The console market

According to market research firm iSuppli, the newly released PS3 game console costs Sony $241-$400 for each console sold. This is not the cost of the system – this is the net loss to the company after subtracting the price of each console from the cost of the components.

Game console makers like Sony and Microsoft take an initial loss for each system sold so they can provide the very best product to the customer. Of course they wouldn’t do this unless they believed that the initial loss would eventually yield a net profit. They make up for the loss in two ways. First, they take advantage of accelerating technology to get cheaper components. For example, while Microsoft initially took a $126 loss for each Xbox 360 sold, it now makes a $75 profit due to the cheaper cost of the components. It’s probable that some of the cost decrease comes from manufacturers who compete for the console maker’s business. Second, they take a cut of the price of every game sold for their system.

Think about the gamble such decisions involve. Microsoft bets on how many million systems will sell at a given performance level to determine whether it will recoup its costs. Hardware manufacturers bet on the success of a given console to decide where to direct their research. Game makers decide which platform deserves years of development time. Consumers, by comparison, face the least risk, but they must also decide which console will be successful and have the games they want. Success is far from guaranteed – consoles fail as often as they succeed, often taking their company down with them. Remember the Sega Dreamcast?

Do you have a sense yet for the excitement of markets? Such strategic decisions are made every day in every industry — to the extent that it is free. Why doesn’t Hollywood make movies about THIS, rather than yet another gang of thieves bickering with each other as they complete yet another caper?

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