From the Inquirer: By Charlie Demerjian: Wednesday 21 February 2007, 15:40 THE CONSOLE MARKET is a virtuous circle with three main points, a virtual virtuous triangle. If you don't do well on all three points, you end up out of the market, and Sony is on the verge of just that. The three points of the triangle are cost, installed base and games. If you don't have two of them, the third will never happen, and if you do have two, the third will come for free. Basically it is a feedback loop, you will excel at all three and ramp up the numbers or you will be in a death spiral quicker than you can say comprehensive Blu-Ray crack. There is no middle ground. Let's look at these things individually starting with cost, you can use price somewhat interchangeably however. Cost is what a console maker has to shell out to get the box on the shelves, price is what you have to shell out to get it off the shelf. Cost is the more interesting one of the two mainly because price is artificial, almost every console maker subsidizes the initial cost of a console in order to sell more. The PS3 was stupidly expensive at $600, but even at that, Sony was eating about $200 putting the cost at around $800. They plan to make it up by getting a kickback of $10-15 per game sold, so if the buyer buys 15 or so games over the life of the console, Sony will break even. As time goes on, parts get cheaper, chips get shrunk, and technology marches on, so the cost to the console makers goes down, which can either be reflected in the price you pay or the profit they make. It usually ends up as a little of both. That brings us to installed base. The cheaper the consoles are, the more they sell. A $99 Xbox360 would probably have sold 25 times as much as a $400 one in 2006, but I doubt MS would be willing to eat the $420 per unit that it would have taken to do that. If MS sold 10 million units in calendar 2006, a $420 loss per unit would be a hit of just over $ 4 billlion. Not bad, but you probably would be buying $99 games to go with the $99 console to make the numbers work at the accounting department in Redmond. The first bit of the virtuous circle is that when the installed base, IE the number of units sold climbs, the cost goes down. If you want to make a grand total of 10 Xbox360s, the development costs, tooling, advertising and other costs are going to make each one cost tens of millions of dollars, possibly hundreds. At a million units, the cost goes down a lot, to the humanly affordable range, and by the time you hit tens of millions of units, the fixed costs go down even more per unit. You can also negotiate better pricing with suppliers, and in general things get cheaper. Take home message, higher the number sold, the cheaper each one is. So the more MS or Sony sell, the more money they make, or at least the less they lose, and the quicker they can drop the price. The more they drop the price, the more they sell. Conversely the less they sell, the longer it takes to drop costs and the longer they have to eat money on each console. The death spiral comes in when they can't drop prices enough to stop the initial eating of cash. Two $100 bills effectively tacked to each PS3 box times 10 million units is a lot of money. The only thing that could be worse than the continual loss of $200 per unit is not eventually making up for it in software sales. This where our third point of the circle (yeah, I know) comes in, software. For every game sold, the console maker gets a cut, usually a pretty hefty cut, but the exact amount is a closely guarded secret. When I was writing for the Atari Jaguar, it was about $5 per cartridge, and the grapevine tells me the number now is about $10-15 per disk sold. This number is highly negotiable, if you are a big name dev house and you are willing to put out your app exclusively for one console, this fee can be negotiated down or even away in rare cases. The little guys, well, they get shafted. In any case, for the sake of argument, I will assume the console makers get $10 per game sold, and zero for big name exclusive games. One more tidbit to toss at you, I have been told by a bunch of people that dev costs are painful on the new consoles, the 360 and PS3 specifically. If a game for the older XBox1 or PS2 cost $5 million to make, the 360 is about double that or theoretically $10 million. The killer here is that the PS3 dev costs are between 2-3 times that of the 360 and about 5x that of the Xbox1 or PS2. Ouch. Now, getting back to the feedback part of the circle, if you are a dev, you want to write your game for a large potential audience of paying customers. Assuming you get $20 per game sold, and a game costs $10 million to develop, you need to sell half a million copies to break even. If you don't, well, you won't be in this business for long. If your new game, Killer Death Robots 999 appeals enough to 10% of the people out there who eventually buy it, you can work out the numbers pretty quickly. If the console has a million units in circulation, you will sell about 100K copies and lose your shirt. If it has 10 million units out there, you stand to make a lot of cash, and at 100 million units, well, call me, I am more than willing to be adopted at this stage in my life. Basically what it comes down to is the more units a console maker has out on the market, the more willing game companies are going to be to write for it. Even if you make a stinker, if there are 100 million consoles out there, you will probably make a profit, there are a percentage of people who will buy anything. Conversely, if you make the best game in the world that everyone buys, if there are 100K consoles out there, you will still not make any net profit. There is a big mushy middle ground here, and that has to do with how much effort you expend on each version of a game written for multiple platforms. If the 360 has 10 million units and the PS3 1 million, you can do the math. Write it for the 360 and spend $10 million, but only port it to the PS3 if you can do the port for under $1 million. This is where a lot of the death spiral side of things comes in. If you don't have enough consoles out there, people will not write games for your super system, or at best do a crappy port to it. This means the console with the most units will get the better games. It will sell more units allowing them to lower costs, make up the money they initially ate faster, and in general be happy camper. The company with the lower number of units gets the shaft. They become less and less desirable to write for, and less and less desirable to buy, and less able to lower costs. Higher costs means fewer sales means worse games. Negative feedback, and it hurts. One note here is that there does not have to be a winner and a loser, there can be multiple winners or losers. If all of the consoles reach a critical mass, they will all win. If none sell enough, they will all lose, so don't assume that one winner means another loser.

I wish someone would pay me to write drivel like that.

yeah, that makes some sense, but is far too simplified. The DC had a great price, solid install base, and solid games, yet it failed miserably.

Sega was indebted when they launched the DC-Sony isnt . Sega was without a lot of third party support-Sony isnt . Segas machine was easily piratable-PS3 isnt . Segas machine has a achilles heel with the GD-Rom vs the DVD -Sony hasnt in fact it has the advantage . Please dont let anyone be fooled .MS killed the Xbox way too fast but it was receiving nearly 90% of the occidental games of the PS2 ,it just lacked the japanese ones ,and that selling a lot worse than the PS2 .The PS3 will outdo the X360 in Japan no matter what and even if it remained second or even third in occidente it wouldnt be by any means in the same category of the Xbox vs the PS2 .So PS3 is a sure bet for its buyers ,and for the developers as well .

Of all the consoles, I think the 360 is in the most danger. Its the least new, and has the least in terms of "mass-market" games coming out. It has also generally failed to capitialise on its 1.5Xmas head start. The converse of this, is that MS have heaps of money - and won't let it fail. That means lots of exclusives, price cuts, hardware revisions, etc. Price cuts are the most powerful thing they can do - what happens to the next-gen race if they drop price by $100 tomorrow? I can definitely see a hardware revision - maybe with HDMI & HD-DVD drive - combined with a price cut to the base/full models. This will result in Sony being forced to also cut the price (it will take 1-2 months AFTER the Europe launch for things to settle down anyway), and then the next-gen race will truly be on. No matter what happens with the Wii - Nintendo will do fantastically well financially from it. At least for 2-3 years. Once all the prices have stablised - anything can happen, and will depend on new software - and what games become 'hits' (i.e. the next GTA). All three consoles will have successes - Im not sure about a clear winner. Just like the Jan NPD figures, its possible for all three companies to spin the news in a way to make them look like the winner. Nintendo will almost certainly make more money than the other 2 - but this has been the case for the last 10+ years anyway.

You know I always thought to myself if Nintendo's Wii is 250, and they're making a profit, and Sony is losing 200 bucks on each ps3, why don't they make a cheap system, perhaps tweak the ps2 with some new features and just give it away for free with the purchase of any two games. It would instantly beat every system on the market and instantly have an attach rate of 2. It would be invincible. They wouldn't even need to market it, it would be publicized everywhere, 3rd parties would love the whole buy two games thing, and everyone would get one, why not it's free?

I would love it if MS dropped the price. As they are the market leader right now, it would pretty much force Nintendo and Sony to drop the prices of their consoles, making everyone happy but the multi-billion dollar corporations. A market that looked like this: Wii: $199.99 360 Premium: $299.99 360 Zephyr: $399.99 PS3 20: $399.99 PS3 60: $499.99 would be a beautiful thing. I would finally be able to afford a 360(not that I'd get one until after the 65nm die shrink and until they fix the reliability issues), Wii's would, if possible, sell even faster, and PS3's would continue to be ignored by most.