PlayStation 3, Console Wars & the Costs of Complexity

by on September 7, 2006 · 8 comments

If you’re a video game fan then by now you’ve heard the troubling news that Sony has announced there will be yet another delay in the eagerly anticipated launch of its PlayStation 3 gaming console. As a headline in the London Times read: “This year’s must-have toy is cancelled for Christmas.” (Needless to say, that’s about the last headline you want to read if you’re in the Sony marketing or PR department!) The new delay will mostly impact European customers, but North American customers will apparently see fewer boxes shipping our way during this holiday season when the box is set to launch here.

As a video game fanatic and former business school student, I must say that this entire episode has turned into quite an interesting case study of how three major competitors go about launching major new business technologies / platforms. Microsoft has taken the “KISS” (keep-it-simple-stupid) approach with their new XBOX 360 and offered a unit without any digital HDMI connections or a built-in high-def disc drive. (A HD-DVD “sidecar” player is scheduled to be offered later this year but the price has not yet been announced). And MS even offers a bare-bones “core” model of the XBOX 360 without a hard drive for just $299, $100 less than its premium $399 unit.

As a result, the company was able to get its system on the market back in November of last year, a full year earlier than Nintendo and Sony’s new systems are due to hit store shelves. Millions of consumers, including some like me who grew tired of waiting for Sony’s PS3, have made the plunge and purchased a XBOX 360. This constitutes a huge advantage for MS in the platform wars. Some predict that 10-15 million XBOX 360s will be sold before Sony finally gets around to pushing out the PS3 in some markets.


Sony, by contrast, seems to be bogged down with its “everything-plus-the-kitchen-sink” approach to its next generation gaming console. The company is determined to get a high-def disc drive onboard (Blue-Ray format) as well as Bluetooth capabilities, HDMI jacks (at least on the top-of-line $599 unit), a big hard drive, a motion-sensitive controller, and tons of processing power.

Having seen and played several PS3 games at this year’s E3 video game expo, I can tell you that the results are absolutely breathtaking. I was floored by the stunning graphics, fluid gameplay and enveloping surround sound. I just couldn’t take my eyes or ears off of it. But all this complexity comes at a significant cost. Indeed, back in February of this year, the investment wonks up at Merrill Lynch broke down the PS3 costs and here’s what they came up with. (Graphic courtesy of Engadget.com)

ps3_cost.jpg

With an estimated actual production cost of $900 per unit versus a retail list price of $499 for the base unit and $599 for the premium unit, Sony is going to be losing some serious cash on each box sold.
(Here’s another excellent discussion of the cost breakdown for PS3 over at Ars Technica.)

Of course, video game console makers, like many other platform providers, are accustomed to losing some money on the underlying platform but recouping the costs later through game sales or the sale of other accessories (and possibly digital downloads in the future). But we’re talking about a pretty big spread in the case of the PS3; at least $300 if we are to believe the Merrill Lynch numbers. Is Sony going to be able to make that up after losing so much ground to the XBOX over the course of a full year?

And don’t forget about Nintendo’s pending launch of the “Wii” with its very cool new motion-sensitive controller, which I also got to play with at this year’s E3 video game expo. It was a blast. If Nintendo’s Wii catches on with the younger crowd (and I’m betting it will because of that super-cool controller alone), it could steal away another big chunk of the market and hurt Sony’s prospects even more.

Worse yet for Sony, what happens if Blue-Ray flops because of the ongoing format wars with the HD-DVD camp? That would mean Sony would have spent a lot of time and money on a worthless piece of expensive integrated hardware. (And how many gamers really buy the console for movie viewing to begin with?)

Also, I’m really wondering if Sony will be able to match Microsoft when it comes to online gaming and home media networking. As I’ve said here before, I find Microsoft’s XBOX Live Network and Marketplace to be absolutely amazing. And even better is the way my XBOX acts a media bridge linking my other computers together and seamlessly transferring music, videos and pictures around my house. It’s all made simple by nature of the fact that Microsoft has Media Center operating on just about every Windows-equipped PC out there today. Once you have everything loaded up on Media Center on one of your computers, it can all be linked to the XBOX and transferred to it. So now, when I sit down to play games with friends online, I often pull up some of my favorite music playlists off a computer two floors above me and stream it all to my console. Meanwhile, I have pictures of my kids popping up as wallpaper or screen saver whenever I have the system paused. Very, very cool. Will Sony be able to compete with that?

Anyway you cut it, this is all represents quite a dilemma for Sony… and one heck of interesting business school case study in the making. I’m hoping that it all somehow works out and that the PS3 is the success story that the PS2 was because I think it’s great to have intense platform competition among three major gaming rivals, even though I have long felt that it isn’t feasible in the long-run. As someone who has owned just about every video game console ever made (including Pong, Atari 2600, Intellivision, CollecoVision, Sega Genesis and Sega DreamCast, all the Sony, Nintendo and MS platforms, and so on), I must say that we are extraordinarily lucky to have the degree of platform competition we see today and I continue to be surprised that it can last with so much competition from PC-based alternatives and handheld units. It will be very interesting to see how the current console wars unfold considering Sony’s recent problems.

Now, excuse me while I get back to finishing another game in my “Madden 2007″ season (on my XBOX) before I finish another Texas Hold ‘Em tournament on “World Series of Poker” (on my PlayStation Portable)!

(Note: Also make sure to read Frank Rose’s excellent piece in latest Wired: “Can the PS3 Save Sony“?)

  • http://www.techliberation.com/ Tim Lee

    I don’t believe Merrill Lynch. $580 of the $800 is for two components: the processor and the optical drive. Those are both parts that were custom-designed for Sony. So I don’t think there’s any reliable way to know how much Sony’s paying for them. Sony doubtless negotiated deep discounts for them based on a commitment to buy several million.

    This is especially true since a lot of the cost of the CPU is in fixed capital expenses. The reason that new chips are so expensive is that companies are trying to recoup their investments during the few months when the new product is hot. Sony doesn’t have to do that as much, because it’s going to be using the same chip for a couple of years. I don’t know anything about the economics of BluRay drives, but I wouldn’t be surprised if something similar is going on there.

    If those are the real numbers, then Sony is insane. There is no way that you could recoup $200 from licensing PS3 games. Even if they charge $20/game, that would mean that the average consumer would have to buy 10 games just for Sony to break even.

    Anybody know how much Sony charges per title for PS3 game licenses?

  • Adam Thierer

    Tim… You may be correct about the Merrill Lynch figures. Take a look at the many comments to that Engadget column I cited above [ http://www.engadget.com/2006/02/18/playstation-3-costs-900-sez-merrill-lynch-mob/#comments ].

    You will see that several of those commenting on the report find errors with not only the underlying cost figures, but the actual calculations made in the report! So, it certainly could be the case that the ML report is over-estimating the costs Sony faces.

    Then again, all that processing power, hard drive capacity and high-def capabilities must add up at some point. I’m no expert on the cost of computing processing and storage, but I would think that the ML figures are probably not that far off the mark. Of course, the figures will fall over time.

    Incidentally, however, there are rumors floating around out there in the video game world that some of the most popular PS3 games could break the $60 mark, perhaps even go over $70 bucks per title. But I really wonder if fans are that dedicated to certain titles that they would spend that much. Again, if that’s how Sony hopes to recoup its upfront fixed costs, this represents a huge gamble for the company. (It’s the old razor & razor blades issue again, right?. How much will people be willing to spend on blades for a razor that is sold below cost? Same thing is going on here except I’m no longer certain this strategy will work for video games.)

  • http://www.techliberation.com/ Tim Lee

    I don’t believe Merrill Lynch. $580 of the $800 is for two components: the processor and the optical drive. Those are both parts that were custom-designed for Sony. So I don’t think there’s any reliable way to know how much Sony’s paying for them. Sony doubtless negotiated deep discounts for them based on a commitment to buy several million.

    This is especially true since a lot of the cost of the CPU is in fixed capital expenses. The reason that new chips are so expensive is that companies are trying to recoup their investments during the few months when the new product is hot. Sony doesn’t have to do that as much, because it’s going to be using the same chip for a couple of years. I don’t know anything about the economics of BluRay drives, but I wouldn’t be surprised if something similar is going on there.

    If those are the real numbers, then Sony is insane. There is no way that you could recoup $200 from licensing PS3 games. Even if they charge $20/game, that would mean that the average consumer would have to buy 10 games just for Sony to break even.

    Anybody know how much Sony charges per title for PS3 game licenses?

  • http://www.techliberation.com Adam Thierer

    Tim… You may be correct about the Merrill Lynch figures. Take a look at the many comments to that Engadget column I cited above [ http://www.engadget.com/2006/02/18/playstation-... ].

    You will see that several of those commenting on the report find errors with not only the underlying cost figures, but the actual calculations made in the report! So, it certainly could be the case that the ML report is over-estimating the costs Sony faces.

    Then again, all that processing power, hard drive capacity and high-def capabilities must add up at some point. I’m no expert on the cost of computing processing and storage, but I would think that the ML figures are probably not that far off the mark. Of course, the figures will fall over time.

    Incidentally, however, there are rumors floating around out there in the video game world that some of the most popular PS3 games could break the $60 mark, perhaps even go over $70 bucks per title. But I really wonder if fans are that dedicated to certain titles that they would spend that much. Again, if that’s how Sony hopes to recoup its upfront fixed costs, this represents a huge gamble for the company. (It’s the old razor & razor blades issue again, right?. How much will people be willing to spend on blades for a razor that is sold below cost? Same thing is going on here except I’m no longer certain this strategy will work for video games.)

  • http://www@pff.com Noel Le

    This brings up the whole point that gamers are the most technologically oriented and demanding of consumers. Funny then that the company that “dumbs it down” might be the one that wins. Many other sectors might learn from this:)

  • http://www.codemonkeyramblings.com MikeT

    Noel, I think it’s safe to say that a lot of it is sheer hatred for Sony after all of the myriad ways they have managed to screw their customers in the past year or two. Remember the rootkit they put on their CDs? Microsoft couldn’t have bought better anti-Sony publicity!

  • Noel Le

    This brings up the whole point that gamers are the most technologically oriented and demanding of consumers. Funny then that the company that “dumbs it down” might be the one that wins. Many other sectors might learn from this:)

  • http://www.codemonkeyramblings.com MikeT

    Noel, I think it’s safe to say that a lot of it is sheer hatred for Sony after all of the myriad ways they have managed to screw their customers in the past year or two. Remember the rootkit they put on their CDs? Microsoft couldn’t have bought better anti-Sony publicity!

Previous post:

Next post: