The Console Wars: Lessons to Be Learned
To answer the rhetorical question presented: YES.
It’s hard to say slashing prices is a brilliant marketing strategy (it’s actually the most generic business strat), but Sony just did the single best thing it could have done to get a huge head start on Microsoft later this year at launch. Cutting ahead of Microsoft decisively on prices is exactly the right business decision for three key reasons:
1. Longer Console Life Cycles Support Up Front Investment in Customer Penetration
Even if Sony is offering significant subsidies to consumers by dumping consoles at below cost, the long term benefits of doing so clearly outweigh the $100 per unit cost difference. Subsidizing customers is exactly what let AT&T pull ahead of U.S. mobile carriers at the launch of the iPhone. The big difference between wireless providers and console makers is time.
The PS3 remained relevant in the information age for a full seven years. The system predates touch screen smart phones, Instagram, and almost Facebook. Back in 2006 HDTV hadn’t fully been integrated by the masses. There is virtually no chance that you have any other electronics in your home that are as old as the PS3. Up front subsidy costs to customers start to look a lot smaller when they’re amortized over 7 years versus two or three in the case of a cell phone. Just imagine if AT&T was able to hold onto those early adopters for an additional 5 years?
Granted, consoles are unlike wireless carrier contracts. Console buyers are not contractually bound for two years at the risk of penalty and might reasonably choose to have both an XBox One and PS4 at home (who has two cell phones these days, drug dealers???). But the financial hit for Sony is minimized now that online gaming is going to be tied to a PS Plus subscription model. In this sense, Sony is really following Microsoft which pioneered the concept of charging for multiplayer online features. The $100 discount to an XBox 360 versus a PS3 would clearly pay for itself in less than a year of a $10 per month subscription. The downside just isn’t there in trying to compete with Microsoft on price if most of that can be recovered in royalties and subscription fees.
2. High Prices Didn’t Work
Sony has learned it’s lesson, system price is a significant impediment to customer adoption for a console. This article reports that it took seven years to surpass the XBox 360 in total unit sales. The 77 million PS3 sales are roughly half the total number of PS2 units sold globally. Buying an 80gb PS3, an extra controller, and two games set me back a mortgage payment in December 2007. That kind of staggering cost made me feel a little proud to lay down, but also was the big reason I had to wait a full year after the initial launch. If anything is clear, early market share and customer adoption are keys to long term customer adoption, and also software product development attention. Although both consoles have been reporting that they have exclusive titles lined up, an astute gamer knows that a significant number of major titles are offered on both systems. I don’t see any foreseeable blowback from the argument that the PS4 will be perceived as inferior either, especially since both major rivals are being launched at about the same time.
3. The Revenue Pie Likely Won’t Be Smaller At Launch
One key factor that will differentiate a PS4 and XBox One buyer at launch day will be the extra $100 the PS4 user has in their pocket. Customers aware of that savings are prone to dump it into an additional controller or extra game. Either way, the money ends up on Sony’s side of the fence (either directly or through a game developer). Greasing the palms of developers at launch in 2013 with double the number of launch game sales is the only way to ensure long term continued support from major designers faced with exploding budgets.
A Win for Users on DRM
More importantly than which gaming system will sell is what the next round of the Console Wars, Sony has made a huge 180 degree pivot in terms of customer DRM. After nearly a decade of increasingly tightening standards on what consumers can and can’t do with their own property, Sony has finally said enough is enough. We’ve been at a point for a long time where content providers can, from a technical standpoint, significantly curtail not just piracy, but also sharing arrangements. Such contractual limitations have been unanimously been upheld as legal restraints on consumer rights. Consequently, the doctrine of first sale, and the days of sharing a game with a classmate are ready to be thrown out the window.
Microsoft shot first here; indicating that it wanted to limit the used game market, either through restricting borrowing costs or selling unlock codes to used game buyers. Sony could have completely killed sharing as well. If both companies adopted this practice the used game market would be as good as dead overnight.
I initially heard an audio version of the NPR article noted above on the way into work this morning. The broadcaster indicated that the crowd met Sony’s announcement that it was supporting used games with PS4 with applause. No doubt Gamestop shareholders met the announcement with signs of relief.
This is a significant step not just for consumers, but for Sony as well. First, it recognizes the growing evidence that sharing, or even flat out piracy, might actually help sales by allowing for greater product awareness. In a world with games where the big titles have always been driven by sequels (Mario Bros. 3, CoD 3, Rock Band 3, Gran Turismo 5, Grand Theft Auto 5), maybe letting some more people play some old games will have a benefit on driving larger market participation. I’m almost 30 and I don’t buy used games anymore, but I definitely know that borrowing Assassin’s Creed from my friend was the main reason I bought Assassin’s Creed II. Sony’s decision here might actually make business sense, as opposed to appearing merely merciful.
The second big benefit is that it makes Sony look like the good guy. Sony suddenly becomes less like Big Brother and more like, well, maybe a big brother. It’s not that technology providers can’t lock this stuff up, either legally or technically, it’s an issue of whether they should. Ultimately, the market should be making the determination as to what features game suppliers should be adding. Sony gives that decision back to the masses. Ultimately they will be the ones to decide whether used games are a feature worth paying for (or saving $100 for). If only our American companies could get on board with the examples of freedom being set by a Japanese company…