Does Microsoft Realise Why Consoles Are Loss Leaders?
Last semester for one of my university modules, one of the chapters discussed was that of marketing principles and one of those principles was called the Loss Leader marketing principle. In essence it incorporated the idea of selling something at a loss, in order to encourage the sale of other things at a profit. Now while the textbook and lecture slides never used this example, it was quite easily a facet of the gaming industry and once I had made that connection, there was surely going to be no way I would not understand that section in an exam situation.
If you think of the Loss Leader marketing principle, what should instantly come to mind for you as one who is into videogames, is that of the console market. A manufacturer’s console is the Loss Leader, here. You will buy a console brand new for cheaper than it cost to produce — more on this in a bit — and then you will pay a bit more for the games that are sold on that console. Effectively, the manufacturer makes a loss on these consoles in order to get what they call adoption, which is to say, in order for you to own the console so that they can sell you games for that console.
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Let’s first take a look at the consoles here. Assume that a console currently costs R5,000 at retail. This was around the retail price of the current gen initially, so it’s a workable example. The console itself might have cost R7,000 to produce, including direct (materials and shipping for that product) and indirect (salaries, research & development and so on) costs, leading to a loss of R2,000 per console sold. If the manufacturer sells one million units within the first year, all other things held constant, it would mean that they’ve effectively made a loss of R2,000,000,000. However the cost to create a console does decrease over time as parts get cheaper, among other things. Thus, perhaps at this current point in time, manufacturers end up not just breaking even on a console sale, but over time they start to turn a profit on console sales. This is typical of the end of a console cycle, when the current generation is outdated and the consoles are cheaply produced but still hold a residual value. Today you can buy the same console that cost R5,000 at release for around half that price.
The thing is, manufacturers work around this loss they make on console sales by charging a licensing fee to developers. If you think of the cost of a game on PC and the cost of that same game on console, there is a difference. Here in South Africa, you might get a PC game for around R350 now, whereas that game’s console variant costs R600. That extra R250 is effectively the licensing fee charged by manufacturers, which allows developers to develop games for that console. This is why games cost more on console and this is why it’s okay to have consoles sold at a loss. After all, if just one game sells two million copies on a particular console within its first year, that’s effectively R200,000,000 worth of licensing revenue for manufacturers and with a single game they’ve covered a fair portion of their losses in console sales. Now consider how many big games release in a year. These obviously aren’t the exact values but they serve to illustrate how all of this works.
We as gamers accept this because it means that we get a console for cheaper than it otherwise would cost, and there’s always the option of picking up a game for a bit cheaper a little later, whereas consoles depreciate much more slowly.
I wouldn’t be surprised if to most of you, all of this is common knowledge. I know it is for me, so I wouldn’t put it past a lot of you as well. But I needed to clearly explain all of this so that we can get to the point of today’s article, and that’s my belief that Microsoft are fucking up again.
Last week Microsoft shared news that they’re going to be selling their Xbox One consoles at break-even, or for a small profit, upon release. This immediately upset me for two very simple reasons:
- They’re not dropping the prices of games, to my knowledge.
- They’re sacrificing a cheaper and therefore more attractive console for small profits.
I don’t have to explain either of these points, do I? But let’s go for it anyway. As gamers we’ve always been blessed with a market that throws up a middle finger to inflation. Petrol has gone up in price, food and basic living necessities have gone up in price, hell even hookers these days ask for more than they’re worth… or so I’ve been told. But gaming? Nope. Ten years ago, longer than that even, you’d pay not much less than you would today for a game. In fact, some game prices have actually been dropping.
Staggering, when you consider the effect of inflation and an economic recession on the world, and yet gaming soldiers on through as if entirely unaffected. This obviously isn’t entirely true, considering how many studios have closed down, and how some games have been marked for ridiculously high prices in the past albeit very temporarily, due to said recession. But for the most part, the gaming industry has been its own sort of force in the world.
And now Microsoft are fucking around with that force and trying to sell us a console that will not affect their pockets as much when I hasten to pose the question: Maybe this is the wrong angle?
I mean, how is it so obvious to me that if the Xbox One was just a bit cheaper, it would be a far more competitive offering than the PlayStation 4, which is already winning over loads of people because it’s releasing earlier and for cheaper. The Xbox One has an arguably better offering but it’s retailing for far too much, for most people. And I can absolutely understand why so many people are saying that for $100 more they expect more than just motion controls and the Kinect 2.0, regardless of how much better it is. There’s just no debating that, as much as Microsoft’s executives will try.
The price has been a sore point since it was announced. And now we discover that it exists so that Microsoft can turn a profit.
On a console?!
You’ve gotta be kidding me, here.
It upsets me more that now that Sony are charging for multiplayer as well, we can’t even argue on the side of the Xbox LIVE Gold offering but there too, is a stream of revenue for Microsoft. A stream that they’ve always had since introducing the Xbox 360, mind you. A pay service and an expensive console, so then why are games not being priced cheaper? Why not have Xbox One titles retailing for R200 cheaper?
Because they don’t fucking need to, that’s why.
I sure hope that they can do something to counteract this somehow, because if all of this is just to make money off us as gamers and we blindly support it, then I feel as if I’m fighting a lost battle and, after all of the fighting of the past few months, everyone’s just laying down and accepting things. Or have I just made a mountain out of a molehill here? Let me know in the comments.