Plaupius said: kn said: Plaupius said: Marty8370 said: Pulling your HW loss figures out your ass I see. Sony has reduced PS3 costs down by 50%, that put costs to make a PS3 at $400 from $800. Seen as the PS3 sells for $400-$500. Sony is either breaking even or making $100 from each PS3 sold, depending on model. Also factoring in that the PS3 price varies from country to country. Sony could be well on course too recoup alot of it's initial loses, through hardwre costs alone. I'd take a guess that Sony makes the PS3 for $400 now.They then sell PS3 at approx $360 too distributor, which then sells on for approx $380 too the retailer. Which would leave Sony with a small $40 loss per unit, and allowing distributor/retailer too make a small profit each. Well, to an extent the numbers are guesswork, but (and I made the same initial mistake) they are not HW loss/profit figures, they include everything else besides the manufacturing cost, i.e. marketing, R&D, general administration, ad placements and so on. On another note, if the distributor only makes 20$ per PS3, and the retailer too, that's just insanely bad business. Granted, Sony does a lot of the work distributors normally do, but still I doubt 20$ is even enough to cover the costs of moving and warehousing the boxes. A somewhat normal distributor markup is around 30%, and for retail a bit less, but depending heavily on the product. I understand that game consoles are an exceptional breed of products, so I want to know if your figures are backed by facts or did you just pull them out of thin air?   A tried to get a retailer friend of mine to locate me a PS3 80 gig MGS4 bundle and she said that all her stores were out and waiting on Sony. She then told me to just go to Wal-Mart as they had them in stock. She said they made $8 on each PS3 they sold and frankly didn't care if I bought it elsewhere -- just come back to her store for the games and accessories....   Wow, I have known that the margins on consoles are low and money is made on games and accessories, but that low? That is just insanely bad business. I wonder why anybody is willing to even run and own game stores? It must be a calling of some sort, they're definitely not in it to make a buck. Actually, this kind of margin structure and business model can not survive the rise of digital distribution of games and other content. I predict that in the foreseeable future, quite probably starting with the next gen, hardware margins have to rise up to the normal levels because with more and more content sold online, there will be less and less sales to offset the losses the stores currently take on console hardware. Meaning, in essence, that the prices of consoles will rise, or if the manufacturers wish to maintain the current price points, the specs have to be sacrificed and there won't be as big of a performance leap.

Retailers sell the hardware in order to sell games and accessories.  If they don't have the consoles, they most certainly won't get as much in terms of accessories and software.  As an example, I bought a PS3 and Singstar PS3.  Had Wal-mart not had the hardware, I would not have bought the software.  When I bought my 360, I bought extra acessories and an extended warranty.  And so on.

 

ils411 said: bumidan said: @ils411 I hope you read the first few posts thoroughly. Then hopefully you can understand where those numbers are coming from. Games division lost US$3 Billion + the last few years. Even by that simple number, of course the PS3 has lost more than that, since PS2 and PSP are profitable. actually, i did which is why i said that you had too many assumptions. lets take fy 05 for example. 404 million is what sony reported. what you did is allocate 48 million for ps1 base on what? you assumed $10 for ps2 hardware and $2 for software base on what? you also assumed $2 for psp software, but again, base on what? though total figures talied at 404 million, the breakdwon is questionable. like i said, too many assumptions for my taste.

@ ils411You are correct.  All numbers, without actual confirmation by Sony, is by definition assumptions and guesswork.Let me tell you a bit of the methodology I used, so maybe you can understand it a little better from my point of view.The $10(*) and $2(*) for PS1 and PS2 were used for the following reasons:1. I assumed PS1 was making money since it was an old system (last year in fact)2. I assumed PS2 was making about the same since it was near the later part of its lifecycle3. With a bit of trial and error, I used $10 and $2.  For the PS2, a retail price of $129.99 to $149.99 with the past 2 - 3 years led me to guesstimate that $130 retail price less about $20 retail & distribution margins = $110.  $10 represents approx. 9% to 10% margins on an electronic product - which is about what Sony margins are for their products.4. Figuring out the PS2, then I just copied it for the PS1.5. Remember I was using NET profit, not gross margins for all Sony game products.As per previous posts, the trial and error worked a little bit like this:Using Sony's published SW, HW and profit figures as constants, I had to use somewhat consistent numbers for all 4 fiscal years.I started with the PS2 - since it is constant in all 4 years that I analyzed.  The major assumption is that the NET profit for both hardware and software will be relatively stable.  That is, it doesn't make too much sense for the profit to be $10 for 1 year and $20 for the next year for hardware (also for software).What made me choose $2(*) for PS2 hardware?  First of all, PS2 sold a lot of software in those 4 years.  If I used $5(*) net profit - the numbers did not make sense.  Why did it not make sense?Well for the FY end Mar 2005 - the PSP hardware would have lost about $1.2(*)Billion dollars or $417(*) per console.  Now most Sony fans will tell you that PSP lost money when it launched, but that high number did not make any sense at all. (I don't know if you agree or disagree with this point).Also, as per in a previous post, using $5 for PS2 software made PS3 hardware losses total more $7(*) Billion.You can also see that by using $5 net profit for PS2 software, it would also make me have to use $5 net profit for PS3, PS1 and PSP software.  Because I would not have a reason to believe that only PS2 software makes $5 while other software makes $2 per unit.Now using a $5 profit for ALL software, the PS3 hardware losses would have totalled $9 to $11 Billion Dollars!That thread was posted by YOURS TRULY and it was SHUT DOWN by a mod. (haha)So I hope that explains some of the reasoning and methodology of the analysis.  So you can see why I used my original assumptions.Do you have any other questions?  Please let me know.Thanks.

 

REPOSTING. SO ITS CLEARER. I DON'T WHY IT LOOKED LIKE THAT.

@ ils411You are correct. All numbers, without actual confirmation by Sony, is by definition assumptions and guesswork.

Let me tell you a bit of the methodology I used, so maybe you can understand it a little better from my point of view.

The $10(*) and $2(*) for PS1 and PS2 were used for the following reasons:

1. I assumed PS1 was making money since it was an old system (last year in fact)

2. I assumed PS2 was making about the same since it was near the later part of its lifecycle

3. With a bit of trial and error, I used $10 and $2. For the PS2, a retail price of $129.99 to $149.99 with the past 2 - 3 years led me to guesstimate that $130 retail price less about $20 retail & distribution margins = $110. $10 represents approx. 9% to 10% margins on an electronic product - which is about what Sony margins are for their products.

4. Figuring out the PS2, then I just copied it for the PS1.5. Remember I was using NET profit, not gross margins for all Sony game products.

As per previous posts, the trial and error worked a little bit like this:

Using Sony's published SW, HW and profit figures as constants, I had to use somewhat consistent numbers for all 4 fiscal years.

I started with the PS2 - since it is constant in all 4 years that I analyzed. The major assumption is that the NET profit for both hardware and software will be relatively stable.

That is, it doesn't make too much sense for the profit to be $10 for 1 year and $20 for the next year for hardware (also for software).

What made me choose $2(*) for PS2 hardware? First of all, PS2 sold a lot of software in those 4 years. If I used $5(*) net profit - the numbers did not make sense.

Why did it not make sense? Well for the FY end Mar 2005 - the PSP hardware would have lost about $1.2(*)Billion dollars or $417(*) per console. Now most Sony fans will tell you that PSP lost money when it launched, but that high number did not make any sense at all. (I don't know if you agree or disagree with this point).

Also, as per in a previous post, using $5 for PS2 software made PS3 hardware losses total more $7(*) Billion.

You can also see that by using $5 net profit for PS2 software, it would also make me have to use $5 net profit for PS3, PS1 and PSP software. Because I would not have a reason to believe that only PS2 software makes $5 while other software makes $2 per unit.

Now using a $5 profit for ALL software, the PS3 hardware losses would have totalled $9 to $11 Billion Dollars!

That thread was posted by YOURS TRULY and it was SHUT DOWN by a mod. (haha)

So I hope that explains some of the reasoning and methodology of the analysis. So you can see why I used my original assumptions.

Do you have any other questions? Please let me know. Thanks.

Great posting and a lot of work, thanks. My question is what kind of a business model is this?

In a rough estimate how much profit or loss has Sony made in its entire history of video game consoles?

How long will a division be able to serve as a black hole for money, or more diplomatically, grossly underperform before stockholders and or management rebel and pull the plug?

It would seem that now and for the immediate future, Sony would be better off without a game division. It's all well and good to say that the PS3 played a role in the development or spun off the cell technology and Blu-ray etc. but like saying that NASA's moon program led to Mylar and Freeze Drying; it would have been a lot cheaper to just develop those things on their own.

kn said: Plaupius said: kn said: Plaupius said: Marty8370 said: Pulling your HW loss figures out your ass I see. Sony has reduced PS3 costs down by 50%, that put costs to make a PS3 at $400 from $800. Seen as the PS3 sells for $400-$500. Sony is either breaking even or making $100 from each PS3 sold, depending on model. Also factoring in that the PS3 price varies from country to country. Sony could be well on course too recoup alot of it's initial loses, through hardwre costs alone. I'd take a guess that Sony makes the PS3 for $400 now.They then sell PS3 at approx $360 too distributor, which then sells on for approx $380 too the retailer. Which would leave Sony with a small $40 loss per unit, and allowing distributor/retailer too make a small profit each. Well, to an extent the numbers are guesswork, but (and I made the same initial mistake) they are not HW loss/profit figures, they include everything else besides the manufacturing cost, i.e. marketing, R&D, general administration, ad placements and so on. On another note, if the distributor only makes 20$ per PS3, and the retailer too, that's just insanely bad business. Granted, Sony does a lot of the work distributors normally do, but still I doubt 20$ is even enough to cover the costs of moving and warehousing the boxes. A somewhat normal distributor markup is around 30%, and for retail a bit less, but depending heavily on the product. I understand that game consoles are an exceptional breed of products, so I want to know if your figures are backed by facts or did you just pull them out of thin air?   A tried to get a retailer friend of mine to locate me a PS3 80 gig MGS4 bundle and she said that all her stores were out and waiting on Sony. She then told me to just go to Wal-Mart as they had them in stock. She said they made $8 on each PS3 they sold and frankly didn't care if I bought it elsewhere -- just come back to her store for the games and accessories....   Wow, I have known that the margins on consoles are low and money is made on games and accessories, but that low? That is just insanely bad business. I wonder why anybody is willing to even run and own game stores? It must be a calling of some sort, they're definitely not in it to make a buck. Actually, this kind of margin structure and business model can not survive the rise of digital distribution of games and other content. I predict that in the foreseeable future, quite probably starting with the next gen, hardware margins have to rise up to the normal levels because with more and more content sold online, there will be less and less sales to offset the losses the stores currently take on console hardware. Meaning, in essence, that the prices of consoles will rise, or if the manufacturers wish to maintain the current price points, the specs have to be sacrificed and there won't be as big of a performance leap. Retailers sell the hardware in order to sell games and accessories.  If they don't have the consoles, they most certainly won't get as much in terms of accessories and software.  As an example, I bought a PS3 and Singstar PS3.  Had Wal-mart not had the hardware, I would not have bought the software.  When I bought my 360, I bought extra acessories and an extended warranty.  And so on.

I know that's the business model currently. However, all three console manufacturers are testing out digital distribution of not only games but also other content for their consoles. It is certain that by the next generation, a significantly smaller portion of games will be sold as physical copies, and similarily a larger portion of sales will come through digital distribution channels which are conveniently controlled solely by the console manufacturers. So, where does this leave the brick-and-mortar shops? The manufacturers need the shops to sell their hardware, and believe me when I say that the execs in Sony/MS/Nintendo are walking a tightrope in establishing digital distribution whilst not upsetting their existing dealers. And when the game sales dwindle, the shops need other sources of income to survive. I do not believe that the sales of accessories can make up for the lost game sales, so the only option is to increase the margin on hardware and make selling hardware a viable business in and on itself.

 

Yes, slowly digital distribution will continue gaining momentum.

However, I don't think it will happen anytime soon.

For microtransactions, it is already here. That is, I would gladly pay $5 to $10 for new maps of COD4 or $5 to $10 for a XBLive Board Game.

However, for a $60 game, it is somehow strangely more satisfying buying something tangible than downloading it.

bumidan said: Yes, slowly digital distribution will continue gaining momentum. However, I don't think it will happen anytime soon. For microtransactions, it is already here. That is, I would gladly pay $5 to $10 for new maps of COD4 or $5 to $10 for a XBLive Board Game. However, for a $60 game, it is somehow strangely more satisfying buying something tangible than downloading it.

 

 Yeh im really looking forward to digital distribution. Round trip it takes me 20-30 minutes of driving to go buy a game. The small sums you save in gas will be welcomed.

Edit: Oh and btw great job. Thats a lot of work and number crunching. Regardless of ppls point of view on the numbers, your work should be respected. Great job!

Grampy said: Great posting and a lot of work, thanks. My question is what kind of a business model is this? In a rough estimate how much profit or loss has Sony made in its entire history of video game consoles? How long will a division be able to serve as a black hole for money, or more diplomatically, grossly underperform before stockholders and or management rebel and pull the plug? It would seem that now and for the immediate future, Sony would be better off without a game division. It's all well and good to say that the PS3 played a role in the development or spun off the cell technology and Blu-ray etc. but like saying that NASA's moon program led to Mylar and Freeze Drying; it would have been a lot cheaper to just develop those things on their own.

Most likely, the game division will be there for a while. 

I will make a new thread soon showing how easy it is for the game division to be profitable again.  Watch out for it.

All the PS3 losses are sunk costs, so no use in worrying about it.  Going forward the game division should be in the black all the way, until maybe the PS4 shows up, which is probably another 5 years away.  Or if they have brand new hardware coming soon.

Also, it may be possible that the Sony Online Entertainment (MMOs) may come under the game division fold soon.  If they are profitable, that will make game division numbers look a bit better.

 

kn said: Plaupius said: Marty8370 said: Pulling your HW loss figures out your ass I see. Sony has reduced PS3 costs down by 50%, that put costs to make a PS3 at $400 from $800. Seen as the PS3 sells for $400-$500. Sony is either breaking even or making $100 from each PS3 sold, depending on model. Also factoring in that the PS3 price varies from country to country. Sony could be well on course too recoup alot of it's initial loses, through hardwre costs alone. I'd take a guess that Sony makes the PS3 for $400 now.They then sell PS3 at approx $360 too distributor, which then sells on for approx $380 too the retailer. Which would leave Sony with a small $40 loss per unit, and allowing distributor/retailer too make a small profit each. Well, to an extent the numbers are guesswork, but (and I made the same initial mistake) they are not HW loss/profit figures, they include everything else besides the manufacturing cost, i.e. marketing, R&D, general administration, ad placements and so on. On another note, if the distributor only makes 20$ per PS3, and the retailer too, that's just insanely bad business. Granted, Sony does a lot of the work distributors normally do, but still I doubt 20$ is even enough to cover the costs of moving and warehousing the boxes. A somewhat normal distributor markup is around 30%, and for retail a bit less, but depending heavily on the product. I understand that game consoles are an exceptional breed of products, so I want to know if your figures are backed by facts or did you just pull them out of thin air?   A tried to get a retailer friend of mine to locate me a PS3 80 gig MGS4 bundle and she said that all her stores were out and waiting on Sony.  She then told me to just go to Wal-Mart as they had them in stock.  She said they made $8 on each PS3 they sold and frankly didn't care if I bought it elsewhere -- just come back to her store for the games and accessories....

Only $8?  For $499, paying by credit card = approx. 2.5% in credit card fees = 12.48 = retailer lost almost $5 on this transaction.

 

I was trying to get my brain around how much $ 5 Billion actually is in real terms. It sorta boggles the mind.

$ 5,000,000,000 is:

·         Is enough to buy 25 brand new 747 aircraft

·         25,000 homes – enough to house Youngstown Ohio

·         166,666 brand new automobiles

·         Equals the income of 100,000 households

·         Would build over 7 bridges the size of Charleston’s new Ravenel bridge, the longest cable suspension bridge in the world.

I mention the last because I know from firsthand experience that it was a 20 year struggle to raise enough funds from Federal, State and County sources and even then everyone in my county has to pay 8.3% higher sales tax than the rest of the state in order to pay back $ 3,000,000 a year for the next quarter century … and that’s to pay for one bridge. Multiply that times seven.

That’s one hell of a lot of money!!!