Fortune Magazine: How Nintendo is beating Sony and Microsoft

[John Crichton]

Price affects how many units you sell.

Porsche sells fewer units than mid-line Toyota Corollas.

Do you think that's because people think the Corolla is the more attractive car?

The thing is though, unlike Porsche, Sony can't *afford* to sell to only hardcore AV consumers willing to drop 600 on a console and 1000 on a tv.

Sony is just fine for the moment, I posit. They are selling both the Corolla (PS2) and the Porsche (PS3) right now and getting the income (or lack of?) for both.

And for the record, one could own a shiny new PS3 & decent HDTV for $1000. And don't discount the fact that anyone buying a new TV these days will pretty much have to buy one that is at the very least HD ready (ew!) and widescreen. The market will grow with the system and the PS2 will slowly be phased out.

Why? Because they are losing money on the hardware (unlike Porsche). They need a large install base so they can make that money back on licensing software.

This is a game for the mass market.

Something Sony, and you, don't seem to grok.

Bah and bah again. I grok just fine, thanks. If you want to personally attack me for "not getting" the way the industry works that is just fine. But I'll remind you that you were convinced that PS3 games would sell for $100 a pop. So, lets dispense with the personal attacks, no?

Sony's main competitor is losing even more money, especially after the warranty extension/faulty 360 fiasco. Sure, MS has virtually unlimited pockets but if this is a game for the mass market then Sony is certainly playing by the rules. If Microsoft really wanted to try to blow Sony and Nintendo out of the water, they would just take more hits on each 360 and drop the extra SKUs and put the Elite @ $250 or some kind of other price drop. So why don't they just do that? Get that install base up, right? No, that would mean more losses or revenue on top of what they are already loosing.

The console prices will drop when the companies are able to do so. Sony doesn't have to go into panic mode just because there is negative buzz.

So again, price in this circumstance is largely irrelevant. I didn't say it was completely irrelevant. The only factor that makes it relevant would be if people are just chomping at the bit to buy the system but needed it to be a little cheaper despite the lacking games selection. And if people will really snatch the console up in huge amounts just because it is cheaper, that means there is a reason, outside the games, that people are picking it up. Be it their confidence in Sony or the presence of a solid BR player.

Add all that together, throw in a few must-have exclusives and there is a recipe for success.

 

[John Crichton]

I've never said that games aren't important. I'm not interested in arguing that a game console would sell even without games (unlike certain Sony executives). However dismissing price is taking a myopic view on the situation.

I'll admit that "largely irrelevant" may not have been the best choice of two words.

There's a reason why most console sales happen below a certain price point (and why a lot of people picked up the Wii on almost a whim).

I want the "picked up a Wii almost on a whim" struck from the record. The console isn't on the shelves long enough for an impulse buy.

Because price, despite how great something may be, determines what people will and will not even consider buying. Right now, at the sort of prices Sony is charging, they're in the ultra hardcore demographic of video game players. More games will encourage more of those people, sure, but the pool of possible consumers is still limited to those willing and able to drop $600 on a video game system.

I agree that it is too much for the mass market right now. This is not in dispute. Does a price point of $500 and a crummy selection of games make that any better right now for the non-hardcore demo? Sure, it's a step in the right direction down the line but it's not as important as giving people who are gamers and current PS2 owners looking for the next big thing a reason to make the jump.

Microsoft has a software library which, apparently, even at $400 (a price point that never worked before in video game history) is able to sell twice as many consoles to consumers as the PS3. Meanwhile, Microsoft is long overdue to drop the Premium's price down to $300, while Sony will struggle to even make $500 this Christmas season.

I'll believe the Premium @ $300 price point when I see it. That happens, expect to see the PS3 follow right behind. Either way, both companies are still losing money and at the very least the PS3 is a very reliable piece of equipment. I cross my fingers every time I turn my 360 on that it will survive a 3-4 hour gaming session.

What are the people who only play Madden each year supposed to buy? The console that can play BluRay movies for the HDTV they don't have?

What about the people who only play GTA? (That series which sold 14 million copies last time around.)

Those are a huge number of sales to lose.

Who says they are losing them? You are forgetting about the PS2 versions of the mutli-console games, especially the ones from EA. GTA is a big one, for sure. We'll see how the numbers pan out by that time for install base. I still expect the PS3 to be lagging behind at that point, but we'll see by how much.

Heavenly Sword, Ratchet, Drake's Fortune, Lair, and Warhawk will move consoles. But not as many at $600 as $400.

Obviously. C'mon, let's stay within the confines of conversation here.

Meanwhile Microsoft is coming out with some, it's fair to say, much more hotly anticipated titles this holiday, while already at that lower price point (and with the potential to dip even further). Lower prices equal more possible consumers; more possible consumers equal more sales; which equals a bigger install base; which generates more exclusive deals; which leads to even greater sales; which lead to even more exclusives.

I am completely aware of how companies make money and aware of what will sell and how it will sell. This isn't just a battle between the PS3 and the 360. The 360 is still competing with the PS2, as well.

Microsoft has a lead right now. They launched earlier. With an inferior machine that breaks at an alarming rate and a plan that included multiple SKUs that can be misleading to the people looking to drop money on a higher end machine that has limited genre selection. The 360 is caught in the middle of truly being a next-gen machine and last generation technology. Why release a model with HDMI and a HD-DVD drive peripheral at all.

They have an excellent online model but then again, there is more money to shell out just to play games on it.

This is a race Sony is going to lose, and if they do it's because they handed the victory to Microsoft.

There is not nearly enough sample size of either console or this generation to even think this is the case at this point.

The bottom line is that for people actually looking for a next generation machine there is only one out there right now and it will only get more games and cheaper. It will be interesting to see how the 360 will do once the PS3 actually starts being competitive.

 

[drothgery]

Sony's main competitor is losing even more money, especially after the warranty extension/faulty 360 fiasco.

Err... no. That maybe equalized their losses on hardware, and that only because MS has sold more than three times as many consoles. And that's assuming they actually spend all -- or even most -- of that $1B accounting charge they took (which seems extremely unlikley).

Sure, MS has virtually unlimited pockets but if this is a game for the mass market then Sony is certainly playing by the rules. If Microsoft really wanted to try to blow Sony and Nintendo out of the water, they would just take more hits on each 360 and drop the extra SKUs and put the Elite @ $250 or some kind of other price drop. So why don't they just do that? Get that install base up, right? No, that would mean more losses or revenue on top of what they are already loosing.

They'd rather not lose money, have a huge lead in installed base, and they don't see the Wii as a direct competitor. So they're not going to cut prices any faster than they think they have to; they lost a lot of money last-generation by being the company that took the initiative on price cuts. They're not going to respond immediately to price cuts that don't reduce the price of the cheapest PS3; if Sony stays above $500, they're not cutting 360 prices until their own costs fall more (and the 'Falcon' internals update this fall should do that). But if they see Sony gaining ground on them significantly, then there will be 360 price cuts, and Sony cannot afford to get in a price war with Microsoft.

 

[drothgery]

I'll believe the Premium @ $300 price point when I see it.

If the rumored $399 Elite/$349 Premium/$249 Core price cut happens this fall, it'll be because they're cancelling the Premium. I think that's quite possible; you can't get 20GB PC hard drives anymore, but retail prices of a 40GB 2.5" hard drive and a 120GB 2.5" hard drive are only ~$30 apart, and I'm sure the price gap is far less when buying millions at wholesale. But if they're keeping the Premium around, it'll get a bigger price cut than that.

I am completely aware of how companies make money and aware of what will sell and how it will sell. This isn't just a battle between the PS3 and the 360. The 360 is still competing with the PS2, as well.

No it's not. The Wii is, to a small degree; they're both selling to non-hardcore gamers that don't have HDTVs yet. But the PS2 isn't anywhere near in the same league graphically as the 360 -- it barely qualifies as being in the same generation as the original Xbox.

a higher end machine that has limited genre selection.

I'm not quite sure where the 'limitted genre selection' is coming from. At the end of the year, there's not a single genre out there where the 360's game selection is either clearly better (RPGs, FPS games, fighters, racing games) or something of wash because everything's multi-plaftorm (sports games), and it's hard to argue that 360 versions of multiplatform games aren't the superior versions.

The 360 is caught in the middle of truly being a next-gen machine and last generation technology. Why release a model with HDMI and a HD-DVD drive peripheral at all.

Huh? The CPU and GPU are what make a console, and the two systems are pretty much even there. Blu-Ray vs standard DVD is just insignificant for most games capable of running on either system; you're not going to come close to filling a BD without including tons of FMV, packing all the international versions on one BD, and not bothering to compress files.

Why release a version with an HDMI output? Why not? The spec wasn't completed when they finalized the 360 spec (and if you want to make a case that MS launched too soon, I'd agree for various reasons; Sony launched at the wrong time for what they launched with -- a console with Blu-Ray shouldn't have launched before 2008 -- but really should have put a new console out in 2005 or 2006), and videophiles thought it was important.

Why release an HD-DVD add-on? Mostly because of big-picture tactics vis a vis Sony that have almost nothing to do with video games. It got a very inexpensive (to people with Xbox 360s and/or clever people with PCs) HD-DVD player out there, and so helped prevent Blu-Ray from being a runaway success.

There is not nearly enough sample size of either console or this generation to even think this is the case at this point.

The conosle that hit 10 million units first has won the console war every time. Without exception. That was the 360. The only 'come from behind' winner in the console wars ever was the SNES over the Genesis -- which was two years newer.

The bottom line is that for people actually looking for a next generation machine there is only one out there right now and it will only get more games and cheaper. It will be interesting to see how the 360 will do once the PS3 actually starts being competitive.

I just don't see the PS3 ever really being competitive as anything more than an N64-style niche box, except possibly as a basis for a Wii-style PS4 (i.e. a straightforward, 100% backward compatible upgrade of the same architecture) that's launched in 2009 or 2010. They're not going to have a sub-$300 model before 2009, and I'd bet quite a bit that MS's thrid-gen console will be out in 2010.

 

[Ankh-Morpork Guard]

One more hit against the 'new' 80GB PS3 is the emulation software for new games is no longer the Emotion Engine(I believe that's what they called) that was basically a PS2 within the PS3. Now its software, like the 360, so only some games will work from the PS2.

And it looks like that's the standard for any PS3s from this point on, as according to Sony is cheaper that way. So there's another big problem for the PS3 that Sony's bringing upon itself.

And that seems to be the real problem. Most all of Sony's problems they're bringing themselves. They're making decisions that are just constantly shooting themselves in the foot, and while Microsoft is definitely losing money on the warranty thing, its no where near the amount that Sony's lost thanks to these constant screw ups.

It also seems to me that the whole not-competiting-with-the-Wii that both MS and Sony isn't really that true in how the companies are reacting. Or, at least, its not working, as the Wii is still destroying both of them...MS is adapting to this, attempting to bring in a casual market of their own, but Sony just isn't grasping that one, either, despite it being proven to be a major way to push consoles this generation.

 

[John Crichton]

Err... no. That maybe equalized their losses on hardware, and that only because MS has sold more than three times as many consoles. And that's assuming they actually spend all -- or even most -- of that $1B accounting charge they took (which seems extremely unlikley).

And how is that not losing more money?

They'd rather not lose money, have a huge lead in installed base, and they don't see the Wii as a direct competitor. So they're not going to cut prices any faster than they think they have to; they lost a lot of money last-generation by being the company that took the initiative on price cuts. They're not going to respond immediately to price cuts that don't reduce the price of the cheapest PS3; if Sony stays above $500, they're not cutting 360 prices until their own costs fall more (and the 'Falcon' internals update this fall should do that).

That is what I was eluding to. I'm a little confused, were you disagreeing with me or just clarifying?

But if they see Sony gaining ground on them significantly, then there will be 360 price cuts, and Sony cannot afford to get in a price war with Microsoft.

No, they probably can't be then again they don't have to right now. Again, I don't think anyone can reasonably predict what Sony can really do strategically until they get some killer games for the system coupled with a price point that is more appealing to the rest of the gaming community.

 

[John Crichton]

One more hit against the 'new' 80GB PS3 is the emulation software for new games is no longer the Emotion Engine(I believe that's what they called) that was basically a PS2 within the PS3. Now its software, like the 360, so only some games will work from the PS2.

And it looks like that's the standard for any PS3s from this point on, as according to Sony is cheaper that way. So there's another big problem for the PS3 that Sony's bringing upon itself.

That very well could suck hard but we'll have to see how bad the software emulation will be. Can't be much worse than the 360's, which

is terrible and frustrating beyond reasonable belief, outside of a few games.

And that seems to be the real problem. Most all of Sony's problems they're bringing themselves. They're making decisions that are just constantly shooting themselves in the foot, and while Microsoft is definitely losing money on the warranty thing, its no where near the amount that Sony's lost thanks to these constant screw ups.

Um, I see them both making blunders along the way as has Nintendo. The Wii is doing well and that is really great as their last 2 consoles have been terrible compared to both Sony and MS.

It also seems to me that the whole not-competiting-with-the-Wii that both MS and Sony isn't really that true in how the companies are reacting. Or, at least, its not working, as the Wii is still destroying both of them...MS is adapting to this, attempting to bring in a casual market of their own, but Sony just isn't grasping that one, either, despite it being proven to be a major way to push consoles this generation.

Sony isn't grasping it? I know you are a big Nintendo supporter but don't be mistaken, Sony is still directly competing with the Wii by still supporting the PS2.

 

[drothgery]

That very well could suck hard but we'll have to see how bad the software emulation will be. Can't be much worse than the 360's, which is terrible and frustrating beyond reasonable belief, outside of a few games.

In Sony's defense, the software PS2 emulation is actually pretty good (about 75% of games work, though some of those have issues). Of course, if MS had to emulate a PS2 rather than an Xbox, their emulation would also be pretty good; it's a lot easier to emulate 6.5 year-old hardware than 4 year-old hardware even without throwing in a radically different CPU architecture (the Cell is similar to an overgrown Emotion Engine; Xenon is almost nothing like a Pentium III) in the mix.

 

[Ankh-Morpork Guard]

Sony isn't grasping it? I know you are a big Nintendo supporter but don't be mistaken, Sony is still directly competing with the Wii by still supporting the PS2.

See, that's one of those things shooting themselves in the foot, though. Yeah, the PS2 is selling well...but THAT is hurting the PS3 sales. They're trying to support two generations of products here, and only one is really selling...the old one.

Though I'd dispute the fact that the Wii is in direct competition with the PS2 anymore than its in direct competition with the PS3 and 360. Say what you want about graphics or any of that...they are competing. All of them. And the Wii is winning against all of them.

And yeah, I'm a big Nintendo guy, but I love my PS2. I think that's what frustrates me so much about Sony. They can make a great system and get great games, but they aren't. They just keep screwing things up and constantly changing their minds on what they want to do or how to do it. My annoyances at Sony are less because I'm loving what Nintendo is doing and more that I'm just baffled by the decisions Sony's making despite the reality of the world around them.

 

[John Crichton]

No it's not. The Wii is, to a small degree; they're both selling to non-hardcore gamers that don't have HDTVs yet. But the PS2 isn't anywhere near in the same league graphically as the 360 -- it barely qualifies as being in the same generation as the original Xbox.

The market would disagree with you. It's certainly still a player. Graphics don't enter into it. If the PS2 wasn't being supported anymore that would change things for all three of the new consoles.

I'm not quite sure where the 'limitted genre selection' is coming from. At the end of the year, there's not a single genre out there where the 360's game selection is either clearly better (RPGs, FPS games, fighters, racing games) or something of wash because everything's multi-plaftorm (sports games), and it's hard to argue that 360 versions of multiplatform games aren't the superior versions.

Right now, they have a limited genre selection. And 2 more RPGs (one of them killer) won't change that. Just like with the Xbox, the new machine is struggling with that genre despite some excellent individual games. And the fighting game genre includes DOA4 and Def Jam right now. I'd say that is lacking. The 360 is primarily a system for FPS & racing games. That's where the limited genre selection comment is coming from. MS still has a very long way to go to emulate what Sony and Nintendo before them did in the past by having a machine that covers every genre with a wide selection of games.

Huh? The CPU and GPU are what make a console, and the two systems are pretty much even there. Blu-Ray vs standard DVD is just insignificant for most games capable of running on either system; you're not going to come close to filling a BD without including tons of FMV, packing all the international versions on one BD, and not bothering to compress files.

That may be just fine for now, but I'm not ready to discount the advantage of all that extra space and the simple ability to have the extra tech there to help out down the line. Sony has a great history of having games on their consoles look better as time goes on. Additionally, the Core 360 has no built-in HD which will effect some devs as opposed to anyone making games for the PS3 knowing it's there.

And the 360's GPU & CPU may be about the same but at least the PS3's isn't frying systems.

Why release a version with an HDMI output? Why not? The spec wasn't completed when they finalized the 360 spec (and if you want to make a case that MS launched too soon, I'd agree for various reasons; Sony launched at the wrong time for what they launched with -- a console with Blu-Ray shouldn't have launched before 2008 -- but really should have put a new console out in 2005 or 2006), and videophiles thought it was important.

I won't say they launched too soon because of HDMI, I'll say it because they didn't put together a solid system. Either QA dropped the call or they just rushed the thing out there knowing there might be hardware failures.

And just like with the statements below about the HD-DVD add-on, this is something that should have been included. The rush out the door for the 360 was just that. A rush.

Why release an HD-DVD add-on? Mostly because of big-picture tactics vis a vis Sony that have almost nothing to do with video games. It got a very inexpensive (to people with Xbox 360s and/or clever people with PCs) HD-DVD player out there, and so helped prevent Blu-Ray from being a runaway success.

I know why they did it and it was a complete 180 turn from what they were saying all along. I like that they were trying to adapt to a market that they underestimated (as companies do very often, this is by no means a dig @ MS). The problem is that it's an add-on. Those don't usually do so well. And HD-DVD is slowly slipping behind BR in sales. Currently at 2:1 but some big HD-DVD releases (Star Trek, Heroes) could swing that.

The conosle that hit 10 million units first has won the console war every time. Without exception. That was the 360. The only 'come from behind' winner in the console wars ever was the SNES over the Genesis -- which was two years newer.

Right, so there is the exception and it's a good one. I don't believe the "first to 10 million" is going to be the gold standard this time around. The market alone has millions more gamers than it previously did not to mention there are more factors at play than there have ever been with the console and handheld markets.

I just don't see the PS3 ever really being competitive as anything more than an N64-style niche box, except possibly as a basis for a Wii-style PS4 (i.e. a straightforward, 100% backward compatible upgrade of the same architecture) that's launched in 2009 or 2010. They're not going to have a sub-$300 model before 2009, and I'd bet quite a bit that MS's thrid-gen console will be out in 2010.

I see the PS3 as one of the only consoles to cover all genres with a better than respectable games line-up. The 360 and MS still have a long way to go in Japan and in all genres with the exception of FPS and racing. They are certainly getting better are setting up well to take the crown from Sony in the next generation (GTA4 & RE5 are big steps).

The PS3 is built to last longer than the years you mentioned above. If MS is planning on pushing the envelop even more by releasing a new console 3 years from now, I'll just have to wait and see how things have played out by that time. 4 year console life cycles don't sit too well with me, though. It reeks of what MS has already done: a partially baked system that is lacking features and wasn't tested enough before release to make sure it actually lasts 5 years, not 5 weeks.