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Groundbeef
01-30-2007, 02:49 PM
Perhaps some good news for those looking for a PS3. An analyist thinks that Sony may drop the price in '07.

I would imagine that right now its a staring game between MS and Sony, although MS has a bit more wiggle room for dropping the retail price.

Anyway, no anti-sony rant here, just thought you all might like this one:

http://biz.gamedaily.com/industry/feature/?id=15103

icarus
01-30-2007, 02:53 PM
Its great to hear you say something about the PS3 without bashing it... ya Prices have already started to drop up here in Canada... its already gone down about 50 bucks, at london Drugs...

Groundbeef
01-30-2007, 04:06 PM
Its great to hear you say something about the PS3 without bashing it... ya Prices have already started to drop up here in Canada... its already gone down about 50 bucks, at london Drugs...

Yeah, I musta had a mild stroke. Still reeling from it. BTW your "price drop" in Canada will be short lived. Sony has no official statement other than they are not raising prices, but it appears many retailers are raising the price to offset the currency difference
between the US and Canada.

icarus
01-30-2007, 04:24 PM
well thats a shame... but whatever by the time final fantasy 13 comes out, the PS3 will have come down in price a bit more than 50 bucks, so i can wait, since thats pretty much the only game that i really want right now

kexodusc
01-31-2007, 05:05 AM
Yeah, I think I read the other day that these things typically see a price drop every 6 months or so. That's good - now, if Microsoft drops the price on XBox 360 to counter I might be interested...:D

As for wiggle-room - when it comes to pricing wars and product-basket strategy, "wiggle-room" really is a non-issue at decision making time. Often price cuts on loss leaders are necessary to minimize aggregate losses (or maximize aggregate profit) if it leads to a boost in synergistic products. PS3 and XBox 360 will both get cheaper to produce over time too.

I'm not even so sure XBox 360 has the most wiggle room in the future. Right now they do, but right now only considers today's cost structure. The BluRay component must account for the biggest difference in cost of these units - If BluRay manufacturing costs fall by 30%, 40%, or even 50% a year early on like DVD, CD, VHS, and other new consumer electronics before them, PS3's future costing structure would probably see a larger % decrease each successive year. Whether Sony passes that on in price cuts is another question. Demand and supply are still the biggest influences here I think.

Groundbeef
01-31-2007, 07:24 AM
Yeah, I think I read the other day that these things typically see a price drop every 6 months or so. That's good - now, if Microsoft drops the price on XBox 360 to counter I might be interested...:D

As for wiggle-room - when it comes to pricing wars and product-basket strategy, "wiggle-room" really is a non-issue at decision making time. Often price cuts on loss leaders are necessary to minimize aggregate losses (or maximize aggregate profit) if it leads to a boost in synergistic products. PS3 and XBox 360 will both get cheaper to produce over time too.

I'm not even so sure XBox 360 has the most wiggle room in the future. Right now they do, but right now only considers today's cost structure. The BluRay component must account for the biggest difference in cost of these units - If BluRay manufacturing costs fall by 30%, 40%, or even 50% a year early on like DVD, CD, VHS, and other new consumer electronics before them, PS3's future costing structure would probably see a larger % decrease each successive year. Whether Sony passes that on in price cuts is another question. Demand and supply are still the biggest influences here I think.

But the 360 uses many more parts "off the shelf" than the PS3. Many of its components are designed specifically for the PS3.

For example, the 360 uses a standard DVD-Rom Drive. Blu-Ray will not be nearly as inexpensive as an off the shelf DVD-Rom drive for the forseeable future.

The 360 uses a standard albiet powerful graphics accelerator, while the PS3 uses a custom made graphics accelerator from ATI. Because it is designed speciffically for the PS3, the only volume discounts and production experience gains will be from increased PS3 sales. The 360 will enjoy lower costs sooner as the graphics chip is used in other computer related graphics cards.

As far as "wiggle room", currently MS holds the cards on this one. It is making a small profit on each unit. Theoretically if MS cut the retail price of the premium unit it could compete with the Wii.

This however, could backfire as consumers may decide that the price discrepancy between the PS3 and the 360 is too much. It may appear that the 360 is "cheap" or not as tech capable. I think that MS will wait out Sony before dropping prices. It has already been over a year and MS hasn't cut it yet, although they are doing some bundle deals with games included and such.

kexodusc
01-31-2007, 08:50 AM
But the 360 uses many more parts "off the shelf" than the PS3. Many of its components are designed specifically for the PS3.

For example, the 360 uses a standard DVD-Rom Drive. Blu-Ray will not be nearly as inexpensive as an off the shelf DVD-Rom drive for the forseeable future.

The 360 uses a standard albiet powerful graphics accelerator, while the PS3 uses a custom made graphics accelerator from ATI. Because it is designed speciffically for the PS3, the only volume discounts and production experience gains will be from increased PS3 sales. The 360 will enjoy lower costs sooner as the graphics chip is used in other computer related graphics cards.

As far as "wiggle room", currently MS holds the cards on this one. It is making a small profit on each unit. Theoretically if MS cut the retail price of the premium unit it could compete with the Wii.

This however, could backfire as consumers may decide that the price discrepancy between the PS3 and the 360 is too much. It may appear that the 360 is "cheap" or not as tech capable. I think that MS will wait out Sony before dropping prices. It has already been over a year and MS hasn't cut it yet, although they are doing some bundle deals with games included and such.
You're right about the standard DVD-Rom drive being cheaper for the foreseeable future - but at the same time, DVD-Rom drives aren't gonna get much cheaper than now. DVD players fell, what, 90% in 5 years? Next year's PS3's are almost certain to be cheaper to build than this year's. This will narrow the gap by some amount between PS3 and XBOX 360. Who knows how much though?

The bundles thing is pretty common to see - adding things while protecting the base price. Those additional games or controllers or both are extremely cheap to throw in a box. In a few years it'll probably Final Fantasy and Metal Gear or something vs. Halo 3 and Knights of the Old Republic. Sweeeet.

The ATI/off the shelf stuff isn't much of an advantage really - and price advantages from volume discounts and production advancements will be equal for either..when you get into the millions of sales numbers, you've already exhausted price cuts - ATI doesn't sell millions of any one of its graphic card models. PS3 could very likely be it's highest production unit unless a single onboard graphics processor has a great run a single year on a few motherboards.
Most of those proprietary components are derivatives of existing components and share in production advancements, components, and technology anyway. They don't re-invent the wheel to make something proprietary, just tweak existing units. Making them smaller, cooler, more reliable, etc.

I think it does pose less risk to XBox 360 in the long run though, as we've already seen - finding critical components for production isn't easy if a supplier can't meet your demand for whatever reason.

Your missing the point on "wiggle room". How much profit you make on a unit today has little affect on competitive pricing strategy.

In a fixed cost loaded industry, prices are set to maximize revenue, and the cost on each unit has no effect on price at all. This is why salaries in pro-sports have no effect on ticket prices. In a variable cost industry with heavy fixed costs like electronics, prices are adjusted to maximize marginal revenue which should maximize profit. Even if price cuts lead to Sony losing billions (which I think is possible for PS3), they'll drop the prices willingly taking a huge loss provided that decision minimizes the aggregate loss on Electronic Gaming operations as a whole. Put another way, if matching XBOX 360 price means Sony sells enough PS3 to lose 6 Billion dollars, they'll do it, if not matching XBOX 360's price meant losing 6 Billion and one dollars. Or whatever number you want to plug.

There's a lot of guesswork involved and companies miss the boat often enough. There's also implicit collusion. Microsoft has the least to gain from a pricing war if their making profit on each unit, and currently outselling PS3. I don't think they're eager to give up a cash flow just to put a squeeze on Sony just to boost the ego by gaining a bit of market share at the expense of profit. If they could see a monopoly in the gaming industry's future, maybe, but that's not going to happen. Demand elasticity produces diminishing returns from price cuts, too. It behooves both Sony and Microsoft to keep their prices high enough as long as possible to make money, but low enough to lure market share. I'm thinking the difference in price will shrink, but XBOX will always be cheaper. It's up to the consumer to put a value on the PS3's supposed advantages.

I read an article yesterday from The Yankee Group market research firm that predicts Sony will sell 30 million units by 2011, with 44% market share, to XBOX 360 27 million units and 40% market share, despite the early lead XBOX 360 enjoys. It talked about the price pressure Microsoft will put on Sony, quite a bit. I'm sure it can be found via google, Yankee Group is pretty well known. That's a huge victory for XBOX 360, IMO, and positions MS to overtake Sony next time around.

Groundbeef
01-31-2007, 02:18 PM
You're right about the standard DVD-Rom drive being cheaper for the foreseeable future - but at the same time, DVD-Rom drives aren't gonna get much cheaper than now. DVD players fell, what, 90% in 5 years? Next year's PS3's are almost certain to be cheaper to build than this year's. This will narrow the gap by some amount between PS3 and XBOX 360. Who knows how much though?

Well right now the spread is at least $250 per unit. MS makes ~$75/unit and some estimates are as high as ~$200+ per unit loss for Sony. I don't think that spread will be eliminated in 1 year.



I think it does pose less risk to XBox 360 in the long run though, as we've already seen - finding critical components for production isn't easy if a supplier can't meet your demand for whatever reason. Or you can't produce your own parts to meet demand. IE the blue laser diode problem w/ SONY.




Your missing the point on "wiggle room". How much profit you make on a unit today has little affect on competitive pricing strategy.

That is an overly simplistic statement. Because we are discussing multi-billion corporations loss per unit is less of an issue. However, there are plenty of operations/companies large and small where pricing plays a major component of strategy. Not every product in a company line can be sold as a loss for the sake of market share.



In a fixed cost loaded industry, prices are set to maximize revenue, and the cost on each unit has no effect on price at all. This is why salaries in pro-sports have no effect on ticket prices. In a variable cost industry with heavy fixed costs like electronics, prices are adjusted to maximize marginal revenue which should maximize profit. Even if price cuts lead to Sony losing billions (which I think is possible for PS3), they'll drop the prices willingly taking a huge loss provided that decision minimizes the aggregate loss on Electronic Gaming operations as a whole. Put another way, if matching XBOX 360 price means Sony sells enough PS3 to lose 6 Billion dollars, they'll do it, if not matching XBOX 360's price meant losing 6 Billion and one dollars. Or whatever number you want to plug.

Again, it is easy to armchair CEO. However, investors are not happy with the current pace of Sony earnings. I am aware that the stock price is going up, but this follows plenty of low points. The gaming division has been reshuffled due to the poor launch.
Sony Investors are not going to stand by idly as the company fritters away profits. (Or MS investors I would add). These decisions are not made in a vacum. The job of the corporation is to return maximum return for investors. Loosing money for the sake of loosing money is not a sound business practice.


Your sports analogy is also a bit off. Prices do go up to support the salarys. The ticket prices do not flucuate like fuel or milk, but at some point costs will go up for the consumer. Much of team overhead is supported with revenue sharing, sponserships, naming rights, licensing deals, etc. But if your theory is spot on, then teams ought to be giving tickets away. After all, if costs don't matter, you ought to give them away.




There's a lot of guesswork involved and companies miss the boat often enough. There's also implicit collusion. Microsoft has the least to gain from a pricing war if their making profit on each unit, and currently outselling PS3. I don't think they're eager to give up a cash flow just to put a squeeze on Sony just to boost the ego by gaining a bit of market share at the expense of profit. If they could see a monopoly in the gaming industry's future, maybe, but that's not going to happen. Demand elasticity produces diminishing returns from price cuts, too. It behooves both Sony and Microsoft to keep their prices high enough as long as possible to make money, but low enough to lure market share. I'm thinking the difference in price will shrink, but XBOX will always be cheaper. It's up to the consumer to put a value on the PS3's supposed advantages.

I don't see any collusion. Please explain your rational of MS vs Sony. How is that MS has more to lose as they are currently making money? Somehow it would be more adventageous for Sony to lose more money per unit than MS to not make quite as much? Perhaps in bizarro world. If anything MS in a better position to compete on price, not the other way around.




I read an article yesterday from The Yankee Group market research firm that predicts Sony will sell 30 million units by 2011, with 44% market share, to XBOX 360 27 million units and 40% market share, despite the early lead XBOX 360 enjoys. It talked about the price pressure Microsoft will put on Sony, quite a bit. I'm sure it can be found via google, Yankee Group is pretty well known. That's a huge victory for XBOX 360, IMO, and positions MS to overtake Sony next time around.

I'll look it up. Sounds interesting.

I have said it before, and I'll say it again. Every point in market share that MS gains is a direct loss for Sony. MS only has up to go, and Sony can only go down. Wii will also be a major fly in the ointment for Sony.

Groundbeef
01-31-2007, 02:24 PM
Heres a kick in the teeth for US consumers. Sony is mulling a SECOND price cut in Japan. But not in the US, Europe or eleswhere.

http://news.yahoo.com/s/ap/20070131/ap_on_hi_te/japan_sony

icarus
01-31-2007, 02:30 PM
thats hurts.... but is intersting that they are planning to break even at the end fo their next fiscal year.

kexodusc
01-31-2007, 06:26 PM
That is an overly simplistic statement. Because we are discussing multi-billion corporations loss per unit is less of an issue. However, there are plenty of operations/companies large and small where pricing plays a major component of strategy. Not every product in a company line can be sold as a loss for the sake of market share.
Once you make your bet and build the PS3 production machine, you're locked it, then it does become very simple...a simple race to maximize profit or minimize losses...if (and that's a big if) it's a price cut and taking a loss on the hardware to boost profit on the software and accessories, then so be it...I agree, MS is likely to make more money, especially now - but Sony's pricing here on in will have more to do with marginal revenue than cost considerations - unless, the unlikely scenario of Sony shutting down PS3 altogether becomes the most profitable solution. All the pissed off investors in world won't change this - they can fire the whole corp and put new people in there...they're going to do whatever minimizes the loss just the same.



Loosing money for the sake of loosing money is not a sound business practice.
Nobody's suggesting that. This is simple business strategy though - the bulk of cost to date were from R&D, not raw material production costs...Sony's pricing strategy here on in will reflect what Sony thinks will make the most money for it long-term. That could mean a price cut on the hardware to recoup losses elsewhere. Maybe they won't have to. I doubt it though. Again put simply, if the losing money on each sale of PS3 boost sales, which increases software support, accessories, etc, enough that the price cut becomes more profitable than not cutting prices, Sony will do this. There's breaking point there too though. I'm not suggesting Sony will drop to $200 and lose $400 per unit - that would be too far...but this is the way business works. The best example I can think of is the last 6 years of North American car manufacturing. They were forced to cut prices (through huge rebate/discount programs) just to minimize losses. GM started it to put pressure on Ford - Ford grudgingly followed suit simply because they were faced with a decision of losing some money or losing more money by doing nothing.


Your sports analogy is also a bit off. Prices do go up to support the salarys. The ticket prices do not flucuate like fuel or milk, but at some point costs will go up for the consumer. Much of team overhead is supported with revenue sharing, sponserships, naming rights, licensing deals, etc. But if your theory is spot on, then teams ought to be giving tickets away. After all, if costs don't matter, you ought to give them away.

I don't think you understand here. Ticket prices are set to maximize revenue. That means make the most money from the fans (with consideration to supporting revnue streams from beer, hot dogs, merchandise, parking etc). If salaries are lower, ticket prices won't change. The profit just goes up. Likewise, if salaries increase, but market demand does not, the price is still set to maximize revenue. Raising prices here without increased demand would lead to less revenue - since the payroll is reasonably fixed not maximizing revenue is a bad decision. Unless you're not in the business to make money, but I don't know of any owners like that. There's "some" correlation between salaries, and demand, but only when salaries translate to superior performance. This is the case some of the time...but definitely not most of the time. Too often fans blame rising salaries as a driver of ticket price escalation. Salaries at best account for a portion of the demand, but only by whatever degree additional salaries increase demand for tickets.

I
don't see any collusion. Please explain your rational of MS vs Sony. How is that MS has more to lose as they are currently making money? Somehow it would be more adventageous for Sony to lose more money per unit than MS to not make quite as much? Perhaps in bizarro world. If anything MS in a better position to compete on price, not the other way around.

MS is in a better position to make more money in a pricing war. But when I said "implicit collusion" it didn't mean they were teaming up and cheating the free market. Just that they're both smart enough to know that it's mutually beneficial to not rush into a pricing war. If XBOX 360 structure is as good as you say, they could cut costs $200 now, and really screw SOny over...think of the billions Sony would lose, the market share, etc. Except this isn't the optimal scenario for MS right now, either. They'd like the market share, but not at the expense of hundreds of millions of lost profit.. A price war hurts both and benefits nobody at this point. We're more likely to see slow tweaking for some time.


I have said it before, and I'll say it again. Every point in market share that MS gains is a direct loss for Sony. MS only has up to go, and Sony can only go down. Wii will also be a major fly in the ointment for Sony.
Yeah, I don't think anyone's ever argued with that logic. Wii will hurt MS and Sony both I suspect - we can't just assume only Sony will lose ground to Wii..I agree, MS will gain market share. I doubt anyone at Sony believed otherwise. I doubt you'd find anyone in Sony who'd put money on PS forever being the market leader, either. Funny thing here is Sony could possibly win the console war and lose money, while MS loses but makes a mint...

Whatever the final outcome, I'm guessing the market share is close between the two...I could see MS taking over this time around, but find it more likely it's a generation away. But neither company is going to be dominate like we've seen the last few generations.

icarus
01-31-2007, 08:29 PM
Groundbeef, and Kex, I gotta give you guys major props on this thread, as a current business student, this is one of the more intersting threads I have read in a while, and you both have presented intellegent and generally well supported arguments to back up your claims.

Its an honour to bask in your wisdom of both the audio world and the business world.:biggrin5:

Groundbeef
02-01-2007, 06:54 AM
Once you make your bet and build the PS3 production machine, you're locked it, then it does become very simple...a simple race to maximize profit or minimize losses...if (and that's a big if) it's a price cut and taking a loss on the hardware to boost profit on the software and accessories, then so be it...I agree, MS is likely to make more money, especially now - but Sony's pricing here on in will have more to do with marginal revenue than cost considerations - unless, the unlikely scenario of Sony shutting down PS3 altogether becomes the most profitable solution. All the pissed off investors in world won't change this - they can fire the whole corp and put new people in there...they're going to do whatever minimizes the loss just the same.

Well, I suppose you can justify some profit loss due to "sunk cost" (IE production facility, R&D, etc). However, currently Sony has no income from licencing deals to speak of. Software and accessories (attachment rate) is VERY low compared to the 360. The attach rate is over 5 for MS (which means at least 5 games or additional items sold w/console). The PS3 is barely at 1. Speculation is that this will rise, as the gray market (ebay sellers, craigs list etc) soaked up the PS3 units for resale, but didn't buy any extras.




Nobody's suggesting that. This is simple business strategy though - the bulk of cost to date were from R&D, not raw material production costs...Sony's pricing strategy here on in will reflect what Sony thinks will make the most money for it long-term. That could mean a price cut on the hardware to recoup losses elsewhere. Maybe they won't have to. I doubt it though. Again put simply, if the losing money on each sale of PS3 boost sales, which increases software support, accessories, etc, enough that the price cut becomes more profitable than not cutting prices, Sony will do this. There's breaking point there too though. I'm not suggesting Sony will drop to $200 and lose $400 per unit - that would be too far...but this is the way business works. The best example I can think of is the last 6 years of North American car manufacturing. They were forced to cut prices (through huge rebate/discount programs) just to minimize losses. GM started it to put pressure on Ford - Ford grudgingly followed suit simply because they were faced with a decision of losing some money or losing more money by doing nothing.

I agree that the much money was spent on R&D, and "sunk", however, independant analysis of the hardware in the PS3 indicates that the selling price is well below the market value of the individual parts. That doesn't take into account the fixed production costs, as the analysis was only interested in the hardware portion of the machine.

I think that your examples are still off. Its just another variation of the old airline example.

Is it better for a plane to take off 3/4 full, or 3/4 full and sell the rest of the seats at a loss just so you make some money on each seat. It is flawed logic. On the surface you think to yourself, well if the airline can make even 1 (ONE) more $ its better than a total loss. But the fact is, its NOT better to take the dollar. There are many hidden costs that are associated with the empty seat. By filling the plane you need more fuel, more snacks, baggage handlers have to use more equipment, more labor and the list goes on and on. The path of failed business is littered with other examples.

Hotels are another prime target of this failed logic. Priceline made a killing by convincing hotels to sell unused (or projected unused) blocks of rooms for this very purpose. After all its better to get even $1. per night than nothing at all. But its not. Now the maid service needs to be used. Linens washed, soaps replaced, etc.

Sometimes it is better to conceed a market share loss than to chase it down the toilet.



I don't think you understand here. Ticket prices are set to maximize revenue. That means make the most money from the fans (with consideration to supporting revnue streams from beer, hot dogs, merchandise, parking etc). If salaries are lower, ticket prices won't change. The profit just goes up. Likewise, if salaries increase, but market demand does not, the price is still set to maximize revenue. Raising prices here without increased demand would lead to less revenue - since the payroll is reasonably fixed not maximizing revenue is a bad decision. Unless you're not in the business to make money, but I don't know of any owners like that. There's "some" correlation between salaries, and demand, but only when salaries translate to superior performance. This is the case some of the time...but definitely not most of the time. Too often fans blame rising salaries as a driver of ticket price escalation. Salaries at best account for a portion of the demand, but only by whatever degree additional salaries increase demand for tickets.

The only reason ticket prices do not reflect the entire fixed costs of the team are because they are subsidized.
I


MS is in a better position to make more money in a pricing war. But when I said "implicit collusion" it didn't mean they were teaming up and cheating the free market. Just that they're both smart enough to know that it's mutually beneficial to not rush into a pricing war. If XBOX 360 structure is as good as you say, they could cut costs $200 now, and really screw SOny over...think of the billions Sony would lose, the market share, etc. Except this isn't the optimal scenario for MS right now, either. They'd like the market share, but not at the expense of hundreds of millions of lost profit.. A price war hurts both and benefits nobody at this point. We're more likely to see slow tweaking for some time.

No, they can't cut price. IMHO MS is in the "sweet spot" of pricing. They are above the Wii but not enough that if someone wants HD gaming they are not going too much higher for more benefits.

They are below the PS3 that cannot demonstrate convincingly that it demands the additional price premium. It is pretty ideal as far as price goes. Could they offer more to the consumer (MS)...sure, larger hard drive, integrate wi-fi, add HDMI, integrage HD-DVD, and some of that will be coming down the pipe. But right now, they are in the perfect spot.

Truth is, if MS slashed price, they would only be hurting themselves. They will only cut price if and when Sony does. By tying any cuts to Sony, they insulate themselves from being perceived as "cheap" by comparison.

Incidently, Sony just continues to shoot itself in the foot. With one pre-release price drop and now another possible cut in Japan, they are coming off as arrogant and greedy to US consumers. Financially it makes sense as Japan is a smaller market, and the greater loss will not be as detrimental to the bottom line. However, psychologically, it harms the US market. Now it appears that we (US consumers) are being forced to subsidize a lower price in Japan. I think its bad policy, and will hurt them more in the long run.



Yeah, I don't think anyone's ever argued with that logic. Wii will hurt MS and Sony both I suspect - we can't just assume only Sony will lose ground to Wii..I agree, MS will gain market share. I doubt anyone at Sony believed otherwise. I doubt you'd find anyone in Sony who'd put money on PS forever being the market leader, either. Funny thing here is Sony could possibly win the console war and lose money, while MS loses but makes a mint...

Frankly, I do think that the bulk of market share loss will be from Sony. MS may lose some ground to the Wii, but the Sony slice of pie is just to great. Both MS and Nintendo are hammering away at Sony, and they have very little to defend with. High price, very little if any competitive advantage over the 360, and lack of games. I suppose you could say blu-ray is an advantage, but the 360 does offer HD-DVD as an option.

I will not suffer dillusions here, Sony will not go bankrupt, nor get out of the hardware business. However, I do think that the once mighty Sony empire is getting humbled. They swaggered into the party late, and are shocked that people aren't swarming to them like lemmings to a ledge.




Whatever the final outcome, I'm guessing the market share is close between the two...I could see MS taking over this time around, but find it more likely it's a generation away. But neither company is going to be dominate like we've seen the last few generations.

I think it will be very close. I will eat my shorts if MS doesn't get at least 35%. I am thinking it will be close to 40%.

Groundbeef
02-01-2007, 06:58 AM
Groundbeef, and Kex, I gotta give you guys major props on this thread, as a current business student, this is one of the more intersting threads I have read in a while, and you both have presented intellegent and generally well supported arguments to back up your claims.

Its an honour to bask in your wisdom of both the audio world and the business world.:biggrin5:

Oh stop it...I'm blushing, and my head is swelling. :22:

kexodusc
02-01-2007, 02:02 PM
Well, I suppose you can justify some profit loss due to "sunk cost" (IE production facility, R&D, etc). However, currently Sony has no income from licencing deals to speak of. Software and accessories (attachment rate) is VERY low compared to the 360. The attach rate is over 5 for MS (which means at least 5 games or additional items sold w/console). The PS3 is barely at 1. Speculation is that this will rise, as the gray market (ebay sellers, craigs list etc) soaked up the PS3 units for resale, but didn't buy any extras.

Again, right now is way too early to compare MS and Sony straight up, a more fair comparable would be to compare to Xbox 360 at its equivalent point in time. Pretty sure Microsoft expects Sony's attach rate to far exceed 1.


I agree that the much money was spent on R&D, and "sunk", however, independant analysis of the hardware in the PS3 indicates that the selling price is well below the market value of the individual parts. That doesn't take into account the fixed production costs, as the analysis was only interested in the hardware portion of the machine. Yeah, we already know Sony loses money on each PS3 they sell...this is rather common, XBox did the same, but became profitable in the end, despite not winning the format war. And again, cost of raw components of PS3 today is dramatically higher than it will be tomorrow. The fixed costs which account for the largest portion however, are already accounted for.


I think that your examples are still off. Its just another variation of the old airline example.
Is it better for a plane to take off 3/4 full, or 3/4 full and sell the rest of the seats at a loss just so you make some money on each seat. It is flawed logic. On the surface you think to yourself, well if the airline can make even 1 (ONE) more $ its better than a total loss. But the fact is, its NOT better to take the dollar. There are many hidden costs that are associated with the empty seat. By filling the plane you need more fuel, more snacks, baggage handlers have to use more equipment, more labor and the list goes on and on. The path of failed business is littered with other examples.

I'm sorry, you're not understanding the process. The airline/hotel examples you provided are flawed. I'll stick with your airline example and keep the factors down to keep the example simple - the decision to sell the seats for additional money takes into consideration the variable costs, or what you called the hidden costs - snacks, fuel, etc...If the additional revenue received from selling that seat exceeds the additional costs - the decision is favorable, the seat is sold at price X and losses are minimized. Activity based costing is the method used attribute these variable costs. I know for a fact a company called SAS (we hold in our portfolio) provides and services and software solutions to airlines, Wal-Mart, the military, etc that does just that. These corps have a very good, reasonably accurate model for determining what the marginal costs are. If airlines aren't taking these variable costs into consideration then they're doomed to fail. Serves them right. You won't find any today that are that dumb though.
Some hotels might fall for this crap for a while, but they'll learn soon enough too. You won't see the larger corporate chains falling for this crap. Although with hotels there's other variables to consider too - maids clean rooms daily, the associated bar, restaurant, spa revenues, etc, but we're getting off track and making the model complex.

With the PS3 they're not taking a loss on the hardware blindly - selling at a loss on the front end can be the optimal strategy to profit maximization. As you know, recovery from software, accessories, etc...it also can be the path to minimizing losses. The hard part for Sony is plugging all these variables into their models and determining the pricing strategy maximizes PS3 profit. Easier said than done, and companies do often miss the boat, as I think we're seeing now with PS3's ridiculous price.


Sometimes it is better to conceed a market share loss than to chase it down the toilet.
Absolutely. Microsoft is probably quite content not being #1 but making more money, than being #1 and losing money. Sony will gladly give up the market share if it means profit maximization in the long-term as well.


The only reason ticket prices do not reflect the entire fixed costs of the team are because they are subsidized.
You're missing the point completely. I didn't say anywhere ticket prices or ticket revenue reflect the entire fixed costs of the team. I said that salaries aren't the driving force of ticket price escalation. Totally different concepts. You have your costs on one side that are predictable and certain (and for the most part fixed give or take a small amount from trades, etc.). On the other side, you have revenue - the profit is maximized only when revenue is maximized. Salaries affect revenue only by the amount additional salaries increase demand.


No, they can't cut price. IMHO MS is in the "sweet spot" of pricing. They are above the Wii but not enough that if someone wants HD gaming they are not going too much higher for more benefits.

They are below the PS3 that cannot demonstrate convincingly that it demands the additional price premium. It is pretty ideal as far as price goes. Could they offer more to the consumer (MS)...sure, larger hard drive, integrate wi-fi, add HDMI, integrage HD-DVD, and some of that will be coming down the pipe. But right now, they are in the perfect spot.

Truth is, if MS slashed price, they would only be hurting themselves. They will only cut price if and when Sony does. By tying any cuts to Sony, they insulate themselves from being perceived as "cheap" by comparison.
That's what I said.


Incidently, Sony just continues to shoot itself in the foot. With one pre-release price drop and now another possible cut in Japan, they are coming off as arrogant and greedy to US consumers. Financially it makes sense as Japan is a smaller market, and the greater loss will not be as detrimental to the bottom line. However, psychologically, it harms the US market. Now it appears that we (US consumers) are being forced to subsidize a lower price in Japan. I think its bad policy, and will hurt them more in the long run.

You could be right.



I will not suffer dillusions here, Sony will not go bankrupt, nor get out of the hardware business. However, I do think that the once mighty Sony empire is getting humbled. They swaggered into the party late, and are shocked that people aren't swarming to them like lemmings to a ledge.

Might Sony has been humbled for years...nowhere near the dominance it once enjoyed...though BluRay seems to gaining obscene momentum based on the CES reports...



I think it will be very close. I will eat my shorts if MS doesn't get at least 35%. I am thinking it will be close to 40%.
Sounds about right.

Groundbeef
02-01-2007, 05:09 PM
Again, right now is way too early to compare MS and Sony straight up, a more fair comparable would be to compare to Xbox 360 at its equivalent point in time. Pretty sure Microsoft expects Sony's attach rate to far exceed 1.

I have no doubt. I qualified my comment that the low attach rate is in no small part due to people buying the console for the sole purpose of re-selling it. Attach rate should pick up. However, currently the xbox 360 is enjoying the highest attach rate, and fastest growth in attach rate of any console in the us. Ever.



I'm sorry, you're not understanding the process. The airline/hotel examples you provided are flawed. I'll stick with your airline example and keep the factors down to keep the example simple - the decision to sell the seats for additional money takes into consideration the variable costs, or what you called the hidden costs - snacks, fuel, etc...If the additional revenue received from selling that seat exceeds the additional costs - the decision is favorable, the seat is sold at price X and losses are minimized. Activity based costing is the method used attribute these variable costs. I know for a fact a company called SAS (we hold in our portfolio) provides and services and software solutions to airlines, Wal-Mart, the military, etc that does just that. These corps have a very good, reasonably accurate model for determining what the marginal costs are. If airlines aren't taking these variable costs into consideration then they're doomed to fail. Serves them right. You won't find any today that are that dumb though.
Some hotels might fall for this crap for a while, but they'll learn soon enough too. You won't see the larger corporate chains falling for this crap. Although with hotels there's other variables to consider too - maids clean rooms daily, the associated bar, restaurant, spa revenues, etc, but we're getting off track and making the model complex.

Well, you brought up US automotive incentives and they are about as sensible as the airline example. Talk about ruining your long term prospects for short term gain. The US automotive buyers have gotten wise to the constant see-saw of pricing games in Airline Tickets, Auto's, Clothes and just about anything else. Hell, I don't even shop for winter clothes until they are marked down 40-80% (In November I might add, just as they are getting out swimsuits. In Central IL, that makes no sense.)

Unfortunatly, US consumers have gotten wise to the endless stream of comons and sales. You even stated this in your first comment or so:



Yeah, I think I read the other day that these things typically see a price drop every 6 months or so. That's good - now, if Microsoft drops the price on XBox 360 to counter I might be interested...

This is where Sony may be muddying the waters for themselves. As the price falls in Japan, buyers in the US may hold out with the hope that the price may fall. As it remains stagnet, they look for cheaper alternatives. Casual buyers are generally going to buy 1 system, certainly not 2 of the most expensive.





With the PS3 they're not taking a loss on the hardware blindly - selling at a loss on the front end can be the optimal strategy to profit maximization. As you know, recovery from software, accessories, etc...it also can be the path to minimizing losses. The hard part for Sony is plugging all these variables into their models and determining the pricing strategy maximizes PS3 profit. Easier said than done, and companies do often miss the boat, as I think we're seeing now with PS3's ridiculous price.

Its even worse than a missed estimate. Its the outright arrogance of the Sony executives. For example, after the price was announced, a reporter asked if they (Sony) thought the price was a bit high. The Sony exec responded, (I'll paraphrase unless you need the link) "If you want it, get a second job."



Absolutely. Microsoft is probably quite content not being #1 but making more money, than being #1 and losing money. Sony will gladly give up the market share if it means profit maximization in the long-term as well. Sony is going to give up share gladly or not.



You're missing the point completely. I didn't say anywhere ticket prices or ticket revenue reflect the entire fixed costs of the team. I said that salaries aren't the driving force of ticket price escalation. Totally different concepts. You have your costs on one side that are predictable and certain (and for the most part fixed give or take a small amount from trades, etc.). On the other side, you have revenue - the profit is maximized only when revenue is maximized. Salaries affect revenue only by the amount additional salaries increase demand. I'll conceed this point only because I really don't follow sports or team finances. You seem to know about this, so I'll let it lay.




You could be right.
:ciappa:





Might Sony has been humbled for years...nowhere near the dominance it once enjoyed...though BluRay seems to gaining obscene momentum based on the CES reports... Ohhhhhh....I think you may be right about it. Of course HD-DVD is doomed to fail, because I bought my first HD-DVD today. The last time I dipped my toes in the water I got burned also.

Bought a Pioneer LaserDisc player, and about 7 movies at Circuit City. After 35 DAYS, the big DVD debut happened. Chapped my ass.

kexodusc
02-01-2007, 06:35 PM
Ohhhhhh....I think you may be right about it. Of course HD-DVD is doomed to fail, because I bought my first HD-DVD today. The last time I dipped my toes in the water I got burned also.

Bought a Pioneer LaserDisc player, and about 7 movies at Circuit City. After 35 DAYS, the big DVD debut happened. Chapped my ass.

Yeah, I took a big hit on Laser Disc too...bought my player straight outta high school with a wicked Technics pro-logic reciever, and full Cerwin Vega surround system...they lasted me until my 3rd year at university or so...I think I had a dozen Laser Discs but I was fortunate enough to pawn them off an another guy. Went back to VHS for a few years until my first DVD player in 2001 or so...rather late to the DVD party I guess.

I wouldn't write off HD-DVD yet, but BluRay's early lead has really surprised me - I'm bad at predicting format winners - I picked DVD-A to outlive SACD too. If BluRay sustains it, Sony's gamble will pay off well for them. Personally, I think HD-DVD will keep producing new titles for a few years, but the studios resolve seems to be stronger than I gave them credit for. I don't really care who wins, but I hope one emerges dominant soon, or at the very least a brutal price war erupts.

Arrogance is something Microsoft does better than anyone else, though I'd put Sony a close second. You should hear some of the crap Bill Gates has been spewing this week...