Tuesday, February 27, 2007

Short Vs. Long-Term Console Life

Phil Harrison, Sony big-wig said a couple of things lately that I feel like addressing. The first is an off-handed statement about the supposed longevity of the PS3 Vs the Wii.

“I think Nintendo, although I am very respectful of the innovation in Wii, and I think everybody should be respectful of it, I’m not sure that it has the technology base to propel that platform in the long-term. So I think their platform lifecycle is inherently going to be shorter, so they could have learned from us in terms of the high technology approach.”

The life of a console is dictated by a simple cost/benefit ratio. A corporation exists to make a profit. In regards to consoles a typical profit chart would be in the red for a period of time. This is typically because of the monies spent on research and development of the console, and for the cutting edge technology and components used in the manufacturing. Typically a console is sold for less money than the unit cost the corporation to manufacture.

The second phase is after the components drop in price because of increased availability and improvements in assembly. Eventually there is a crossover point where the corporation begins to make more in the sale of a unit than it cost to manufacture but the corporation still has not recouped the research and development costs.

The third (and every corporation hopes, the longest) phase is when all their numbers are in the green because they have earned back their R&D costs and component/assembly prices have continued to drop making each unit produce a net profit.

Sony has stated over and over that the PS3 will be around for 10 years. Its easy to see why they hope it will happen. The PS2 has only made it into the third phase in the last year or so. Sony doesn't make detailed information available often but we know they barely made back (in total) what they spent (in total) for the PS2. Not having a long-term phase three product hurts Sony's ability to continue R&D for future products and is just a step away from putting a department in a deficit.

Every console manufacturer in this business is already hard at work designing the NEXT console but when that console launches years from now it will contain cutting-edge tech, not stuff that we have now. Obviously the designs are in a very fluid form now, and will slowly solidify the nearer we get to the launch of a new product.

When a console is released it represents a sizable investment for the corporation and steps are taken to protect that investment. Marketing is going on to push the consoles out the door because even if the sale of a new phase one unit represents a loss, the software purchased to play on it will hit it's own crossover point almost immediately, bringing money back into the corporation's coffers. Peripherals also usually represent a monetary gain as the R&D costs are typically small change compared to the console.

Another way they protect their investments is to compete technologically with each other. Nintendo has stated that they have removed themselves from the competition by providing a cheaper, less powerful machine focused on the gaming experience. If, however, the Wii was exactly the same as it is today but with N64 graphics, units wouldn't be selling. At all... So while they say they aren't competing graphically with the other big boys it is more of a gradient scale because the fact is that they have lost customers who feel that they would rather have a console with HD output. They will continue to lose customers to this fact. The majority of people though will find it more cost effective to buy a much cheaper, somewhat less powerful machine. It happens every day.

Let me draw a ready comparison. I looked up some pricing for a segment of the technology market that I would classify as very volatile; video cards. I just looked up prices for the very popular GeForce cards. Their current top of the line is the 8800 gtx weighing in at $555. The 8800 gts is only slightly less powerful and launched at almost the same time, yet it only costs $294. Last years models range in price from $268-$44. The available models from the two previous generation were around $50-$30, meaning within 18 to 24 months a brand new product is brought in line with products from three years prior.

This comparison is important because it spans the technology industry. Blue Ray is expensive now, but in a couple years (if it manages to beat out HD-DVD which I wouldn't bet on) it will drop drastically in price and that particular component of the PS3 or any device containing it will drop comparatively.

The cost/benefit scale for replacing a console becomes skewed when the console reaches phase three because you now have access to new technologies that you can pack into a new machine, which brings us to the most important way to protect your investment; keep releasing new hardware. You phase out an old product and start the cycle fresh with one BIG difference, an installed base. If you can manage to sway people to your product lineup and make your new machine backwards compatible you will already have millions of people who can enjoy your new product without the outlay of cash needed to buy a console, some peripherals AND a few games to play. And as the first few months of a console release are typically meager on the the software release side they will have games available to stave off the boredom that might have them turning to a competitor.

The PS3 won't be Sony's flagship for ten years. It's not impossible, just not fiscally feasible. They want to have a longer phase three to boost profits but Microsoft and Nintendo are sure to release new consoles in the typical 5-6 year time frame and they will have newer technology than the PS3 currently has, giving the PS3 only one advantage of being cheaper as the PS3 will have dropped in price to the consumer in 5 years. But the disparity between the outdated PS3 versus the next generation consoles will woo consumers away from the PS3 and its software forcing Sony to release a new console to compete for consumer dollars.

Sony wants their console to last for 10 years, but they have to dance to the beat of their competitors. The PS3 won't last a decade. Not this generation, maybe the PS4 will have a better chance.

In stark contrast I will quickly point out Nintendo which launched the Wii with last year's graphics card, so to speak. They went directly into phase two as they immediately made a profit off each unit and only need to recoup their R&D costs. With the majority of Nintendo games being produced in-house they will be in phase three probably before their competitors meaning that at least in regards to profit, the cheaper, somewhat underpowered machine beats out the cutting edge product on the bottom line. Nintendo has produced about the same net profit as the whole of Sony for the last few years even with it's "terrible" Gamecube sales. Nintendo produces a 20% net profit which is a level of efficiency many corporations cannot achieve.

As a side note the Wii has sold 4 million units worldwide, half as much as the 360 and almost three times more than the PS3. If sales continue at this rate Nintendo could outsell the 360 by the end of the year if software support remains strong. We will see.


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