Wii the Death Knell of the Bleeding Edge Console?

[Sullla]

For the uninitiated, console makers rely on the razorblades-and-razors business model, which follows the model of razor companies who sell razors at a loss, and offset those losses with high-margin razorblades. In the games business, consoles are the razors and software are the blades. Nintendo's current razor, the $250 Wii, isn't a money-losing piece of hardware.

What I find interesting is how short the memory of everyone involved in this industry seems to be. It's simply not true to say "everyone sells their hardware at a loss", because that's NOT the way the gaming industry traditionally worked. Prior to the sixth generation, no company ever used this business model. The PS2 was the first console that was ever deliberately sold at a loss on launch in order to increase the install base as quickly as possible. Since then, three other consoles have followed the same market strategy, and one handheld: the XBox, XBox 360, PS3, and PSP. Aside from the PS2, every one of these platforms has resulted in multi-billion dollar losses for the company involved.

I remember us having a discussion about this last year at VGChartz. The fact of the matter is, the whole "sell your console at a loss" market strategy is about the dumbest thing possible if your goal is to make a profit. The ONLY way that this plan works is if your platform experiences a runaway market victory, like the PS2. In every other scenario, it's a huge loser. Even the PS2 didn't really make all that much profit (about $2 billion dollars lifetime) because Sony relentlessly cut the price again and again, sacrificing profit to drive the install base higher. Sadly, the PS2's dominance (which, frankly, it would have easily achieved even without selling at a loss!) has convinced everyone other than Nintendo that "this is the way the industry works", and thus resulted in massive losses for Sony and Microsoft over the past three years.

“We live in a free market and businesses will generally take the most profitable route when marketing their products. In our industry, it is unlikely that the manufacturers will drop this model as it has been proven to be one of the best business models for consoles that offer more than just the ability to play videogames.”

If only that were true! As usual, the analysts are clueless.