PS3 still losing money?

[Plaupius]

Rpruett said:

Plaupius said:

Rpruett said:

Sure they can. You are trying to simplify this WAY too much in your head.  Have you forgotten everything else that is for sale for a console? Controllers? Memory Card Adapters? Controller Covers? Bluetooth Microphones?  On top of the first party software that they have created (Many of which are some of the best games on the system).

The average attach rate for the PS3 is somewhere around 9 games.  Trust me.  9 games sold (With about 3 to 4 being first party) would easily without a shadow of a doubt cover Sony losing 100 dollars.

 

Sony will not get into a cutting price war for one primary reason.  They have a product that costs tons of money in actual cost.  They are competing against two products that have cost a substanial amount less from day one with cheaper overall hardware.   It makes zero business sense for them to get into a price cutting war and lose the ONLY advantage that the system has.

In the eyes of the consumer,  the PS3 is a valuable item.  By keeping the price high, you keep the demand high.  Sony is nursing a price cut because it makes sense for them on a business standpoint as well as a marketing one.

 

   If they cut the price on the PS3 they aren't in survival mode.  That's utter rubbish.

 

The question here is, because of the dire financial situation of Sony: can they sell enough additional software within the same fiscal year to cover the losses caused by the price cut? They do not really have the luxury of offsetting the payback to future fiscal years. Remember that the current attach rate is a product of the total lifetime of the PS3 in market, and it does not mean that an average new owner would buy 9 games in a year. So, with that in mind, here are two different scenarios:

Scenario A, with the current price, Sony sells 10 million PS3s during the current fiscal year, with 4 million sold up to the beginning of October and 6 million after that.

Scenario B we assume that they drop the price by $100 at the beginning of October and end up selling 14 million during the current fiscal year.

The cost of scenario B compared to Scenario A is an extra loss of $100 dollars for 10 million consoles = $1000 million extra loss.

Now, about the accessories and extra software: The price drop caused an additional 4 million PS3 to be sold, so the burden of turning a profit out of the price drop lies on those 4 million, which means that each additional PS3 sold would have to bring in more than $250 profit from accessories and software. And that is not likely to happen no matter how you twist it.

Now, if Sony were in a position where they could afford to take losses with the hope of recovering during a longer time interval, things would be different. Let's get together two additional scenarios that span two fiscal years:

Scenario C, maintain the current price. Sales remain flat so 20 million PS3s sold during two fiscal years. Same as before, 4 million sold up to the beginning of October and rest after that.

Scenario D, price cut of $100 at the beginning of October. It boosts sales so total sales for the two following fiscal years is 28 million PS3s. In addition, the manufacturing price of the PS3 is gradually decreasing during the second fiscal year so that at the end of the year, they are back to the level of profitability they were before the price drop.

The cost of scenario D compared to Scenario C is an extra loss of $100*10 million + $50*14 million = $1700 million extra loss.

The price drop caused an additioinal 8 million PS3s sold, so each new owner would have to bring in more than $212.5 for the price drop to be profitable within 2 fiscal years. Still unlikely, IMO.

First of all,  While I appreciate your scenarios, they mean very little without concrete financial figures from Sony .  Speculating what Sony is making profit on, what they are losing money on is a pointless exercise.  We have no idea how cheap Sony can produce a PS3 for or how architecture changes and a variety of other things can reduce it's cost to them.

Sony CAN sell a PS3 for a loss because they have a constant flux of cash coming in (Which is the very nature of consoles and is why these companies are willing to take big losses).

 

An area where people neglect to mention, is existing owners. I bought a PS3 a few months after it released.  In this fiscal year for Sony,  I will have bought several first party games (Kill Zone 2 60$, Uncharted 2 60$, InFamous 60$), A Sony Mic (60$) and another controller (60$), as well as additional content for other games. Do I not count into Sony's bottom line?   Or do only new console owners count?  Sony alone will have sold me $300 worth of product in their current fiscal year.   There will be plenty more just like me.   These people (Plus the sales of all accessories) offset the losses that Sony might have accrued over the new sales.

Then there is contributory things that you have to consider.  Such as Blu-Ray penetration.  The more households and name branding of Blu-Ray,  the higher sales of Blu-Ray movies overall (Many studios which are owned by Sony), the higher sales of newer Television sets to display those nice Blu-Ray movies(In which Sony is a big name in the business).

 

 

Sony will drop the price when it works for them.  If they drop the price that isn't some warning sign.

 

The beauty of it is that we don't have to know the real figures from Sony to do this kind of calculations. You said yourself that Sony will drop the price when it works for them, and using these calculations I've shown that it is very unlikely that a price cut would work for them in the current economical situation.

Since we know for sure that Sony is not profiting greatly from the PS3, the actual margin they have on it is irrelevant. Any price drop will directly translate into less profits. Only if they were actually profiting from the HW by a great deal, then a price cut could actually increase the total profits from the HW if the increase in demand were enough the offset the loss of revenue from the lower price. As it is now, that is not the case.

The reason existing owners are not included in my calculations is that Sony has your money regardless of the price cut. When you are estimating if the price cut would be a good move for Sony, you have to calculate the immediate economical effects it would have. And in case you haven't noticed, Sony is not in a situation where they can keep on incurring losses because "they have a constant flux of cash coming in". That constant flux has seriously dried up. Sony really, REALLY needs profits NOW, not three years from now.

I agree with you that Sony will drop the price when it works for them. It just is not going to work for them for a long time IMO. So, if they would drop the price now, that would seriously sound my alarms.