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.
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?