Intrinsic said:
SWORDF1SH said:
Of course install base is important but thet have to find that balance.
Using your example (I know it's a very loose example) and persuming they make $50 on each console (probably not, maybe more)
15M at $400 with $50 profit = $750M profit
20M at $350 with no profit = $0 profit
20M at $300 with $50 loss = $1B loss
So by having a $100 price cut they would have to make back $1.75B. So in this case it wouldn't be smart to drop price. PS Plus and software sales will never sell enough to make the difference up.
Again these are very very rough figures but the outcome is always the same. Sell less at higher profit or more for less profit but you will only want to cut price if the end results means making more profit.
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Well if you wanna be anal about it :), let's see...
What we know is that as of Feb last year Sony announced they were making a profit on hardware and went on to say that their focus is on market growth not hardware profitability. This suggests that they are willing to slash prices to increase market share rather than make as much as they can make from hardware. But let's do some loose math.
- At launch the PS4 BOM was ~$381 but extremely high demand meant they had to air freight shipments which would have resulted to a unit cost of over $400 for them. when demand stabilized, this problem goes away.
- As it stands, 15M@$400*$50 profit = $750M (this would meanthe BOM of PS4 is now at around $340 cause the retailer gets around $10-$20/console sold.
- By sept-dec, and to allow a price drop there will be a console internal revision, which would bring the BOM down to at least $320 or less. Remember Sony is a hardware company at heart, this is their thing, if anyone can get costs down by better engineered hardware its them.
- So 20M@$300*$30 loss= $600M loss in hardware. Yh, looks bad I know.
Now let's look at the benefits.
- Potential 38M-40M user base by end of 2015 as opposed to 33M-35M, basically around a 20% increase in potential user base.
- That means, more games sold, more extra controllers bought, more PS+ subscriptions, more "obvious choice" third party support and benefits, harder for competitions to buy 3rd party support....etc
- To put things in perspective, take two very popular 3rd party games for instance as a worst case scenario base; Next COD and MGS5. If those games sell 10M between them on a 40M install base (low balling it here) and Sony makes $15 per game sold, that's a profit of $150M. From just two games.
- If you extrapolate and take into consideration first party games, digital sales and all the other multiplatform games there, then you see the truth of the console "loss lewder" business model. There is more money to be made from taking a hit on hardware and selling more software.
- While Sony may lose $30 on every console they sell at $300, the business they get from every console sold comoketly negates that and gives them a profit overall. If a consumer buys a PS4 and then 2 games or a PS+ subscription, or one first party game, or an extra controller.... Sony has already broken even.
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And I agree with most of what you say. I did say Sony have to find a balance. Not being anal at all. I used hyporthetical figures to show that price cut can lose you money and not always the solution and if Sony project to make more that they lose from the extra install base they will do it. If the extra sales can make up what they lose through pricecut they will do it. Let not forget that (using hyporthetical figures again) those 15M will buy ps plus games etc anyway, what they lose through the pricecut will have to be made up through the 5M customers they gain.
Bolded part. You say that Sony will lose $30 at $300 but the reality is that they lose $100. If your figures are right, they could of made $70 per console but instead lose $30. That loses them $100.
