Game Console Industry

The halting console industry is unpredictable, as the market leader changes as frequently as new games being released. Currently, the well-nigh large(p) console manufacturers in the industry atomic number 18 Sony (PlayStation), Microsoft (Xbox), and Nintendo (Wii). While Sony and Microsoft focus on powerful machines and games targeted at older teens and young adults, Nintendos family friendly, less graphically minute consoles target an entirely different market, and is not applicable to the Sony/Microsoft battle. The adoption of consoles depends heavily on one factor the subject matter available.A console manufacturer needs to pitch third-party developer support in narrate to aim a steady stream of select video games being released throughout the year. Although brand loyalty, technical capabilities and expenditure sure as shooting plays a part on the purchase decision of an individual, consumers tend to buy the console that offers the games that the consumers enjoy the mo st. Sony and Microsoft some(prenominal) publish a catalogue of a uncomparable line up of video games made in-house as well as receive royalties from third-party video game developers such as Electronic Arts and Activision (ATVI).Microsoft and Sony some(prenominal) use a passage leader strategy, pricing their consoles lower than the merchandiseion cost thus, increasing the market for higher margin sales of related softwarfaree, licensing fees, accessories, and downloadable content. As such, both potents sacrifice console receipts to attract customers to adopt their eco frame. This pricing strategy for game consoles, coupled with each consoles respective open dates, has immense effect on setting the competitiveness of the companies for years to come.Historically, higher sign pricing methods bottlenecked initial uptake on consoles, and is often followed by price cuts to encourage greater adoption. During the engulf of Xbox 360 and PS3, the price disparity and subsequent pric e drops hugely altered consumer purchasing decisions. The lower initial price point for Xbox 360 resulted in a quick grab for market share, but Sony followed with price cuts thus, resulting in a price war one that was won by Sony in amount number of sales, but also the most amount of losses.To most consumers, these consoles are mutually exclusive and purchase decision is mostly based on prise for money. Timing of the immerse is also crucial as many gamers aim to be first adopters for new consoles. Relationship with Gaming Suppliers and Consumers The victors abuse exists callable to the biased optimism of gambolders and the unknown repute of the object being conjure on. This is especially true in the heated rivalry between Xbox atomic number 53 and PlayStation 4. The bid that these two giants are trying to win is the hearts of the console period of play community.However, both companies are unable to actually quantify how much the console gaming industry is worth as biddi ng takes place during the production phase, prior to sales. Generally video game players can be segmented into PC gamers, soothe Gamers, or Casual Gamers. The PC gamers are currently being served by Gaming PCs, with the latest technology and the widest variety of customization regarding multimedia this is essentially the enthusiasts market.The Casual Gamers are generally younger gamers who have less of a focus on the depth and graphical intensity of games. This demographic is currently being satisfied by Nintendos Wii & DS or a normal home PC. Both the PS4 and the Xbox One can be categorized as serving the console gamers, for these gamers often subscribe high quality machines, certain elements of media integration, and high degree of innovation from new generation consoles. However, above all else, the quality of games and price of systems are the primary order victors for console gamers.The quality of games is generally determined based on the two factors of aesthetic and gamep lay. The aesthetics of a game depends largely on the processing capabilities of the system period the gameplay comes from the creative minds of the game developers. Thus, for Sony and Microsoft to accurately predict the relative demand for their consoles, they need to evaluate the strength of both these key success factors. In the 8th generation of consoles, Xbox One and PlayStation 4 have very similar processing power and graphics rendering capabilities.The similarity of the two devices mean that the order winner for a console gamer bequeath not be based on the internal capabilities, rendering demand predictions using aesthetics of a game irrelevant. With regards to game play, this falls squarely on the shoulders of game developers and publishers. Both Sony and Microsoft have their in-house gaming development arm under subsidiaries. Microsofts game developer, 343 industries are responsible for the blockbuster knock Halo 4, which hasalready sold 4 million copies to date.On the S ony side their in-house developers, Naughty Dog has created the Uncharted franchise and has sold 5 million copies with its warrant instalment alone. From an exclusive content perspective, both companies all have clear winners and it is very difficult to predict which exclusive content will outsell the former(a). off from exclusive titles, there are also independent game developers such as Activision-Blizzard and Square Enix.These independent game developers are capable of influencing player doings by releasing exclusive content on specific systems. For example, Microsofts partnership with Activision on Call of Duty Modern Warfare 3 (COD MW3), ensures that specific content only gets released over the Xbox platform, thus incentivizing players to choose Xbox during the games release in November 2011. Microsofts success with Call of Duty does not however spell censure for Sony, as Sonys partnership with developers like Square Enixs Final Fantasy franchise creates enormous success as well.In the end, not only are most games playable across the two different platforms, but even for the exclusive contents the two firms are essentially ensuring competitive exclusives are available on their respective consoles. Adding to this uncertainty is the fact that games are very much like animated blockbuster movies, while having a talented cast of game developers for sure lowers the risk of creating an unpopular game, it is not guaranteed to always be a hit. A perfect example of this is the game Haze, supported by Sonys PS3 and developed by the All-Star developer Free Radical Design.Prior to its release it was deemed to be the Halo (one of Xboxs most successful franchises) killer. However, once the game hit the shelves it was met with lukewarm reception and only 500K in sales, which resulted in the closure of Free Radical and a huge write-off for Sony. At the time of production for Xbox One and PS4, many games for the consoles have yet to be developed therefore, making it almost impossible to foresee which franchise will continue to do well and which will fail.One key order winner for console gamers is the quality of games, yet on this specific metric Microsoft and Sony are practically non-differentiable and it is nearly impossible to predict which console will fare better than the other(a). Subsequently, because of this ambiguity, it contributes to the notion that in this common value auction sale, the players do not know the actual market value of the item they are bidding on, and will likely overpay due to the uncertainty. The launch of PS4 and Xbox One As the launch of PS4 and Xbox One is extremely recent, there has been little market data to show who is winning out the competition.Because these consoles are the ordinal generation of gaming platforms, observing current actions in comparison to past events can grant us a view into their individual competitive advantages and value their strategy. The pricing strategy for Xbox One is to offer th e console at a much higher premium. At $499USD, the Xbox is $100 to a greater extent than the PS4, which is largely attributed to the Kinect 2 motion-sensing technology as part of the package. It is yet too early to tell how consumers will react to this huge price discrepancy, as the value added for the bundled technology creates an interesting value proposition.This pricing strategy is also noticeably opposite of what Microsoft has done in the past. In the previous generation of consoles, Microsoft sold each Xbox 360 at a loss of $126, while Sony saw $130 loss per PS3. Microsoft claims to be, at minimum, breaking even per unit of Xbox One to cover variable costs. While this discourages a price war like what has taken place in the pass through Sony and Microsofts use of loss leader strategy through their pricing, it is yet to be seen if consumers will be able to swallow the $100 difference. In contrast, Sony is selling the PS4 at an average loss of $60 per console, at a price of $39 9 per unit.Even with the addition of PS Eye, a similar accessory to the Kinect 2 the $100 premium of Xbox One is still higher the PS4 cost with PS Eye. We can see that Sony chose to continue to keep abreast a loss-leading strategy, potentially overestimating the revenue that can be reaped from future sales. Sony is still operating with the optimistic idea that by incurring a high initial loss, they will be able to reap higher benefits in the future, continuing their vicious cycle of the Winners curse. Microsofts merchandise expenditure for the Xbox One launch is expected to exceed $120 million USD.Assuming that Microsoft is breaking even per each console sold, that means it needs to sell at least 200K consoles fair to see a return on marketing investment. Noting the fact that Xbox Ones controller itself cost over $100MM USD to develop, a small snippet of skilful R&D costs, the timeframe at which Xbox makes a positive interlock present value remains to be seen. Xbox 360 sold just over 79MM units over its time-span with shifty consumer focus away(p) from consoles to PC gaming, it is hard to predict just how lucrative or unprofitable the One will be for Microsoft.The situation is just as devastating for Sony with a unit contribution loss of $60, it would take a lot of cross-product sales to achieve a return on investment. Sony is just as heavily invested in terms of development and marketing costs compared to Microsoft. Even with the uncertainty of consumer adoption and market share capture rate, the two firms are discharge head-to-head in hopes of securing a return on their investment through capturing more of the pie. Beyond competing on price and marketing, Sony and Microsoft are competing for first adopters through launch dates.Historically, Sony gained the gaming console market first with the original PlayStation while Microsoft waited a whole generation before entering. PS2 dominated the sixth generation of gaming consoles while the original Xbox o nly assembleed about 1/8th of the pie. By launching 13 months ahead in in Europe, Microsoft in effect(p)ly out competed Sony and was able to gain almost half of the market share. This neck to neck competition means the launch of the eighth generation of consoles will determine who truly wins out in the console world, as clearly both firms are much more concerned about getting their consoles into peoples homes at any cost.Interestingly, Microsoft dogged to launch in the Eurozone ahead of Sony while the situation is reversed for the North American market. The two firms are essentially trying to steal shares from each others respective strongholds. There are many competitive strategies at play for this battle, but regardless of these actions, both firms are losing money. Microsoft has been making a net loss with the gaming division in the past decade, largely attributable to the winners curse and also price wars. There has been signals that Microsoft wants to shift away from this co mpetition that has resulted in such heavy losses on both sides.With a pricing that supposedly creates a unit contribution of zero, Microsoft is no continuing suffering from the Winners curse to win out the bid of each individual consumers wallet. Although it has yet to be seen whether this will be effective as consumers are price sensitive in this industry, Microsoft is also trying to change its value proposition and appeal more to the mass market. Microsofts marketing launch strategy focuses largely on pushing the entertainment hub aspect of the product, as foreign to solely the gaming aspect.Many of Microsofts marketing ads have been center on the multimedia content and screen sharing technology of the console. This aims to shift Xboxs value proposition away from Playstations game centric focus, and plan of attack to communicate to consumers the value for money. In contrast, Sony continues to align their image to fit the hard-core gaming segment alongside the pursuit of the lo ss-leading strategy. This image is not only reflected in marketing techniques, but also the technical specifications of the consoles.Even with the lower price of the PS4, Sony chose to integrate a more powerful console, in hopes that the hardcore gamers will buy more games. The heavy initial spending on R&D and marketing is in essence a bid for greater market share. Contrary to the winners curse, in this competition between Sony and Microsoft there is no winner as increased spending has not translated to greater profits. The pricing and technological attributes of the product is also a bid for each consumers purchasing dollar in which the winner makes either a loss or no profit for the console sold.These individual transactions amalgamate to result in the desire to gain a larger share of the pie through greater console sales which leads to heavy losses on both sides. Winners Curse Winners curse occurs in a common value auction due to incomplete information. In the case of Sony and M icrosoft, the adoption rate of their respective consoles is the objective of the auction. Since the value of each customer is worth roughly the same to both Microsoft and Sony, they have equal incentives to win the bid and they are differentiated only by their individual valuations.Prior to the launch of the Xbox One and PlayStation 4, Microsoft and Sony independently evaluates the value of the market which historically has been inaccurate. At the end, the player that wins the auction and sells the most amount of consoles will often be the one that incurs the largest losses. This is perfectly exemplified in the seventh generation consoles of Xbox 360 and PlayStation 3, where PlayStation won the bid and outsold Xbox, but in doing so, it cost Sonys console gaming division $5B relative to Microsofts loss of $3B. These corporations can justify such large losses as they have cash cows in other divisions.The fact that these losses are justifiable is due to both firms competitive orientati on if one pulls out of the market, the other would dominate and be profitable. This has been seen in Olympic broadcast rights bidding where stations are willing to lose just so competition wont gain. The reason for such over-bidding comes down to optimism. Since the value of consumer adoption is nearly impossible to estimate, Sony and Microsoft are essentially guessing what their potential monetary success would. From this uncertainty, the winner is alone the one that made the bigger and more optimistic mistake.In the last generation Sony won the auction by making aggressive price cuts following the launch of their console as well as investing heavily into marketing and development expenditures. This spending exceeds the actual value generated from sales of the console and games thus, resulted in a large deficit of $5 billion dollars. Both firms have been extremely stubborn in their strategies, going head to head to ensure the other firm does not win. As discussed previously, there has been signs that both firms are acknowledging this winners curse scenario, resulting in both aiming to focus on different segments of the consumer market.As this industry is relatively young and consumer interests are fickle and unpredictable, there has been uncertainty in the value of the market. The loss-leading strategy was extremely effective and profitable for Sony during the sixth generation of consoles, prompting Microsoft to enter into the industry. As such, now it is impossible for one to pull out as both realize the market potential when there are no steer competitors. Another strategy for Microsoft or Sony to adopt is to occupy another space and focus their appeal to specific consumers.Nintendos Wii was able to be extremely profitable and outsell both Xbox 360 and PS3 as it appealed to a wider demographic, stressing the value proposition of social gaming. The Xbox One is aiming to occupy a different space by becoming a multimedia hub rather than just a gaming consol e. However, the success of this is yet to be determined. Analysts suggest that the Xbox should be priced lower in order to compete against the PS4 and PS Eye bundle. However, looking back at this price war and continued winners curse, it may be a better strategy for Xbox to obligate its price position.Sony at this moment is more on the defensive where they are not able to raise their price without suffering backlash from consumers. As well, it may be prudent for Sony to wait and see Xboxs transition away from hard-core gaming to see if they regain adoption rates from this demographic. The winners curse has plagued this segment of the gaming industry severely in the past decade with Xbox and PlayStation. As Microsoft tries to redefine its appeal and shift to a more warmheartedness segment of the market, this winners curse will start to be alleviated.This can only be realized if consumers accept Xboxs new position, differently the negative spiral continues. Ideally, a consumer wil l be educated in the differences between the two and purchase based on pragmatic reasons as opposed to perceived value. Xbox pricing their product at cost is a strong indication there is desired change to avoid the winners curse. similarly Sony is losing less per unit of PS4 as well. With less incremental loss per unit, the firms will hopefully generate a profit in the long-run for their gaming divisions.