Over the past several years, there have been three major players in the console market, Microsoft, Nintendo and Sony.
A console-maker has a number of avenues for drawing revenue from its console. It charges for console development kits, and code-signing, which allows it to pull a share of all third-party games revenue. It can charge network subscription fees to draw ongoing revenue from the console’s customers, it can produce its own first-party games with a greater margin than third-party developers, and – of course – it sells the actual console hardware and accessories. In short, the console-maker has the most opportunity to pull revenue from every part of the console ecosystem.
So, how much actual profit does that amount to for a console-maker? Well, in the case of Microsoft and Sony, the simple answer is none at all.
Sony’s console division hasn’t generated any profit since the Playstation 2, and Microsoft’s console division has never made a profit.
With all of these revenue streams open, Microsoft and Sony are losing millions every year, vying to be the king of the deepest money-hole, essentially.
Nintendo, paradoxically, is making money. You might wonder just how.
In the normal course of things, a console-maker usually sells the console hardware itself for less than it costs to make. A console generally being about the cost of a low-end budget-PC to manufacture, let’s call that US$600 (and upward) for argument’s sake. The actual unit itself, however, retails to the customer for US$300 and upward.
Selling below-cost means that the more units you sell, the more money you lose. You’re essentially selling the unit at half the price that it costs to make. That hole gets very deep, very fast.
The question then becomes, why would you even do this?
Actually, it’s not that uncommon. Most printer manufacturers will sell you a printer at a fraction of the cost, knowing that you’ll keep coming back for overpriced consumables. They can’t sell you printer ink at US$5.50 per millilitre unless you have the actual printer. The same goes for games consoles – since they’re not compatible with PC games (or with other consoles) the only way to sell the games to you is if you’ve bought the actual console hardware.
That’s the strategy that Microsoft and Sony employ, using the hardware as a loss-leader so that you’ll buy first-party and third-party games. Nintendo, on the other hand, doesn’t subscribe to this philosophy, instead producing less powerful hardware, sold at a price that generates actual profits. Since the hardware is less-expensive, it can still hover near the consumers’ sweet-spot without having to retail at huge discounts.
Microsoft and Sony can afford to keep digging their holes ever-deeper, for the moment, since those divisions are subsidised by the profits from the many other products that the respective companies produce. Both companies are playing the long-game, hoping that the competition will run out of money first, leaving them the king of this vast hole, into which money vanishes – and hopefully, lever that market dominance into an actual profit someday.
As I see it, though, the next generation of consoles is not going to change the landscape to any significant degree. Microsoft and Sony will keep digging deeper holes – battling their way to the bottom – and Nintendo will probably keep profiting comfortably (unless it makes an egregious error). As for third-party developers, there seems to be less and less money per-title to be made in the realms of console games, though some of them are still grimly hanging on.