Why Gates wouldn’t trade places with Sony in console wars

Two years ago I was over talking with the Xbox team and some of the folks over there explained the facts of life to me, which came back to me after reading that Bill Gates is very happy where he is right now. They were explaining why they were in a race with Sony to get the Xbox 360 done before Sony could ship its unit. At that time they expected Sony to ship at the same time as the 360.

They told me how console business works and why you need a console on the market for four years to make money.

Why?

1) Cost for the unit declines over time and you need that fourth year for Moore’s law to really kick in.
2) Attach rate (er, games sold per console) goes way up in fourth year.

They told me that’s why Xbox 1 lost so many billions of dollars.

The two graphs:

First year, you’ll lose $200 per machine (Sony is supposedly losing $300 on PlayStation 3).
Second year, you’ll lose $150.
Third year, you’ll lose $100 (although price will probably drop too).
Fourth year, you’ll lose $25 to $50, or if market conditions are good, you might even break even.

That’ll be offset by what the industry calls attach rate.

First year attach rate? Xbox is seeing something around eight games, if I remember right, and a pretty good run rate on Xbox Live, too (I’ve bought eight Live games, for instance, in addition to the seven games I have sitting at home).
Second year will see an additional three to four games. Each game is worth somewhere around $10 to $20 worth of revenue (out of a $60 game, I’d guess $20 goes to retailer, $4 goes to distributor, $20 goes to game manufacturer, and rest goes to Microsoft for licensing fees). So, to recoup that $200 lost on each console Microsoft needs to sell something like 15 games.
Third year, another three to four games (maybe more, cause by then there’ll be a huge market of consoles and game manufacturers will have built efficiencies so can kick out new games faster.)

So, if you have your console for three years, you’ve probably bought the 15 games that Microsoft needed to sell to break even. What happens in the fourth year? You buy games #16, #17, #18 and Microsoft (or Sony) starts making huge profits.

The Sony Playstation 2 is on its fourth/fifth year right now, which is why that’s a cash-generating machine. Xbox 1 never got more than three years, which is why that lost billions.

It’ll be interesting to see whether Sony can break this cycle and get more games sold per box (if Sony really is losing $300 per box it sells, it needs to see an attach rate that’s higher than Xbox to have any chance of breaking even).

So, why did Microsoft make this bet? To keep Microsoft’s foot in your livingroom. As more and more people get HDTVs that foot is going to be mighty important.

What do you think?

58 thoughts on “Why Gates wouldn’t trade places with Sony in console wars

  1. So much for the xbox360. My son traded his in on a wii and other goodies. LOL so much for the latest and greatest. lol Gotta watch those kids. Market leaders of the future. NG soooooooooo Long. 1 month play time.

    What do you think?

  2. So much for the xbox360. My son traded his in on a wii and other goodies. LOL so much for the latest and greatest. lol Gotta watch those kids. Market leaders of the future. NG soooooooooo Long. 1 month play time.

    What do you think?

  3. Well, I’d enroll all Xbox team members in a lunchtime Economics 101 class. It’s not just getting each machine unit into the ‘black’, it’s about the overall market footprint and the R&D cost factors that went into it, not to mention the overall lifecycle of the product. What if after 4 years, volume demand is well lower? Get “black” per unit, but go “red” as lower demand. There are so many other factors, that a “4 Year Plan” strikes me as sooooo prototypical Microsoftian Soviet econ. They say they are a free-market company whenever sued, but their own forecasting and factoring is so “Planned”, that it’d make Milton weep. They will never ever be profitable on a macro level, for the billions spent already need a generation or a Halo 2 hit a week for 5 years…to catch up. (Agree with Richard).

    On the flipside, “lost calculations” are always invariably flawed, as only Sony knows the per unit costs, as they make some of their own components and get huge discounts for large orders, factors that the external analysts never can see. Perhaps a tad less hazy with Microsoft being that they aren’t already in the Electronics biz like Sony, and have to go more “retail”, but even there, only Microsoft knows the true numbers.

  4. Well, I’d enroll all Xbox team members in a lunchtime Economics 101 class. It’s not just getting each machine unit into the ‘black’, it’s about the overall market footprint and the R&D cost factors that went into it, not to mention the overall lifecycle of the product. What if after 4 years, volume demand is well lower? Get “black” per unit, but go “red” as lower demand. There are so many other factors, that a “4 Year Plan” strikes me as sooooo prototypical Microsoftian Soviet econ. They say they are a free-market company whenever sued, but their own forecasting and factoring is so “Planned”, that it’d make Milton weep. They will never ever be profitable on a macro level, for the billions spent already need a generation or a Halo 2 hit a week for 5 years…to catch up. (Agree with Richard).

    On the flipside, “lost calculations” are always invariably flawed, as only Sony knows the per unit costs, as they make some of their own components and get huge discounts for large orders, factors that the external analysts never can see. Perhaps a tad less hazy with Microsoft being that they aren’t already in the Electronics biz like Sony, and have to go more “retail”, but even there, only Microsoft knows the true numbers.

  5. I think that I don’t care, I dont’ have a 360, and I don’t have a PS3, I won’t get either of them because I guess i’m not that hard-core-of-a-gamer, however, the Nintendo WII looks cute & has an Innovative way to intruce gaming. Wokring int he Technical Industry, I think personally, that its not about how many processors a gaming console should have, its about how YOU feel about the technolgy your using.
    Let Sony Loose Money, Let Microsoft Loose Money, Let Nintendo loose money, Fact is, that won’t stop the evolution of technology. Think about it, in 5 more years, we’ll be going though it all over again, with the XBox 620, Playstation 4, and Nintendo Zeta ..

    So Does It Really Matter?

  6. I think that I don’t care, I dont’ have a 360, and I don’t have a PS3, I won’t get either of them because I guess i’m not that hard-core-of-a-gamer, however, the Nintendo WII looks cute & has an Innovative way to intruce gaming. Wokring int he Technical Industry, I think personally, that its not about how many processors a gaming console should have, its about how YOU feel about the technolgy your using.
    Let Sony Loose Money, Let Microsoft Loose Money, Let Nintendo loose money, Fact is, that won’t stop the evolution of technology. Think about it, in 5 more years, we’ll be going though it all over again, with the XBox 620, Playstation 4, and Nintendo Zeta ..

    So Does It Really Matter?

  7. Darcy, dear, the XBox division is not profitable, period — wishful thinking on your part notwithstanding.

    I think the impact of the Wii on holiday sells is probably being underestimated, We’ll see.

    The other thing I am wondering about is the mistaken notion of compatibility between the XBox and the Zune. There was an entry on a Forbes blog critical of the Zune, as most press has been. It was linked to at an XBox site and the enthusiasts descended. Not only could virtually none of them pass a junior high school level grammar and spelling test, they were under the impression that Zune and XBox video content are interchangeable. They also had bought into the ridiculous myth that Microsoft will allow Zune buyers to have any music files they purchased at the iTunes Store free. The blogger had linked to Pogue and Mossberg, but the XBoxers had never heard of them and I doubt they actually visited those sites. I’m wondering what the effect of learning learning they are wrong about so much will be on these people. Backlash against Microsoft?

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