Mifely said: LOL @ many. Raise your hand if you think the word "SALE" must mean that the retailer is losing money overall, or someone paid them to do it! Raise your hand if you think "SALE" is about the discounted item(s)! Raise your hand if you think Sony/MS/Nintendo make more money off hardware than software! Raise your hand if you think games are a low-margin item at the retail level! ...if you raised your hand, or even are remotely unclear on those items, I think you should seriously consider not posting to the sales board, because you are... really misinformed. The very idea that Sony had any part in this Wal-mart giftcard deal is... ludicrous. I find myself (as usual, on many of these topics), doubting how many of your understand anything about retail, Wal-mart (go look for some books... try: Author, Sam Walton, in the local bookstore, or library, for starts), or occasionally even basic mathematics. I apologize if anyone is insulted by this post... but some of you are *really* off base, and I figure someone needs to tell you, before you... I dunno, get hit by a bus, in the financial sense... like get an ARM loan for a new home or something.

 

Dude, seriously, get your money back for that mail in business accounting degree, its just not working out for you. Does this remind everyone else of the far-fetched explanations thought up by the typical factory work lifer your stuck working next to at your summer job? The guy who thinks he's figured out the world based on nothing more than his own observations? Such typical self assumed arguments as "how cigarettes really don't cause cancer" or "how sea turtle blood cures cancer" or "how Coffee is healthier than Green Tea", etc. etc. etc. (Can you tell I've had too many summer jobs at factories?)

 In all seriousness though, you offer no substance to your claims, just claims, and no cohesive reasoning as to why you're right and we're wrong, you just say something "is this way" because "that's how it works" I think its been quite thoroughly established you have no gauge of knowledge here to assert anything on the subject matter.

I can post some interesting numbers later if you guys are truly interested.

 

As an example, typical retail per-item profit on a new $60 game is about $20. Distribution takes about another $10, and the publisher gets about $30, some portion of which they pay as licensing fees to Sony/MS/Nintendo.. it varies widely, but $10 is a good middle ground. The physical item you purchase only costs the publisher about $2-$5 to make, depending highly upon media type and packaging. The rest of the publishers profit needs to go to recouping dev and marketing costs for the product, before the publisher actually sees profit. The margin for discounted games ("Best Seller" $20 variety) lessens considerably, and really hurts the retailer's % more than everyone else. I don't know the numbers as well for the discount titles, but I seem to recall that the retailer only sees about $2 of the $20 -- but they sell like hotcakes, and although they are not worthy of the prime shelf space, they are still a decent margin item, and thus the stores carry them. As an aside, I can tell you that the developers really get screwed on the $20 discount items -- they usually don't see a dime of royalties once the title hits that stage, no matter how good their royalty deal was with their publisher.

Once a retailer purchases an item, at least from the video game industry (I can't claim expertise on other industries, so I don't know if this is different for other types of products -- and yes I *can* claim expertise on the games industry, and that's where I'll stop with that), that's it. The retailer owns the item, and the only way to recoup losses from the publisher is to claim that the item is defective. Hardware is a little different from software, in that, indeed, hardware price drops are paid for by the manufacturer, but they have never, in my experience, done a price drop for individual retailers, or via a gift card. That's... really new (a nice way to say... that its just not true), if its the case here.

The rental industry purchases new games for a much higher price than the regular retail industry, perhaps for obvious reasons. I've been told that movies actually work via a different mechanism (royalties? dunno), but to-be-rented games I know are purchased for, for example, ~$150/copy when the game is new.

 

Also (and this data is available from NPD), Wal-mart, despite being a colossal retailer, doesn't have as much pull with the games industry as it once did. They can push publishers around when it comes to making shovelware, and that's about where it ends. Wal-mart sells a lot of shovelware, but when it comes to full-price games, and probably Bluray discs, they can't compare to companies like BestBuy, Target, or even GameStop. Yep, you heard me. GameStop. What used to be a minor sector of the sales has grown by leaps and bounds in the last few years. The "specialty" shops, like GameStop, are doing *really* well. As a matter of fact, I believe that I saw Wal-mart in the #4 or #5 position in raw games industry revenue recently, behind exactly the companies I mentioned... BestBuy, GameStop, Target.. and Target was falling back as well.

Given the Wii's magnitude of shovelware, perhaps Wal-mart games sales will pick up soon, and they'll be the champs again (they once were, in the games industry, but not for a few years now). As is, Sony has no reason to pander special deals to Wal-mart, that they aren't going to push everywhere else.

 

Wal-mart stands to benefit hugely from their customer base owning BluRay players and PS3s. As I stated, the profit margins on the software/movie items are quite large, and Wal-mart has a "special" place in the retail sector. They *own* the rural market in America, which is not only the largest overall sector, but also the most sparse in regards to console ownership per capita. If they can get rural communities hooked on blu-ray and PS3s (or 360s), they are doing themselves a *huge* favor. Their customers don't have another choice for electronics (or anything else, really -- Wal-mart is very much a rural monopoly, as I said -- they let the other stores have the urban sector, and let them compete with each other), so Wal-mart is it -- BluRay city, and no 100-mile round trip @$4/gallon of gas to get there.

 

Wal-mart made "future money" (and a lot of it, potentially) with this deal. In a lot of cases, they probably saw the gift-card used directly to purchase high-margin games in the same sale... thus reducing their immediate losses considerably, and retaining the same future potential. The other retailers saw the same oppotunity (Target, BestBuy, etc. all had deals, but not as large) and also dove in. It was worth it to all of them.

 

Why not do this all the time? Sony doesn't come out with a new, attractive bundle all the time. One of the primary functions of these deals was to clear shelf space (of items that cannot be returned unless defective -- that's just not how it works) for these "improved" items. Yes, it was worth this much to Wal-mart, Target, etc. to have this sale. They make a lot of money from games and BluRay. A lot. More installed base means everything to them... especially Wal-mart, with their "different" customer base (monopoly).

And now, the deals are over... the shelf space is clear, the new 80GB PS3s are on the way, and the market just got larger.

Mifely said: LOL @ many. Raise your hand if you think the word "SALE" must mean that the retailer is losing money overall, or someone paid them to do it! Raise your hand if you think "SALE" is about the discounted item(s)! Raise your hand if you think Sony/MS/Nintendo make more money off hardware than software! Raise your hand if you think games are a low-margin item at the retail level! ...if you raised your hand, or even are remotely unclear on those items, I think you should seriously consider not posting to the sales board, because you are... really misinformed. The very idea that Sony had any part in this Wal-mart giftcard deal is... ludicrous. I find myself (as usual, on many of these topics), doubting how many of your understand anything about retail, Wal-mart (go look for some books... try: Author, Sam Walton, in the local bookstore, or library, for starts), or occasionally even basic mathematics. I apologize if anyone is insulted by this post... but some of you are *really* off base, and I figure someone needs to tell you, before you... I dunno, get hit by a bus, in the financial sense... like get an ARM loan for a new home or something.

Sigh, so wrong. The key problem here is that game hardware is an amazingly low margin product. Your assumption about profit margins with loss-leading hardware is spectacularly wrong.

Do you know how much money TRU pays for a 399.99 PS3? 399.98. Until the end of a lifecycle, retailers traditionally make 1 penny on loss-producing hardware like the PS3. Software is a different story, which is why there are random deals at all varying stores going on all the time.

The suggestion that Sony is not involved in this sale is ludicrous. I would recommend you read (or take) economics courses -- even basic ones at the college level. Or, I recommend you work at a retailer like Wal Mart. Either would likely allow for greater insight into these sorts of concerns.

Again, who has the greatest marginal benefit here? Clearly it is Sony, by a wide margin. Wal Mart gains little. Stand alone Blu Ray manufacturers gain some, but not nearly as much as Sony. All of them will take a part of this hit, but unless you'd like to turn traditional economic models upside down, the party with the greatest marginal benefit shoulders the largest marginal cost.

 

 

 

Bodhesatva said: Mifely said: LOL @ many. Raise your hand if you think the word "SALE" must mean that the retailer is losing money overall, or someone paid them to do it! Raise your hand if you think "SALE" is about the discounted item(s)! Raise your hand if you think Sony/MS/Nintendo make more money off hardware than software! Raise your hand if you think games are a low-margin item at the retail level! ...if you raised your hand, or even are remotely unclear on those items, I think you should seriously consider not posting to the sales board, because you are... really misinformed. The very idea that Sony had any part in this Wal-mart giftcard deal is... ludicrous. I find myself (as usual, on many of these topics), doubting how many of your understand anything about retail, Wal-mart (go look for some books... try: Author, Sam Walton, in the local bookstore, or library, for starts), or occasionally even basic mathematics. I apologize if anyone is insulted by this post... but some of you are *really* off base, and I figure someone needs to tell you, before you... I dunno, get hit by a bus, in the financial sense... like get an ARM loan for a new home or something. Sigh, so wrong. The key problem here is that game hardware is an amazingly low margin product. Your assumption about profit margins with loss-leading hardware is spectacularly wrong. Do you know how much money TRU pays for a 399.99 PS3? 399.98. Until the end of a lifecycle, retailers traditionally make 1 penny on loss-producing hardware like the PS3. Software is a different story, which is why there are random deals at all varying stores going on all the time. The suggestion that Sony is not involved in this sale is ludicrous. I would recommend you read (or take) economics courses -- even basic ones at the college level. Or, I recommend you work at a retailer like Wal Mart. Either would likely allow for greater insight into these sorts of concerns. Again, who has the greatest marginal benefit here? Clearly it is Sony, by a wide margin. Wal Mart gains little. Stand alone Blu Ray manufacturers gain some, but not nearly as much as Sony. All of them will take a part of this hit, but unless you'd like to turn traditional economic models upside down, the party with the greatest marginal benefit shoulders the largest marginal cost.

This isn't about hardware, and I thought I was clear on that. This is about the major retailers taking a loss (and not as big a one as many here are imagining) to grow the market and increase the profit-potential/liquidity of their hardware shelf-space.

 

Retailers take the single-largest portion of the revenue from new console games, as I said.  They stand to benefit *hugely* from increased market.  The games industry is a lot different from the typical, mature industry you might be lectured on in college -- don't make the mistake of assuming its even remotely similar to any industry outside of the DVD-side of the movie business, and even then its not a very close similarity.

Uh... well I agree that single-SKU software sales are often initiated by individual retailers, precisely because they are high margin product.

But since this specific sale we're talking about in this thread is about nothing but hardware, I'm not sure how that's relevant. Someone is losing exactly 100 dollars more (than usual) every time a PS3 was sold in the last week at Wal Mart. Who are you ascribing that loss to?

Edit: Ah ha ha, Milfey, come on. You think Wal Mart is willing to lose 70-80 dollars per PS3 sold last week just to increase hardware market share? And just for Sony? Don't be ridiculous. If that was their goal, why not have a sale on the 360 too? Why not the Wii? Why not just drop the prices all the time?

 

Let's just be straight about this, Mifely: you're suggesting that retailers are willing to lose millions of dollars to push the consoles. Their marginal benefit is miniscule. The companies who are responsible for pushing the consoles are Nintendo, Sony, and Microsoft. They are the ones with the largest marginal benefit -- by an enormous margin -- as this industry grows.

If video games weren't selling, then movies/music/some other entertainment would be selling, instead. Wal Mart does not care what's selling, they will be making money any way. If Nintendo died, that just means more people are buying Sony/Microsoft games. It's irrelevant to Wal-Mart. If people stopped watching movies, it would just mean that they're using their time doing something else instead; listening to music, playing video games, going to the beach. In which case Wal Mart is there to sell these people Ipods, Video Game consoles, and Volleyballs.

Wal Mart is affected by fluctuations in the GDP much more than they are fluctuations in any specific market. They are in all markets at once; they aren't concerned with any single market, because if the GDP is still growing, shrinkage in one industry is automatically and logically counterbalanced by growth in another. But do you know who actually stands to gain the most from growth in a specific industry? The companies that manufacture products in that specific industry. Do you know who stands to gain the most from growth of a specific product in a specific industry? The company that makes that specific product in that specific industry.

 

I'm not sure all retailers pay the same amount for the product. The more you buy, the better price you usually get. Walmart/Sams Club is a powerhouse and sets many of their own purchase prices, specifications and lead-times. Many of those who want to sell to Walmart agree to those terms or take their product elsewhere. Now Sony may set the MAP (minimum advertised price), but that doesn't mean Walmart doesn't buy the PS3 for less than Target. Because of MAP many places now offer gift cards or freebies so customers are encouraged to buy from them rather than the competition. We have been seeing this on games from Toys-R-Us, Circuit City and Best Buy. Its just a way for them to sell the product for less, without breaking the MAP agreement. Walmart may have needed to move a lot of PS3 product to keep their low purchase pricing. Or it may have been an agreement with Sony to move a lot of product fast for one reason or another.

Also if Walmart gives you a $100 gift card and you use the whole thing, they are not out $100 because they didn't actually pay $100 for the product they sold you. I would be interested to see if they lost anything and if so how much.

Bodhesatva said: But since this specific sale we're talking about in this thread is about nothing but hardware, I'm not sure how that's relevant. Someone is losing exactly 100 dollars more (than usual) every time a PS3 was sold in the last week at Wal Mart. Who are you ascribing that loss to? Edit: Ah ha ha, Milfey, come on. You think Wal Mart is willing to lose 70-80 dollars per PS3 sold last week just to increase hardware market share?

So you are essentially suggesting that Sony marketing is willing to piss off _all but one of_ its retailers by making a secret deal with one retailer only? Doesn't sound like a good business strategy to me. On the other hand, Wal Mart is pretty good in guessing how much they will lose in this deal (apart from the fact that the deal seems to be about blu-ray players, not about the (limited numbers of available) PS3 packs). Obviously they decided there is more to gain than to lose  in the long run from this $100 rebate.

 

Bodhesatva said: Uh... well I agree that single-SKU software sales are often initiated by individual retailers, precisely because they are high margin product. But since this specific sale we're talking about in this thread is about nothing but hardware, I'm not sure how that's relevant. Someone is losing exactly 100 dollars more (than usual) every time a PS3 was sold in the last week at Wal Mart. Who are you ascribing that loss to? Edit: Ah ha ha, Milfey, come on. You think Wal Mart is willing to lose 70-80 dollars per PS3 sold last week just to increase hardware market share? And just for Sony? Don't be ridiculous. If that was their goal, why not have a sale on the 360 too? Why not the Wii? Why not just drop the prices all the time?

Yep. Wal-mart. I know it sounds out there -- I hear where you're coming from. But... yeah, Wal-mart stands to gain alot by liquifying those 40GB unbundled models and increasing the market share. They weren't movin fast enough, and the deal isn't a sustained one. I doubt they'd do such a thing for a sustained period, as I mentioned above. Clearing the shelves and making room for the more expensive 80GB models is a big deal -- especially since Sony has very likely cut the costs on these units enough to begin offering them at lower prices to retailers.

When the PS3 came out, the yield for 7-SPU functional Cells was pretty low -- probably around 20%. Now its probably closer to 90-95%, and the process for making them has gotten cheaper across the board. That Sony is "losing money" on HW is pretty old news, as far as computer hardware goes. They aren't raking in all the bonus $ that Nintendo is on the cheap Wii, but I'd be surprised to see a current report stating they were actually losing money on PS3s, and that retailers didn't get some small profit as well.

The benefit gained from selling a Blu-ray player to a customer who has only you to come to for Blu-ray movies is titanic. This alone explains why the Wal-mart deal was so much better than the other retailers, who were only offering like $50 gift cards. This isn't a big gift season, so its very likely that the first use of those cards were on a high-margin item, like a game (or two, in wal-mart's case). If you purchase 2 games at $80 (40x2) from a distributor, and sell them for $120, you made a $40 profit, obviously. If you sell a piece of hardware at cost, and a gift card at cost ($499 for $399 revenue), you post a $100 loss. (100-40) == $60 loss remaining to be recovered from someone who now owns a brand new Blu-Ray player, and potentially a PS3. That's like 4 Blu-Ray movies, or 3 games, tops. Some games rake in closer to $25 or $30 profit for the retailer, so honestly it could be as low as only 2 more games or three movies.

I think if you dig through some studies on console owners, you'll find that they own at least 5-6 games AND a bunch of movies before the console's lifespan is up. During the PS2's lifespan, NPD posted a study claiming that some 70% of all PS2 owners in America purchased it and used it primarily as a DVD player. You can bet a heckuva lot of the DVDs they were playing, were purchased at Wal-mart, and Wal-mart is (safely, IMO) gambling that HD movies, and the growing HD games indsutry, will result in the same. This helps explain the Blu-Ray part of the Wal-mart deal as well.

 

Yes, they are willing to take a loss in the short-term, for a large benefit from their monopolized customer base in the long term. It's worked for them many times in the past, and will continue to do so.

I should add that Wal-mart is probably more interested in selling Blu-Ray movies than games. Movies are a high-margin item (probably even higher than games), and Wal-mart really garners a lot more revenue (and profit, I believe) from movies than they do from games. This deal was about Wal-mart increasing their Blu-Ray marketshare... not about Sony.

The PS3 was probably the least beneficial Blu-Ray player for them to sell with a gift-card (although, if they included it, they clearly thought it was a good idea). Wal-mart owns the movie marketplace like no other. Rural communities are into games as well, but they're still playing catchup to urban areas where Wal-mart doesn't exist in droves like it does in rural areas.