Sony's tightrope, and it's implications for future console generations.

[Bodhesatva]

Last generation was the seonc time a serious console contender was being sold at a loss: the original PS2s were being sold at a loss of 100 dollars or more.

When I heard this, I understood why they were doing it -- market share. Get the system out there at a reasonable price, and sell it a loss to accumulate market share over time. Their strategy immediately made sense. However, as soon as this thought had processed, my next thought was: "Uh, what happens if it doesn't work? What happens if they sell it at a significant loss and do not accumulate significant market share?" It's difficult to simply calculate how much money Sony stands to lose if/when they lose control of the market (we might already claim they've lost the top spot, but that's outside the scope of this post), because selling less software -- where their profits come from -- is usually coupled with less hardware sales -- which is where the losses come from. Regardless, it's safe to assume Sony will either see profoundly less profits off the PS3 than off the PS2, or it will actually see a net loss for the console's generational lifespan.

This post isn't actually about Sony in particular. It's about their marketing and sales strategy, about selling a system at a loss to gain marketshare. It works just fine and dandy as long as you actually do accrue market share: the problems occur when you don't. Now, everyone knows that you make less money with a smaller market share than you do with a larger one. That's not complicated. But you don't actually have to lose gobs of money in the process: selling the system itself at a profit would immediately solve this problem. Nintendo had a steady stream of profit during the Gamecube generation, despite being the third place contenders with approximately 16 percent of the market share. While Nintendo's strategy may also mean that they don't get as much market share as they might with a lower price point, they also are much less vulnerable to disaster.

My question to you all is this: do you think the fallout from this generation will end the "sell at a loss to gain marketshare" strategy? The strategy may work for one, two, or even three generations, but in the long run, you're eventually going to get burned badly, and we may be seeing the first real example of that right now.

Edit title: its, not it's.