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Friday, September 15, 2006

I'm Not Very Rational

Just a quick response to this Joystiq post:

If companies like Sony and Microsoft want to subsidize their consoles to the the point that they're losing money on every unit sold, shouldn't we (as rational consumers) want to take advantage of this built-in subsidy? All else equal, shouldn't a rational consumer choose the console with the largest built-in subsidy?

Sony and Microsoft are giving us free hardware when they sell each console at a loss. A gamer who wants the most computing power for his buck will naturally prefer the subsidized console, ceteris paribus. Whether this is ultimately healthy for Microsoft and Sony is another matter entirely. The ultimate profitability of a game manufacturer is no concern of ours, as gamers.
-- Rational gamers choose subsidized hardware, all else equal

There is one problem with buying subsidized hardware. If it becomes too popular, it will become the only choice. Sony and Microsoft are some of the few companies in the world with enough money in their coffers to blow away millions just for marketshare. Microsoft went way into the red with the Xbox and the 360 probably won't even recoup that. They don't care because they can lose money on a division for years and years and years, use it as a tax write-off and wait a few generations for profitability.

Especially if they've pushed everyone out of the marketplace because all those rational gamers bought $600 machines for $300. The ultimate profit margin of the companies might not be our concern, but the overall health of the market most definately is our concern.

And for the record - this is precisely how it's playing out. Microsoft engineered it's place in the market based largely on making the Xbox one of the most subsidized consoles in history ... and now Sony is fighting back with the PlayStation 3 perhaps taking it's place for that recognition.

Once they've gotten their brand recognition and built-in markets they'll pull the free hardware. Microsoft's already started to do this the 360 - which isn't nearly the bargain the Xbox was. Sony will undoubtably follow once they have Blu-Ray players in the living room (assuming Blu-Ray survives).

Nintendo has mounted a great defense to this, but I'm not expecting any other company to be capable of doing so anytime soon after the last generation.

I'm not sure ceretis paribus actually fits here ... since one is comparing different companies and consoles. It's only "equal" compared to some other mythical device. I'll toss out another economic concept that does fit: TANSTAAFL. There ain't no such thing as a free lunch.

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Troy Goodfellow said...

Cole's argument is completely insane. Leaving aside the ceteris paribus thing, no "rational buyer" (if there is such a thing) would buy a gaming machine for the sake of the hardware. Gaming machines are for games.

A rational buyer simply tries to get the best value for their money, and it is certainly questionable whether gaming hardware has an economic value that can simply be assessed by how much loss the company is eating.

Josh said...

Exactly. If the Wii did nothing but emulate pong, I wouldn't care how subsidized it is. Also, the 360 might be $200 under it's manufacturing costs - but it's not viable for my SDTV ... so it doesn't matter.

But I also wanted to point out that simply thinking "I want the most hardware at the lowest price" isn't necessarily as straightforward as it sounds. Plus, no company is going to give anythign away for free without an expectation of a return, and probably a ROI. Sony most certainly overpriced things like memory and controllers to recoup costs and I'm sure Microsoft has some similar strategies.

Greg Tannahill said...

This isn't about asset acquisition, where we theoretically want the machine with the beefiest stats because we're going to use it in our spare time to break Russian military cyphers. It's about entertainment.

Joystiq's argument is akin to this: You walk into a movie theatre. There's two movies on. One is a special effects action blockbuster that cost $250 million to make but is getting reviews that suggest it's the worst thing since unsliced bread. The other is a low budget gem along the lines of Memento, Cube, or Primer, produced on a shoestring but brilliant beyond belief. The tickets to each film cost the same price.

According to Joystiq, your duty as a rational consumer is to ignore the good film and go and see the rubbish, because you're getting more production budget input per dollar of ticket price.

Ultimately, it doesn't matter how much money has been input into the product you're purchasing. It only matters what value it's outputting.

Josh said...

Well, right, which is why Sony is so damn annoying with their lousy PR.

I read something online today about someone detailing the reasons they'd get a Wii over a PS3.

Half of the reasons were actually present on the PS3 and the person was completely unaware of the fact.

Apparently Sony is betting on "rational" gamers who will just spend $600 in the hopes that they are actually getting $900 worth of hardware.