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.

No. Strategy is key, and that strategy paid off. The only difference is that Sony had a 1 year head start to establish itself, which paid off in the end. The price drop came sooner, and the support from 3rd parties was growing. The same thing is happening with the 360. I think it was a good move from Microsoft, who is a newcomer in the industry, to have followed Sony's last gen strategy. Expect a price drop and good 3rd party support and exclusives to drive 360 sales for a long time. While I do not support Microsoft, I do believe their strategy this time around will pay off.

Almost, but not exactly. The losses come from producing the hardware. Sony has produced lots of PS3 which are now sitting in inventory.

Another problem with too much production which has already been mentioned in the forum is that, if they decide to do a price drop after reducing manufacturing cost and this happens soon, they'll be selling expensive hardware at a reduced price point.

Right, I absolutely agree that the strategy can pay off, and has in the past. No argument here. The question I'm asking is: what happens when the strategy doesn't pay off? What happens when you sell the system at a loss and you're still just in 3rd place, with 15 percent of the market share? If this were a 1-shot thing -- where you entered the market and stayed with the same machine -- I'd say it might be worth it, but this cycle repeats itself every 6 years or so when a new generation begins. I totally agree that the strategy is worth it when you win, but everyone is going to lose sooner or later, and when you lose with this strategy, you lose really hard. That is my point.

Well, that is my belief as well. I just anwsered no and went on to discuss strategy. However, seeing as Sony and Microsoft are the ones that use this "sell at a loss" strategy, it is hard to say what WILL happen. The loss of their gaming branch can be offset by their other departments. So, they can go with the same "sell at a loss" strategy even if they placed 3rd last generation, and simply focus on a new strategy.

When this strategy doesn't pay off you lose $5 Billion (or more) like the XBox did in the previous generation ... The loss of money wouldn't be the worst part of it for Sony, the loss of market share and brand recognition would be far more damaging.

Lets ask ourselves WHY Sony and now Microsoft sell at a loss. Nintendo makes money from their hardware AND software, makes significantly more money from first party software than Sony and MS, and has both a successful handheld and successful home system. When Sony was initially entering the market, they were just going to have a home console and mostly third party software. Again with the PS2, these were the only areas they'd be able to go head-to-head with Nintendo. The reason PS2 and now PS3 were sold at a loss, is because Sony spent so much money developing "convergent" entertainment platforms which would establish non-gaming revenue streams. PS2 was an aggressive attempt to do this. When it failed, Sony went on to make less money than Nintendo during the generation. At that point, Sony released a handheld system and tried to crank their internal production up to Nintendo levels, imitating Nintendo, because I guess its kinda embarassing to not make more money than your supposedly marginalized competitor. The loss-leading strategy has always failed, because it was always designed to create more revenue streams. Sony and now MS have been forced to sell their systems at a loss because they're Trojan horses, which is a nice way of saying consumers don't put value in their extra features. You could say selling at a loss helped them move more systems, but even lower prices from Nintendo and Sega never helped them move more systems. The bottom line for a console is that it needs compelling, attractive software, and an affordable price. PS and PS2 positioned themselves perfectly to get tons and tons of compelling software and were affordable. But PS2 could have been just as successful in terms of revenue and sales if its development and production was as cheap as Gamecube's was, or only higher due to DVD-playback.

Wait, wait wait. Wait, wait, wait. Wait.

....

Wait.

Nintendo made more money off the Gamecube than Sony did off the PS2? Do you have evidence of this? I'm not doubting you -- I'm just so absolutely flabbergasted by the notion I don't know where to start. How bad does a company's business model have to be to make less money with 72 percent of market share than a company with 15 percent of it? I understand what you're saying, Erik: Sony sees the system as a vessel through which the real games, accessories, and other media is channeled (Blu-Ray being the current and best example of this "other" media). I'm just flabbergasted at how poorly it's done. For those who keep up with stock values and corporate profits, Nintendo's profits are almost 2/3s that of Sony's despite being less than 1/3 the size (according to assets/revenue), and I'm sure that number will increase. It's theoretically possible that within a year (if the Wii/PS3 numbers continue as is), Nintendo will be making higher profits than Sony. That's amazing. If you can give me evidence, I will have zero doubt that this strategy is a poor one. 

Nintendo made a lot more money than Sony's gaming division although the lion's share of that profit probably came from the GBA.