. I mean, if they're banking on post-disc, then they don't have a competitive advantage over PS4 in real terms. The complaints gamers had about the DRM system is that it turns your discs into digital but doesn't really give you any actual benefit from doing so.
Yeah, from what I understood, Microsoft's original plan was to have the disc as a convenient way to prevent a lengthy, multi-gigabyte download and to save space on the console's hard drive, but they failed to sell this vision to the developers.
> I was surprised that Microsoft didn't take a couple billion dollars and buy PS3's.
> Obviously, Microsoft could have got in a lot of trouble for attempting such a strategy,
Umm, I think you answered your own question:)
And to go a bit further, the console strategy that Microsoft and Sony employ is to lose money selling the console to grow the user base and make it up on games sales.
I remember when Sony was selling the PS3 at like a $200+ loss at launch. I was surprised that Microsoft didn't take a couple billion dollars and buy PS3's. It would have cost Sony hundreds of millions of dollars and would have made the PS3 a money sink hole for even longer. Microsoft had enough money to probably put Sony out of business doing this.
Obviously, Microsoft could have got in a lot of trouble for attempting such a strategy, but the point is simple - an unprofitable business model makes you vulnerable, especially a growing unprofitable business.
If it don't make dollars, it don't make sense.