Bodhesatva said:
Sony was really the first company to use their wallets to profound advantage in the console wars: they sold their consoles at a substantial initial loss; they bought up development houses; they paid third party developers for exclusives titles. Sony used many different creative and effective methods to turn their cash into marketshare. It's worked wonders for them, no question.
The problem isn't that the strategy is ineffective -- it's that Microsoft can play the same game, only better. |
I disagree, Bodhesatva. The problem isn't that Microsoft can play this game better, the problem is that this is a losing strategy, period. Let me explain.
Pursuing market share at the expense of profit can allow a company to win one particular generation, without a doubt. The best example of this is of course Sony's runaway victory with the PS2 during the last (6th) generation of consoles. Now in some markets, you can use a market share strategy to establish a virtual monopoly, from which your position is so strong as to be unremovable. Microsoft's Windows operating system is a good example; even though we all know that the competitiors are much better, 90% of us are still using some kind of Windows OS because that's what most software requires. Microsoft pulled those shady market share tactics back in the 80s, and is still reaping the benefit today.
The problem for the console industry is that new systems are released about once every 5 years. And no matter how deeply entrenched one console may have been in the previous generation, it's a whole new ballgame every 5 years when the system wars start all over again. (The best examples being the 95% marketshare enjoyed by the NES, which was essentially halved by the Genesis/Megadrive, as well as the ongoing collapse of the PS2's dominance in the current era.) In the console industry, no matter how great your victory in one generation, you cannot carry that victory over into the next one. And for this reason, pursuing market share at the expense of profit is a losing venture, long-term.
Let's use some examples, so that you can see I'm not pulling this stuff out of thin air. During the 5th generation, Sony's Playstation captured a clear victory in the console wars, ending up with about 2/3 of the market. Yet Nintendo actually made more profit from the N64 than Sony did from the PS1 - how was this possible? Because Sony aggressively cut the price of the PS1 again and again as soon as it turned a profit; Sony "won" the console war and effectively undercut Nintendo, but they didn't make a lot of money from that generation. In the 6th generation, Sony won a gigantic success (in market share terms) by being even MORE aggressive with the pricing of the PS2. It was sold at a loss initially, and throughout most of its shelf life as well. The $100 price cut (from $300 to $200) right when the Gamecube and XBox were released effectively disembowled the competition before they could get off the ground. But by selling the system at a loss over and over again, Sony ensured that they would never make all that much of a profit on the PS2. Over its total lifespan (say, 2001-06), SCE only turned profits of about $2 billion. That's a ton of money, no doubt about it, but you'd still expect more given the 125+ million PS2s sold. In summary: when companies follow a market share strategy with consoles, then can "win" a high percentage of consoles sold, but they will always be limited in their profits.
Now for the downside: what happens when you sell your console at a loss and still don't manage to win that generation? Umm... you lose a LOT of money. Microsoft's XBox is the best example; they freely admitted they were not even trying to make a profit on the original XBox, just capture market share. Well, Microsoft succeeded: the XBox sold over 20 million consoles and grabbed about 15% of the market - but had to lose $4 billion to do it. Four billion dollars! Can you even imagine that big of a loss? This is a point well worth repeating: Microsoft's XBox division has NEVER turned a profit in any fiscal quarter, EVER. They're currently over $5 billion in the red. The 360's going to start turning a profit sometime this year, but it will never overtake those losses in its lifetime. It won't even come close. Microsoft will need to have at least 2-3 more successful consoles to make up those losses, and if one of those turns out to be a "loser", they'll be even FURTHER in the red. Similarly, Sony had two consoles that were runaway successes, but with just one stinker (PS3), SCE has already lost ALL of the money they made during the PS2 halcyon days. And to make the PS3 successful, they're going to have to cut the price soon, which means losing even more money... By the end of this generation, SCE may be almost as far into the red as Microsoft's XBox division.
So do you see why the market share strategy is such a bad deal long-term? It can work very well in the short run, but all it takes is one failure to wipe out all the profits of multiple successful consoles. The console industry is a very high-risk one; virtually every company that has put their hat into the ring has ended up losing money in the long run. Even industry huge names like Atari, Sega, and Microsoft have all been long-term losers from a profit standpoint, despite great success in the short term (Sony may also be in this category soon). In fact, from a financial standpoint, Nintendo is the only company that has ever turned a long-term profit from making consoles. Is it a coincidence that they've been the only one NOT to pursue this market share strategy in recent years? I personally say no. Their policy of selling all consoles at a profit has allowed them to stay in business even through generations where they basically failed in their objectives (Gamecube comes to mind).
I've been convinced for years that the "sell at a loss now, make it back later with games" strategy is a long-term loser; Sony was always the sterling example to the contrary, but whoops! Not anymore. Fans who post on message boards only look at the market share aspect of things, so the tactics of a Sony or Microsoft LOOK great when the Gamecube is getting pasted in the market. But profit is what ultimately matters, and since no company can win every generation, the market share strategy is doomed to failure when viewed in the long-term perspective.
Thoughts? 
