PS4 Pro and Xbox One X: Successful Regardless of Sales

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.