"With the component cost and the retail price so close, it’s possible, Rassweiler said, that Sony is taking a very small gross margin or even a possible loss on the console in hopes of making it back on games. “If your cost is within $10 to $20 of the retail prices, there’s very little chance you’re making a profit on the console,” he said."
I feel like this understates it. Of course they're making their money on the games. These discs (or even better, digital DLs) cost close to nothing to spit out, yet sell for $60 each. Of course, Sony doesn't make get all of that profit, but come on, Sony isn't stupid -- it's obviously trying to produce a high-end, expensive console with plans on making money on the games.
Someone please correct me if I'm wrong, but my understanding was that Sony licenses the discs to the publishers, so in fact to Sony the discs do cost next to nothing (in which case you'd want to include the price of developing/manufacturing the console to make the discs not "cost nothing," not the cost of developing the games, which is on the publisher).
But Information Wants to be Free! If can duplicate it cheaply, it shouldn't have a price and no one should get paid for it. They can make money from selling t-shirts instead. You shouldn't expect to make a living just for creating things. /s
Part of the issue was trying to cram a BluRay player into the console at a time when BluRay players were new (and could cost $1k). HD-DVD hadn't even lost the battle when the PS3 came out. That, and going with the Cell processor probably really pumped up the cost.
Yep. IIRC at the time Sony said something to the effect that they were willing to lose $4B in the short term to ensure that Blu-ray won the format war.
But what happens if and when digital video goes completely to a streaming/download model? And what about 4K/8K? Can Blu-ray as it stands even support that, or would there have to be yet another disc format?
I'm wondering if perhaps Sony won a Pyrrhic victory here.
I think Blu-ray will live out its full allotted decade of life; whether Sony makes back their $4B during that time is questionable but it's their strategy tax to bear. 4K will probably be download-only (and probably fiber-only).
> 4K will probably be download-only (and probably fiber-only).
Legality aside, I'm a member of a private movie tracker. High quality 1080p rips come in at ~12GBs or more for ~1h45m of content. I have an 80Mb connection, and it still takes me about 30-35 minutes to complete the download.
1080p, let alone 4k, downloads are years away for the average consumer. What are they getting these days, 20Mb + download caps? So sure, fiber only, but my god it's a long way off.
Ultimately, all the protons in the Universe will decay, rendering movies obsolete. I'm wondering what the point of anything is, knowing we will all become nothingness some day.
(To be less abstract: they probably made back the money already. Everything else is gravy.)
Of course the discs cost next to nothing to make but that’s not the point. If you think like that you are completely misunderstanding the entertainment industry and their cost structure.
Actually making the game (not the disc but what’s on the disc) is extremely expensive and the production costs of AAA games are actually exploding. Think of all the more or less non-automateable manual work that is involved in creating believable virtual worlds. Think of all the textures that have to be painted, things that have to be animated, lines of dialog that have to be written and voice-acted. Much of this is hard, manual work. There is no way to make it better except by paying more people more money to do it.
The second thing that costs a lot is marketing, i.e. making sure that everyone and their grandparents actually know about the game and want to buy it, mostly because making AAA games is so expensive already, so it better be successful.
It’s perfectly reasonable to be worried about the new consoles and the future of (AAA) games. Even last generation expensive games like the Tomb Raider reboot sold tons of copies but were nevertheless barely satisfactory in their financial performance. Think about what kind of challenge it must be to make a game for a console fewer people have and that also needs much better assets (i.e. is more expensive) because what’s the justification for making a next-gen game otherwise?
The next few years will be extremely interesting for video games. I’m very much looking forward to see how that shakes out (though I wouldn’t necessarily want to work on AAA games). Will there only be few, safe and expensive mammoths like GTAV? Or safe and boring yearly updates to games like Call of Duty? Some of this is already happening. Just look at the bankruptcy of THQ. And on the other end of the spectrum there are tons of indie games popping up (which purposefully limit their scope – mostly by not creating photo-realistic virtual worlds – to get by with much less money).
This is a terribly exciting time for video games and I wouldn’t be surprised if this industry looks completely different in ten years (the supposed life-span of these new consoles – maybe the last consoles?).
All of this is not to say that Sony doesn’t take a hit on the console but plans to make money some other way, that is probably very true. But it doesn’t have anything to do with the fact that making a plastic disc costs a few cents.
Yeah but the real question is how much Sony pitches in for development costs. From what I've heard, I hear that the dev company actually pays for all of that, but I'm not 100% sure since I can't find many sources. But if that is the case, then it has everything to do with disc costs.
It's not randomly guessing, it's comparing to defect rates in other 28nm processes. An example: if you have 30 chips per wafer and 3 defects per wafer, you get 90% good chips. But if you have only 10 big chips per wafer with the same defect rate, now you get only 66% good chips.
It's not a random guess - it might surprise you just how low the yield actually is on CPUs.
Yield is inversely proportional to die size, so the larger the die, the lower the yield. Yield is also lower on newer manufacturing processes. Both apply here. Furthermore, although some chips might be only marginally defective and 'binned' to a lower SKU that option isn't open to Sony. They have no use for those lower-clocked chips.
Chip manufacturers never publish their yield figures, but if you look around you'll see yields of around 60% are certainly not uncommon or unheard of.
Are you sure about that? My background is limited but my understanding is that chip makers will set their spec limits far higher than need be. The chips then get tested, and those that struggle at the higher frequencies will be designated as the lower end processor. Or those which have a single low speed core will be designated as "tri-core" processors.
I know these practices wouldn't apply too well when you're making a PS4 with a single performance level, but that 60% yield still sounds horrible from a process design perspective.
Caches and GPUs have extra capacity that is used to tolerate defects. Cell had 8 SPEs but shipped with 7 working. It's possible that the PS4 has 20 CUs and ships with 18 working; this would increase yield dramatically. (Update: Yep, 20 CUs: http://www.chipworks.com/en/technical-competitive-analysis/r... )
It wouldn't even be surprising if they sold the consoles at a loss, considering there is a lot of money in owning as much as the market share as possible, due to game sales but most of all the ever growing "online store" phenomenon.
The fact that the PS4 costs a good chunk less than the XBox One and is perceived as being the more powerful console will serve Sony well, I predict.
> It wouldn't even be surprising if they sold the consoles at a loss
Of the Wii, the XBox 360, and the PS3, only the Wii wasn't sold at a loss at release. The idea that they would sell at a loss isn't new. They make their money on the games.
IIRC, there were even people promoting buying the original XBox just to mod it and run Linux on it, because every sale was a hit to Microsoft's pocket (since you weren't using it for games).
They make money on game licensing for sure, but the economics of consoles is based on the falling cost of production over the lifetime of the console. That's why consoles have 5+ year lifespans.
This is the first major console launch in many years where the console itself is being sold at a profit - previous launches have sold the hardware at a loss, and clawed back the profits on software. I believe this is true of the PS1, PS2, PS3, 360 and original xbox.
The headline could be 'PS4 not being sold at a loss!' instead of 'PS4 is only just scraping a profit'.
The Wii was sold at a profit. Also I believe they are still making a loss, since the component breakdown doesn't include costs of marketing/development etc.
He's referring to "COGS", meaning "cost of goods sold" which only includes costs directly related to the actual production and sale of the products sold. Indirect costs, such as R&D and marketing, are not usually included in COGS under US standard accounting practices (but are in some non-US accounting practices).
Under standard accounting practices (GAAP), COGS is the only common above-the-line expense item used to determine gross revenue (aka gross income). Essentially all other expenses are deducted from gross income to determine net income (i.e., profit or loss).
The PS4 is actually out. The XBox One is out in a couple of days.
You can't do reviews, post tear-downs, complain about performance (or DOA consoles) when no one has the console yet (other than a handful of reviewers that might get a pre-release peak).
Consoles are like the archetypical example of loss leader hardware. I assumed this article would be going the other way - that Sony making any profit on the hardware is actually really surprising/impressive.
> That is only $18 shy of the PS4’s $399 retail price, leaving Sony little profit margin on the sale of the device itself.
Wait, the retailer takes a significant cut too. They're not selling these things for free. Sony doesn't receive the full retail price, so Sony can't have "little profit margin", they're definitely selling them at a significant loss. Or am I missing something?
You're not missing anything. The gaming console market has almost always been driven by a give away the camera and sell the film type of business model. They'll make their money on games and dev licensing once the installed user base is big.
Yep, this is par for the course when it comes to gaming consoles. Although the PS3 sold at a lose during launch, does anyone know the profit margins nearing the end of the console's life? Surely hardware gets cheaper and the manufacturing process gets more refined as time goes on, so I'm curious to know how much the same technology costs to produce now, compared to day one. Anyone know the numbers?
AFAIK the only bits of Sony making money right now (well, prior to the PS4 launch) are the content (music/movies) and insurance businesses. So my guess is the PS3 has been a net loss for Sony (unlike the PSX and PS2).
It improved substantially during the life of the console. Unfortunately for Sony, it took about 3 years after launch for the manufacturing price to line up with the price at retail.
Also these days they get a cut of any in-game purchases that flow through their service (and they'll no doubt block any game that tries to enable in-game purchases by other routes). It is the razor blade model except they get the income from three sources after selling the razor: dev licenses, a cut of game sales, and a cut of in-game purchases.
Of course the cost of the kit will fall over time so next year they will either be making some profit on the kit (though they may instead drop the price for market-share reasons).
Though if you think the loss on the physical console parts is surprising: think about the R&D costs that they incurred before manufacturing even one single consumer unit. Consoles are a fairly extreme example of a loss-leader product.
Still, if you look at historical attach rates, the PS3 had fewer than 10 games per console.(1) A console developer might get $20 per title. However, doesn't include the games that ship with the platform and/or other bargain bin titles, so let's just call it 8 games. Call that $160 per user lifetime, which shows just how much they were actually losing. They get additional revenue from dev kits etc, but they also lose money for advertising, spending to purchase console exclusivity, marketing, etc.
A recent analyst expects an attach rate of 3.25 games to new consoles,(2) which means just $65 per console not including the profits (if any) that they make on the unit itself. Considering the overall costs to R&D, build and maintain a console, it's a pretty frightening up front cost for a long tail game. Now you know why they want each console generation to last 10 years.
There were about 800 games produced for the PS3 [1]. Each dev kit costs about $10,000, nearly all of them used multiple devkits.
Then they get paid by the unit for each game that gets sold.
"The exact licensing fee varies based on the manufacturer, as well as any deals they may give a publisher, but it can generally be anywhere from $3 to $10 per unit." [2]
The console itself is almost always a loss leader. BUT it doesn't stay as a loss leader for the lifetime of the console. the PS3 stopped having a negative margin between 2 and 3 years after it was released (which was also slower than average) [3] This was likely due to the Cell processor which was never really popular anywhere but in the PS3. The PS4 uses far more standardized pieces and should become profitable much more quickly.
There is also a ton of money to be made on delivering content, advertising and indie game markets as well as the subscriptions used to take advantage of these online services.
They also make money on peripherals and controllers.
Of course it's very risky nonetheless as sega demonstrated. But there are also less tangible benefits. By including the blueray player in the PS3 they may have won the HD format war. That alone might make it all worth it. [4]
The retailers get screwed both ways. Their cut of a console is low, and their cut of game sales is similarly low.
It should be no surprise that every time you buy something from Gamestop they try to upsell on your "protection plans" and strategy guides, items that actually have high margins.
The time of brick and mortar game retailers is coming to an end. As soon as either MS or Sony gets their act together and can do midnight launches digitally (see: Steam), that will be the final nail.
> It should be no surprise that every time you buy something from Gamestop they try to upsell on your "protection plans" and strategy guides, items that actually have high margins.
And second hand games. They give customers a low price for the game and add a fat markup before selling it on again.
Used to be a buyer for a grocery chain, which has very little to do with video game consoles, sure, but I can assure you that certain big ticket items are sold at a loss under the expectation that the margins are there under peripherals and games. Sony is definitely eating it on the sale of each console --
For a fun personal example -- rotisserie chickens are always sold at a loss, but it's normally the center piece of a dinner, meaning you also sell mashed potatoes, cole slaw, bread, etc at a high margin.
In the Midwest where pork is cheap to begin with (and people seem to have an insatiable appetite for it) you'll often see pork chops and loin sold as a loss-leader to get people into the store. For example, last week my local grocer had chops on sale for <$1/chop (works out to $3/lb) when the actual cost is closer to $7-8/lb.
If memory serves we'd eat (har har) between 1-4 bucks on each chicken depending on it's price (those went on sale a lot).
Grocery functions successfully on average product margin of around 40-45% --
So when you calculate that pre-made mashed potatoes and coleslaw are massively overpriced, it balances out. There's a good chunk of psychology here as well. The person who is buying a pre-cooked chicken is the same person who isn't going to mash their own potatoes or make their own slaw. Get them hooked with cheap chicken, everything else seems like a fair price too.
Is it really? I've noticed that wine and beer are more expensive than in continental Europe, but maybe it's unfair to compare against wine in France/Italy/Spain and beer in Belgium/Netherlands/Germany...
Plus there is "VAT" - 'value added tax', not that I have ever worked out what value gets added by the tax.
Our friends in continental Europe have lower tax rates. Hence the discrepancy you see.
The problem in the UK over recent years has been with pubs. Unless they can get some deluxe food options together then they have a tough time making a profit. The supermarkets sell alcohol far cheaper than they can, furthermore there has been a smoking ban. Consequently your dedicated alcoholic has stayed at home, with his widescreen TV and supermarket alcohol.
Not to mention that these things aren't cheap to develop in the first place. If you factored the R&D costs into the PS4 I'm sure that would add a significant amount.
I don't see any signs that this takes business deals into account: volume pricing that covers other products (Sony makes many other products that use similar parts), cross-promotion (getting paid to ship specific demos or software), etc.
As for volume pricing it almost certainly does take that into account. Most electronic component manufacturers publish "Budgetary price per xK pcs" which I assume is where most of prices mentioned in article come from. For even slightly specialized parts this number tends to be significantly lower (tens of percent to order of magnitude for some parts) than price given by distributor even for same xK volume discount. Also most significant parts that are used across different Sony products tend to be either insignificant (passives) or manufactured by Sony (or semi-custom parts manufactured for Sony).
I doubt there are published prices on the web for the volumes that Sony is buying. Much smaller companies than Sony make special deals with suppliers for parts.
Well i suppose that they are selling them at break even points. Sony surely gets pretty decent wholesale discounts on the BOM and probably give 50-80 dollars to the retailers. Which means that the outlook for next gen is bleaker - even the developers of the console are wary of the next few years.
Consider that PS4 will be sold for a couple years with identical specifications. Manufacturing cost will drop while yield increases, memory gets cheaper and so on. Eventually they will move to a smaller case, further integrate chips shortening the BOM, reduce power supply demands and so on. Look at the different PS1, PS2 and PS3 revisions on Wikipedia, it's quite the lesson.
Considering the PS4 is much more powerful than the Xbox One, which also goes for $100, I'm not surprised they're making very little money (or even losing in the early days).
As other posts have mentioned, Sony is certainly taking a loss. In the long term it is probably worth it for them in this instance since the $400 price ($100 less than Xbox One) really cut the legs off the Xbox One in the wake of the always-connected DRM fiasco (which Microsoft has since backed off on).
There's plenty of places for them to make up the difference if the original intent of increasing percentage of marketshare works (and it seems to be): they get a cut of every game sold, they are likely to sell a lot of PS+ memberships, accessory sales (extra controllers, the PS4 camera) and they will almost certainly get costs down faster than the retail price on the eventual redesigns (PS4 slim or whatever) in a couple years.
On a related note, I've had a PS4 since Friday and the machine is very, very nice.
The controller is much better than the older PS controllers. Unfortunately the only game I have is Battlefield 4 which likes to crash every 15 minutes and delete my save files (not a PS4-specific issue).
I don't have BF4... my gaming on the PS4 has been blissfully crash free thus far. I agree about the controller, the older Playstation DualShock controllers were too small for my hands and would cause cramping after a while.. haven't had that happen with the DualShock 4. I do kinda wish the analog sticks were non-symmetrical the way they are on the Xbox/360/One controllers, but that's a fairly minor detail and I have no other complaints about the controller.
Sony will also make money on hardware accessories. Most PS4 owners will buy an additional controller ($59 retail, $18 teardown) and many will buy a PS4 camera ($59 retail, no teardown price listed here, but I've seen sub-$20 estimates discussed elsewhere).
This is not really surprising when figure the cost to build a comparable PC. When I say comparable, I mean comparable in size, specs, etc. Yes, you can get a big case, discrete gfx card, cpu, and cheap together a machine for about $400, but once you start making a smaller PC, it gets a bit harder to really match what Sony has done.
Since the XBone is basically the same machine + kinect sensor, I'm guessing the teardown price is going to be something like $400-450. Neither company is making money on the hardware obviously.
I have an original PS3 (via eBay) which I acquired about 2 years ago. I wanted this one as it still had the hardware to play PS2 games (I have a few). Today is mostly used for playing Blu-ray disc (after Portal 2 was completed)! I thought about getting the PS4 however the fact that it cannot play MP3 files (or all the other stuff over DNLA) is a show stopper for me. I was not planing to use it as an MP3 player (I have a media center PC hooked up to an external DAC to an Tube Amp). However the fact that they purposely removed such a basic function stops me from buying one. It is a jerk move on their part and I will not support them by buying the PS4.
Hell, Sony execs ought to be fly-me-to-the-moon ecstatic if the PS4 actually costs less to manufacture than its retail price. Let's not forget that it was estimated that the initial run of the PS3 was sold at a loss of up to $300 per unit:
"Electronics supply chain researcher iSuppli’s analysis showed that Sony loses $306.85 per 20GB hard-drive equipped PS3 sold, not including packaging, controller or cables. The amount is greater than the loss incurred from the 60GB model, which has a $241.35 difference between the cost and retail price."
The article seems to really skew things for some reason. As others have pointed out, it's actually very common for consoles to sell at little or no margin.
Importantly for Sony, the cost of manufacturing the PS4, relative to the cost of the system at retail versus how things were with the PS3 is a vast improvement. Sony is likely taking a small loss on the console, but took very large losses when initially selling the PS3.
They were in the position of having to sell a lot of games and accessories to make up for the loss on the PS3, whereas even a single game or accessory sale probably makes up most if not all of their loss on the PS4.
The article also really misses some crucial points. For one, it's not just about games. There are accessories (controllers, playstation camera, controller charging stations, covers, etc.), digital downloads (skins, avatars, etc.), Playstation Plus, Sony's music streaming service, and a whole array of revenue streams that are fairly high margin and in most circumstances the loss they took on the console should be made up quickly.
From another angle, Sony is already at a price advantage and there's a decent chance they won't discount the device as manufacturing prices drop. This is the exact opposite position the PS3 was in as it was much more expensive than it's competition and Sony had to continually discount the machine to stay in the running with the Xbox 360.
Finally, a small aside. I think it's interesting now that the PS4 is on x86 and using a straightforward unified memory architecture. Doing a bump on this (double memory, double cores, double GPU compute units) doesn't seem very far fetched and could probably happen at
a similar price point within 5 years. This would give Sony a new console with a huge back catalog of games that would not need to be ported (and could even have "HD" add-ons for download), plus a bunch of new power for games on an architecture developers are already familiar with. All this and it would likely cost a lot less to develop as opposed to developing new hardware from scratch as has been done for every generation previously. I think it would be an interesting move and could allow Sony to have a long running platform to compete with.
It seemed to me that Apple could really have screwed Sony and Microsoft by announcing a game-capable AppleTV successor based on iOS (either requiring an easy port or simply running existing iOS games using other iOS devices as controllers). But thinking back on it, it would be even more devilish to wait for Sony and Microsoft to sell a few million consoles at a loss and then do it just when they might have started making profits.
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[ 3.1 ms ] story [ 163 ms ] threadI feel like this understates it. Of course they're making their money on the games. These discs (or even better, digital DLs) cost close to nothing to spit out, yet sell for $60 each. Of course, Sony doesn't make get all of that profit, but come on, Sony isn't stupid -- it's obviously trying to produce a high-end, expensive console with plans on making money on the games.
What's that supposed to mean? These discs have contents that took years to develop.
Developers even have to pay Sony for hardware, SDKs etc. to develop the content.
I'm wondering if perhaps Sony won a Pyrrhic victory here.
Legality aside, I'm a member of a private movie tracker. High quality 1080p rips come in at ~12GBs or more for ~1h45m of content. I have an 80Mb connection, and it still takes me about 30-35 minutes to complete the download.
1080p, let alone 4k, downloads are years away for the average consumer. What are they getting these days, 20Mb + download caps? So sure, fiber only, but my god it's a long way off.
(To be less abstract: they probably made back the money already. Everything else is gravy.)
Actually making the game (not the disc but what’s on the disc) is extremely expensive and the production costs of AAA games are actually exploding. Think of all the more or less non-automateable manual work that is involved in creating believable virtual worlds. Think of all the textures that have to be painted, things that have to be animated, lines of dialog that have to be written and voice-acted. Much of this is hard, manual work. There is no way to make it better except by paying more people more money to do it.
The second thing that costs a lot is marketing, i.e. making sure that everyone and their grandparents actually know about the game and want to buy it, mostly because making AAA games is so expensive already, so it better be successful.
It’s perfectly reasonable to be worried about the new consoles and the future of (AAA) games. Even last generation expensive games like the Tomb Raider reboot sold tons of copies but were nevertheless barely satisfactory in their financial performance. Think about what kind of challenge it must be to make a game for a console fewer people have and that also needs much better assets (i.e. is more expensive) because what’s the justification for making a next-gen game otherwise?
The next few years will be extremely interesting for video games. I’m very much looking forward to see how that shakes out (though I wouldn’t necessarily want to work on AAA games). Will there only be few, safe and expensive mammoths like GTAV? Or safe and boring yearly updates to games like Call of Duty? Some of this is already happening. Just look at the bankruptcy of THQ. And on the other end of the spectrum there are tons of indie games popping up (which purposefully limit their scope – mostly by not creating photo-realistic virtual worlds – to get by with much less money).
This is a terribly exciting time for video games and I wouldn’t be surprised if this industry looks completely different in ten years (the supposed life-span of these new consoles – maybe the last consoles?).
All of this is not to say that Sony doesn’t take a hit on the console but plans to make money some other way, that is probably very true. But it doesn’t have anything to do with the fact that making a plastic disc costs a few cents.
Yield is inversely proportional to die size, so the larger the die, the lower the yield. Yield is also lower on newer manufacturing processes. Both apply here. Furthermore, although some chips might be only marginally defective and 'binned' to a lower SKU that option isn't open to Sony. They have no use for those lower-clocked chips.
Chip manufacturers never publish their yield figures, but if you look around you'll see yields of around 60% are certainly not uncommon or unheard of.
Could they be selling them to someone else?
i.e. if the GPU is binned to a lower SKU, could they be selling it to someone else that's then throwing it onto a regular PCI-e card for a desktop?
I know these practices wouldn't apply too well when you're making a PS4 with a single performance level, but that 60% yield still sounds horrible from a process design perspective.
It wouldn't even be surprising if they sold the consoles at a loss, considering there is a lot of money in owning as much as the market share as possible, due to game sales but most of all the ever growing "online store" phenomenon.
The fact that the PS4 costs a good chunk less than the XBox One and is perceived as being the more powerful console will serve Sony well, I predict.
Of the Wii, the XBox 360, and the PS3, only the Wii wasn't sold at a loss at release. The idea that they would sell at a loss isn't new. They make their money on the games.
IIRC, there were even people promoting buying the original XBox just to mod it and run Linux on it, because every sale was a hit to Microsoft's pocket (since you weren't using it for games).
The headline could be 'PS4 not being sold at a loss!' instead of 'PS4 is only just scraping a profit'.
Under standard accounting practices (GAAP), COGS is the only common above-the-line expense item used to determine gross revenue (aka gross income). Essentially all other expenses are deducted from gross income to determine net income (i.e., profit or loss).
Weirdly, absolutely nothing from the Xbox One
You can't do reviews, post tear-downs, complain about performance (or DOA consoles) when no one has the console yet (other than a handful of reviewers that might get a pre-release peak).
For games consoles, it's extremely common for them to be sold at a loss. (Nintendo used to be the exception)
Wait, the retailer takes a significant cut too. They're not selling these things for free. Sony doesn't receive the full retail price, so Sony can't have "little profit margin", they're definitely selling them at a significant loss. Or am I missing something?
Came here to ask the same question. I'm curious what the final P&L was for the PS3 console (not software/licenses), over its entire run to-date.
Source: http://www.gamespot.com/articles/ps3-manufacturing-costs-dow...
Of course the cost of the kit will fall over time so next year they will either be making some profit on the kit (though they may instead drop the price for market-share reasons).
Though if you think the loss on the physical console parts is surprising: think about the R&D costs that they incurred before manufacturing even one single consumer unit. Consoles are a fairly extreme example of a loss-leader product.
http://en.wikipedia.org/wiki/Freebie_marketing
A recent analyst expects an attach rate of 3.25 games to new consoles,(2) which means just $65 per console not including the profits (if any) that they make on the unit itself. Considering the overall costs to R&D, build and maintain a console, it's a pretty frightening up front cost for a long tail game. Now you know why they want each console generation to last 10 years.
(1) http://www.vgchartz.com/analysis/platform_totals/Tie-Ratio/G...
(2) http://wccftech.com/xbox-ps4-attach-rate-325-average-nextgen...
Then they get paid by the unit for each game that gets sold. "The exact licensing fee varies based on the manufacturer, as well as any deals they may give a publisher, but it can generally be anywhere from $3 to $10 per unit." [2]
The console itself is almost always a loss leader. BUT it doesn't stay as a loss leader for the lifetime of the console. the PS3 stopped having a negative margin between 2 and 3 years after it was released (which was also slower than average) [3] This was likely due to the Cell processor which was never really popular anywhere but in the PS3. The PS4 uses far more standardized pieces and should become profitable much more quickly.
There is also a ton of money to be made on delivering content, advertising and indie game markets as well as the subscriptions used to take advantage of these online services.
They also make money on peripherals and controllers.
Of course it's very risky nonetheless as sega demonstrated. But there are also less tangible benefits. By including the blueray player in the PS3 they may have won the HD format war. That alone might make it all worth it. [4]
[1]http://en.wikipedia.org/wiki/List_of_PlayStation_3_games [2]http://www.ign.com/articles/2006/05/06/the-economics-of-game... [3]http://www.pcworld.com/article/196214/article.html [4]http://en.wikipedia.org/wiki/High_definition_optical_disc_fo...
It should be no surprise that every time you buy something from Gamestop they try to upsell on your "protection plans" and strategy guides, items that actually have high margins.
The time of brick and mortar game retailers is coming to an end. As soon as either MS or Sony gets their act together and can do midnight launches digitally (see: Steam), that will be the final nail.
And second hand games. They give customers a low price for the game and add a fat markup before selling it on again.
For a fun personal example -- rotisserie chickens are always sold at a loss, but it's normally the center piece of a dinner, meaning you also sell mashed potatoes, cole slaw, bread, etc at a high margin.
The idea of grocery stores having permanent loss-leading items never occurred to me.
I shop at WinCo in the PacNW and $3/lb would be pretty standard for pork chops when buying a ~2-3 lb package.
I see that you're talking local grocer, but I assume their pricing wouldn't be that drastically different to a major chain.
Grocery functions successfully on average product margin of around 40-45% --
So when you calculate that pre-made mashed potatoes and coleslaw are massively overpriced, it balances out. There's a good chunk of psychology here as well. The person who is buying a pre-cooked chicken is the same person who isn't going to mash their own potatoes or make their own slaw. Get them hooked with cheap chicken, everything else seems like a fair price too.
It's really a fun job, thinking back on it.
Lose money on the alcohol, recoup it on everything people end up buying along with it.
http://www.hmrc.gov.uk/rates/alcohol-duty.htm
Plus there is "VAT" - 'value added tax', not that I have ever worked out what value gets added by the tax.
Our friends in continental Europe have lower tax rates. Hence the discrepancy you see.
The problem in the UK over recent years has been with pubs. Unless they can get some deluxe food options together then they have a tough time making a profit. The supermarkets sell alcohol far cheaper than they can, furthermore there has been a smoking ban. Consequently your dedicated alcoholic has stayed at home, with his widescreen TV and supermarket alcohol.
They don't. They really don't. I'd be surprised if the retailer made more than $5-10 on the console.
In fact, I would not be surprised if the estimation error is bigger than 5%, so we don't know if they are selling at a loss or not.
There's plenty of places for them to make up the difference if the original intent of increasing percentage of marketshare works (and it seems to be): they get a cut of every game sold, they are likely to sell a lot of PS+ memberships, accessory sales (extra controllers, the PS4 camera) and they will almost certainly get costs down faster than the retail price on the eventual redesigns (PS4 slim or whatever) in a couple years.
On a related note, I've had a PS4 since Friday and the machine is very, very nice.
> Sony may have lost between $4 and $6 billion on PlayStation 3.
Since the XBone is basically the same machine + kinect sensor, I'm guessing the teardown price is going to be something like $400-450. Neither company is making money on the hardware obviously.
http://www.edge-online.com/news/isuppli-60gb-ps3-costs-840-p...
"Electronics supply chain researcher iSuppli’s analysis showed that Sony loses $306.85 per 20GB hard-drive equipped PS3 sold, not including packaging, controller or cables. The amount is greater than the loss incurred from the 60GB model, which has a $241.35 difference between the cost and retail price."
Importantly for Sony, the cost of manufacturing the PS4, relative to the cost of the system at retail versus how things were with the PS3 is a vast improvement. Sony is likely taking a small loss on the console, but took very large losses when initially selling the PS3.
They were in the position of having to sell a lot of games and accessories to make up for the loss on the PS3, whereas even a single game or accessory sale probably makes up most if not all of their loss on the PS4.
The article also really misses some crucial points. For one, it's not just about games. There are accessories (controllers, playstation camera, controller charging stations, covers, etc.), digital downloads (skins, avatars, etc.), Playstation Plus, Sony's music streaming service, and a whole array of revenue streams that are fairly high margin and in most circumstances the loss they took on the console should be made up quickly.
From another angle, Sony is already at a price advantage and there's a decent chance they won't discount the device as manufacturing prices drop. This is the exact opposite position the PS3 was in as it was much more expensive than it's competition and Sony had to continually discount the machine to stay in the running with the Xbox 360.
Finally, a small aside. I think it's interesting now that the PS4 is on x86 and using a straightforward unified memory architecture. Doing a bump on this (double memory, double cores, double GPU compute units) doesn't seem very far fetched and could probably happen at a similar price point within 5 years. This would give Sony a new console with a huge back catalog of games that would not need to be ported (and could even have "HD" add-ons for download), plus a bunch of new power for games on an architecture developers are already familiar with. All this and it would likely cost a lot less to develop as opposed to developing new hardware from scratch as has been done for every generation previously. I think it would be an interesting move and could allow Sony to have a long running platform to compete with.
Doesn't include years of R&D, manufacturing setup, advertising, shipping, support, finance-related costs, retailer mark-up, QA and repairs, etc.
Production costs will drop, but they are likely years away from profits.