Perhaps the most interesting thing
about the new consoles from Sony and Microsoft – the PlayStation 4
Pro and the Xbox One X – is that they are successful products for
their respective companies whether or not they sell well. How can
this be? Isn't a product a failure if it doesn't sell well?
Typically, that's true. But the PlayStation and Xbox markets are very
different, because being profitable is not about selling hardware so
much as it is about selling software.
Console hardware is, in itself, barely
a profitable business. The PS4 and the Xbox One S are currently at
$249 retail, and there's not a lot of margin there, if any, once all
the costs of manufacturing, marketing, distribution, and retailing
are taken into account. The money is in software and services. That
year-long subscription to Xbox Live or PlayStation Network is mostly
profit. Every piece of software sold for either platform pays a
healthy royalty to the platform owner (around $7 for a $60 title),
and that's nearly pure profit for the platform owner. First-party
titles are even more lucrative. And DLC is more profitable still.
So the platform owners want to sell as
much software as possible, which means expanding the hardware base as
much as possible – which is why margins are low to non-existent on
hardware. That makes it easier to sell more hardware, which gives
more opportunity to sell the profitable software. The consoles are
essentially a required marketing expense where sales cover the costs.
Which brings us to the introduction of
more powerful consoles. In the past, a new console meant the company
was starting over in creating a new player base and software base,
because new consoles were not compatible with old software. This
time, it's very different. The PS4 Pro and Xbox One X will run all
existing software as well as all upcoming software for their
respective platforms. In fact, they'll generally even make the old
games look better, and some new games will look really good.
These new, more powerful consoles are
essentially powerful marketing pieces for the platform. The platform
is no longer the console hardware – it's the PlayStation 4 or Xbox
One software platform. The new hardware, while more expensive, serves
to promote the software platform. Sony and Microsoft will be showing
ads for games displaying all the capability of the new consoles, and
that will help sell the software and the older consoles as well.
So it's really not important to Sony or
Microsoft what percentage of their console sales come from the newest
hardware. There's no particular profit there – PC
World tried to build a 4K gaming PC that could match the power of
the Xbox One X for $499, and didn't even come close to that price
point. What matters is overall sales – and powerful new consoles
can help drive the marketing message for the games, which is where
the profit lies. Sure, maybe the new consoles will only be a small
percentage of overall platform sales this Christmas – maybe 10% or
20% of overall sales. That will rise over time as more people get 4K
TVs and the price of these new consoles begins to drop.
Both Microsoft and Sony haven't really
made strong cases for buying their new, more powerful consoles over
the less expensive ones. They don't need to – the new consoles help
them sell more software in any case, and that's where the profit is.
Posts
