Hate to be the spoiler on this but it has to be said.
The PS3 has had massive price cuts (2 of them!) within its first year just to be able to MATCH the XBox 360.
Not to leave it in the dust, just to MATCH it.
With their loss leading business model they don't make enough software sales to cover the gap. And because of their high production costs it takes just that much more software to turn some coin from.
The two price cuts & the reconfiguration of models has certainly helped them in what would have been a totally bleak year but do you REALLY think Microsoft is just gonna sit idly by and let PS3 get momentum??
PS3 sold close to 9 million in its first full year from opening launch.
XBox 360 sold about 9 million in its first full year from opening launch. With no price cuts.
Granted XBox 360 had a universal launch while PS3's PAL debut happened a few months later (their own fault for that though) but still it took PS3 two massive $100 cuts to approach what XBox 360 has done on the market. Itself only using one $50 cut in addition to new models with new prices.
Benefitting the PS3 is the fact that at least its hardware isn't seen as shoddy and unreliable. This stalled 360 no doubt. I truly believe that. And Sony's inclusion of Blu-Ray tech in the package may be helping PS3 get some value advantage which can move a few units. But the sad fact is the losses made to achieve what they're achieving now hurts them without games to back it up. Blu-Ray movies aren't selling enough to make up the gap either since the HD disc market isn't fully developed yet & some Blu-Ray afficionados aren't all buying the PS3 for Blu-Ray anyway.
It's sad that for every PS3 sold it hurts the pocketbook that much more due to how their business model is set-up. Going by what we know from the dominant PS2 all that can be said from its success is "Pyrrhic Victory". You won but at what cost to yourself? The 6th gen dominator did not have incomes that reflected their unit sales. Even so it was enough to pay the bills & have some luxury funds with but it showed the glaring weakness in their strategy. To win with that setup you have to be all-dominant...just to pull in a LITTLE profit.
Since Sony is not efficient every minute costs them. If it doesn't sell then that's problems for warehouse expenses & such. If it sells then that's problems for production expenses & such.
Say it costs Sony a net of $400 to make a PS3 (net being end result of original production cost [say $800] & retail price [say $400]). If they sell 5 million of them then they lose $2 billion in production costs. Success costs them if they move units. $2 billion is 1/25 of a Bill Gates or 2 Oprahs. 4% of Big Bucks Billy & 200% of Stedman's Galpal. Do you know how much money that is???
But what if it doesn't sell? A net loss of $400 with assorted storage costs, warehousing costs, retail buybacks, shipping fees, etc. Not only do they still lose that original $2 billion in production costs (they lose that money simply by producing. not dependent on sales) but they also lose all kinds of money for the logistical problems caused by units that dont move. They have to alter their future production estimates while still holding factories (luckily they have internal ones which offset some problems). The ones waiting to sell accrue storage fees from warehousers. Retailers burnt by an overstock of non-moving units will demand that the manufacturer buy them back since it costs the retailer money to store the units. This may incline them to not buy so many next time. And because of all this they spend money trying to find solutions to all of these problems.
Let's just say all this combined costs $1 billion (not so sure on the costs of those kinds of problems so I just put a figure). That would end up being $3 billion lost from making those 5 million PS3's instead of $2 billion and because of the domino effect this will make worse future losses due to a not-in-demand product. Games will be less able to sell due to smaller base & developers start looking for other avenues to place their games on out of fear for lost returns. Retail space is adjusted for popularity making worse problems for sales and some retailers may eventually stop displaying the product at all. Meanwhile all of the logistics are tallying up on the cab fare 'cause time is money.
This is the situation Microsoft is looking for in 2008. They have more money than Sony. Anybody who loses $4 billion just to enter the game business & sticks around means business. Simple as that. They will put the pressure on Sony in 2008 going after their developers with bribe money to make the switch to 360 exclusivity. They will market hard to make the PS3 name 'Mud' with all their 'FUD'. They will be aggressive in markets where the PS3 & 360 are comparable and competitive (Europe). A well-timed price drop, a well-timed game platform switch, a well-timed media campaign. This is what you'll see in 2008 from Microsoft towards Sony.
And to underline this look at the main markets. XBox 360 is strong in the USA/North America region. An American console would HAVE to be wouldn't it? Bad if it wasn't. It's weaker in Europe & PALs overall though stronger in some individual regions while weaker in other ones. It's nobody in Japan. The misfit there.
The PS3 has the most promise in the overall Europe/PALs for growth. In Japan, it's #2 but a very distant #2 in the home console segment due to Wii. In USA/NA, it's a clear #3. You can't look at this in a vacuum. Nintendo has ruined the party for both of them, Sony AND Microsoft, with their handheld/home console tagteam. Nintendo is all dominant in Japan on both handheld & console side. Nintendo is dominant handheld-wise in Europe with overall strength console-wise with Wii (Europe's Nintendo's weakest region). Nintendo is strengthening in USA/NA being tops with handhelds & high with consoles.
For The Americas, Nintendo puts pressure on Microsoft in its strongest area and that pressure will grow until it's clear that Microsoft is a distinct #2 in hardware & software there. Microsoft has no handheld representative so it can't answer the DS. For Europe/PALs Nintendo is fighting Sony's loyal hold repairing ancient damage which has kept this their weakest market for decades. And they're winning. When the Sony loyal countries start turning to Nintendo for both handheld AND console Europe/PALs overall will belong definitively to Nintendo. Certain regions of this multi-faceted market have already made the switch. In Japan, it's Nintendo-land. They can't be challenged there by anybody. And that messes up Sony tremendously since Japan is the capital of this whole business to begin with.
So we have Sony trying to take MS's place in the Americas (most notably USA, the buyingest nation in the world) while Nintendo loosens MS's grip on this market. We will have Microsoft trying to increase its presence in Europe/PALs to cutoff any potential Sony progress while both of them also face a strong Nintendo. In Japan, we have Sony trying to close the gap between #1 & #2 in both handheld & console against Nintendo's dominant juggernaut with Microsoft just trying to get a decent look there.
Sony has to watch for an increasingly aggressive Microsoft while STILL having to prepare for the inevitable inescapable Nintendomination which will consume and transform the whole market to Nintendo's advantage. All this spells to me is costs, costs, costs. Expenses, expenses, expenses. Liabilities, liabilities, liabilities.
If a miracle happens & Sony stops Microsoft's plans to totally usurp them then they will lose LESS. However, because of how the market is going & has gone they will never see a profit from the PS3. XBox 360 has not panned out gold for Microsoft yet despite its strong sales in USA. They have moved on the market slowly even with so much advantage. PS3 is tracking like them more or less. It's not good enough to do OK if your business model is costing you. With every Nintendo success both Sony & Microsoft are hurt. They will have to approach some of the sales speed Nintendo does to make a turn around in the accountant books.
Much like with Microsoft, Sony as a whole won't crumble because of the PS3 but it's a good chance their Computer Entertainment (Games) Division might. No one really understands this business better than Nintendo & this generation is showing this. Keyword: Business. Many enter, most leave. It's not easy to last in this field. You gotta be smart and efficient to hang around long-term.
Of course these production cost margins will narrow since nothing runs at a constant rate but time is of the essence for either Sony or Microsoft to turn a profit from their machines. Some may say that time has already passed. That much will be for sure once Nintendo pulls the rug out from under them as they reshape the industry in their image. Better think of something, guys.
John Lucas
Words from the Official VGChartz Idiot
WE ARE THE NATION...OF DOMINATION!
