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I see a couple comments here, including the highest voted top level comment, questioning how the xbox can be "crushing" their competition given that a straightforward reading of console sales indicates things aren't so cut and dried.

However, the xbox is crushing its competition, in several ways, and let me explain why a naive reading of unit sales is misleading.

Many consoles sell at a loss, especially initially, or on a very small margin, console sales alone are meaningless. Console sales themselves just serve to expand the player base, enabling follow on game and service sales where the vast majority of the profit to the console maker and of course to the game makers comes from.

Here's where things get interesting. Nintendo has always sold everything at a profit, so they've never lost money on incremental console sales. However, again that margin is still fairly small, what they need is game sales. And for the Wii that's been a disaster. They sold a huge amount of consoles but a lot of the people who own them don't play them very much, and they don't buy many games. This is a big reason why Nintendo has stopped making a profit overall as a company the last few quarters, which has been rather disastrous for them.

Now let's look at Sony. They started off with a crazy console design, which is almost an experimental prototype device, this is not the sort of thing one usually does with a console. The result was that the hardware of the console was hugely expensive, which meant that they were losing a huge amount of money on every console sale, about the same as the cost of a Wii. This meant that Sony needed to have strong follow-on game sales to make up for such huge loses. However, because the console was so difficult to develop for they struggled with game availability for a long time. Eventually these factors started to become less of a problem. Multi-platform game engines eventually matured sufficiently to where it wasn't a huge problem to target PS3/360/PC releases for most games, and that has helped PS3's game library tremendously, in addition to a very small handful of excellent exclusive titles (such as Little Big Planet, Heavy Rain, etc.) Also, eventually Sony managed to reduce the hardware cost of the PS3 down to a point where they weren't bleeding money on each sale so horrifically. However, despite all of this improvement it's questionable whether the PS3 has made a total profit for Sony overall, and if it has it's likely not very large. Worse yet, a lot of Sony's big efforts such as the playstation network and the Sony Move have not taken off and not garnered much enthusiasm in the market.

And then we get to the 360. This console certainly has its fair share of problems and debacles. At launch it was definitely sold at a loss to the company. It struggled with reliability problems and expensive warranty extensions through many of the early hardware iterations. And sales in Japan have always been weak. But, somehow it managed to come out ahead. The 360 never sold at as much of a loss as the PS3 and it didn't take long for them to get to a point where they reduced hardware costs enough to make a profit on console sales. Even with the expensive $1 billion warranty extension their balance sheet on pure hardware alone is far, far better than Sony's, which means that MS actually needs to sell fewer games per console to come out ahead in total profit. As it turns out, people who own 360s are far more active gamers than people who own other consoles. They play for more hours per month, and they spend more money on games. Of all of the consoles currently on store shelves, the 360 has the highest multiple of average number of follow-on game purchases per console. But it doesn't stop there. The Kinect add-on has been one of the most popular consumer electronics devices in history. Also, whereas every major competing online multiplayer service is offered for free (Steam, Origin, PSN), Microsoft's Xbox Live Gold service costs money. On its own it has subscription volume and costs similar to the most successful MMOs in existence (such as WoW). That's a testament to the sheer volume of people who think that Microsoft's service offering is valuable enough to pay cold hard cash for, but it also, of course, goes straight to Microsoft's bottom line, to the tune of around a billion dollars per year. And because it's a digital service the development costs are fairly low. But wait, there's more. In addition to game sales, xbox players are also more likely to purchase DLC packs and other digital content such as xbox live arcade games. Again the incremental costs on these digital goods are fairly low so Microsoft (and the game publishers) make a much higher margin on them.

What does this all mean? Several things. First, in total Microsoft has been far better at consistently extracting significant profits from the gaming market over the lifetime of the current console generation. Second, Microsoft has far more momentum in terms of game sales and customer loyalty and enthusiasm than the other console players. Third, Microsoft is making far more headway than other console makers in earning revenue from digital goods and services, where the profit margins are the highest. Fourth, many game makers find that they make a lot more money from the xbox versions of their products, which helps ensure that exclusive games that aren't on the xbox are a rarity.

And this is precisely why this year we will see all 3 companies release new consoles, and why Nintendo has already done so. Because without a significant disruption in the status quo the result is that the xbox will continue to outpace everyone else, and continue to gobble up more and more market share and gaming revenue. Nintendo is trying to give themselves a chance to stay relevant. And Sony is trying to put themselves on a new footing. And Microsoft is trying to hold onto what they have or extend their lead.

Note that I intentionally left out a lot of complicating elements such as competition from PC and mobile/tablet gaming, introduction of new console makers, etc. That may play a role in the future but it hasn't played a significant role in the fight between the different home consoles so far.




Thank you for this insightful commentary.

I wanted to add that there is a general vibe in this overall thread (not your comment - the vibe that you have responded to) that Microsoft essentially muscled their way into the console industry and achieved market dominance, largely because of their financial abilities.

Certainly, their financial abilities allowed them to shoulder the losses on hardware, but as you have pointed out, it is a common practice to implement a loss leader [1] strategy on hardware to achieve market share for other services (e.g., subscription gaming services, games, etc.)

Back to my point regarding financially muscling their way into the console market and why I do not believe that this is an entirely correct assessment.

For example:

1. Microsoft included a NIC in the XBOX at launch. It was baked-in; this was not an add-on. Sony had to step up and compete by offering the PlayStation Network Adapter, initially as an add-on. Also, Microsoft launched XBOX Live approximately 4 years ahead of PlayStation Network... 4 years!

Before that time, Sony essentially relied on game developers and publishers to support networked gameplay via a server infrastructure that was not controlled or offered as a subscription service by Sony. That service did not occur until Sony offered PlayStation Network.

2. Microsoft included a hard disk (a console industry first) in the XBOX, for storing downloadable content.

These are two examples of why it is not entirely correct to say that Microsoft achieved success solely by financial ability alone.

It was Microsoft that had the vision to launch with a unified, subscription-based gaming service with XBOX Live and a hard disk for storing additional content. They ultimately delivered a superlative networked gaming experience out of the gate, particularly with the quintessential launch title, Halo: Combat Evolved.

[1] https://en.wikipedia.org/wiki/Loss_leader

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Well put, and although I may be somewhat biased, I agree -- financial muscle only gave us the ability to get on the field, it doesn't help you win or have a long-term strategy. The original hardware profile (PC-like so tools were available) and including a HDD was what allowed us to get game developers on-board quickly. Including the HDD and the NIC were also the bets, and as I tried to say in my original post, these were the innovations and the bets on the living-room Trojan horse -- we could afford to include these things because the console business model involved an audience size, a higher bill-of-material and a payback model which things like set-top-boxes and WebTV did not. Securing a few awesome first- and second-/third-party games exclusively to the console was also a critical tactic early on. I remain somewhat surprised that outside Halo there are no longer standout exclusive titles. I don't know why that effort has been dropped, that's stupid, too.

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I think pursuing exclusive titles is a bit of a wild goose chase. They're necessary more to prop up a struggling console than to further benefit an already successful one. If the system is doing well then you don't have to convince anyone to target it. Especially in today's world where the big game engines target multiple platforms so easily, deciding to target only one is just leaving money on the table, even if your studio has strong preferences towards a specific console. Generally the only way to ensure an exclusive is to buy or pay off a game studio, but that can be self-defeating because that money offsets the increased game revenue.

But if you're relying on your console being a solid default favorite platform for games because it makes financial sense there's nothing wrong with that. It may not be as satisfying a "win" as exclusivity, but it's precisely the sort of win that you want. And it should still be flattering that developers are targeting your console merely because they think it's a good system rather than out of any backroom dealings.

Of course, you can change the equation with custom hardware, as the Kinect has done, and that has generated a few decent exclusive titles. We'll see what MS does with the hardware with the next console rev, maybe they'll be able to deliver more on the promise of the hardware and bring more major developer attention than it's gotten so far.

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I think you are right, pursuing big name exclusives is often a fool's errand, and also that temporary hardware advantages like Kinect can cause exclusives to just happen, at least for a while.

But I also think that a thriving indie dev culture, as the OP is calling for (or rather, chastising MS for thwarting) can do the same thing: it can give a platform exclusive titles (games, but the same could be said of non-game apps) at least for a while, just because small indie devs can often only target one platform, at least until their indie title is a hit bringing in the cash to target other platforms.

(Had a little bit more but will have to leave it there as my laptop's reserve battery power warning is getting very insistent.)

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I am just curious - where are you getting the console costs from? From what I know this information is highly sensitive and even most insiders don't have an access.

Also, what scale do you use to compare costs? From the fact that you call Kinect (sold ~18M [1]) "one of the most popular consumer electronic devices in history" and Move (sold ~15M[2]) "has not taken off" it appears that either you are using some kind of highly non-linear measure or are better informed than almost everybody else.

[1] http://en.wikipedia.org/wiki/Kinect#cite_note-18-million-1

[2] http://en.wikipedia.org/wiki/PS3_Move#cite_note-15_million-4

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I have no idea on the concrete numbers, but the two sources you cite appear to be separated by almost one year (jan/2012 for the Kinect and nov/2012 for the Move one)

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Indeed, the sales figures are not synchronous. This is why I asked if GP has some special data, because the publically available one does not confirm his/her assertions.

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Found a newer source than the wikipedia citiations: http://www.hypable.com/2013/02/12/kinect-sales-reach-24-mill...

24 Million Kinects and 76 million XBoxes!

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Thanks. So even with the most up to date numbers Kinect does not seem to be crushing Move.

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That's comparing the number of Kinects sold to total Move controllers which include people buying multiple controllers and the Navigation controller.

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The figures for the PS3 are well known. And the Wii/Wii-U's profitability per unit is also well known and publicly admitted. With any console you can generally just look at the parts list and compare costs to retail.

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>The figures for the PS3 are well known.

From what source?

>And the Wii/Wii-U's profitability per unit is also well known and publicly admitted.

Really?

And Xbox, I figure, is also "well known"?

>With any console you can generally just look at the parts list and compare costs to retail.

True, if you know the costs of parts you can do this.

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Totally anecdotally, as cliche as it sounds I feel like what my parents (and other people who don't care about games) mistakingly call video games is a good indication of the current market.

When I was a kid, every video game was "Nintendo"

During the PSX/PS2 era, every video game was "Playstation"

Now, every video game is "xbox"

(Also a PSP is a "DS")

I imagine they pick up the words unconsciously over time from TV/news/papers/passing conversation, which could be a pretty good indication of where the brands stand next to each other.

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You've got to pick parents with the right level of awareness for this. My Mum is the same, but my Dad calls his phone a Gameboy, and refers to all other non-TV electronic devices we own as "The Machine".

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It's very interesting to take this spot-on assessment of the game console industry and compare it to the mobile phone industry.

Microsoft and Apple are dominating in very similar ways when it comes to gaming consoles (Microsoft) and mobile (Apple).

Yet Microsoft hasn't been able to replicate this winning strategy with its own phones. It seems to me that if one department at Micrsoft is "killing it", it would be Xbox. Yet that's the last thing anyone talks about.

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If there's one division at Microsoft that's killing it, it would be server and tools, which at $5.2 billion (latest Q) in sales is nearly as big as the Windows division now (and within 4 to 8 quarters - as the Windows 8 bumper dies down - will probably surpass it).

The $20 billion / year in sales server and tools does, is three times the size of the XBox + Live group.

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It isn't fair to compare server products with gaming ones, because server products are bought by people with big money, and the lock-in potential is much bigger. You need much more popular product, and you must be consistently good across versions.

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Microsoft does well when it starts with an advantage and the main issue is avoiding making huge mistakes.

In phones MS has been ahead, then utterly disrupted, then made valiant come-from-behind efforts. But the problems they are faced with are different than they're used to. With phones they're fighting against the network effect of competitors. They need to not just be a little better than the competition, they need to be a lot better. Also, look at how much money both MS and Sony spent buying up game studios and exclusive content for their consoles and compare that to the relatively weak outlays in the same vein for mobile content.

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Not that I disagree but just so I can back myself up when I go repeat this to friends and colleagues where's the data to substantiate these claims?

In particular that 360 has made more money for 3rd party devs than Wii.

It doesn't really matter if Microsoft makes more money per gamer than Nintendo if Nintendo is still more popular. As a ludacris example I'd consider consider a company that sold a million $1 items more successful than a company that sold one $2 million dollar item. One has market. The other just as a customer.

I'm not suggesting Wii is more popular than 360. I have no idea since I have no data. I'm am suggesting that the profit of Nintendo vs Sony vs Microsoft is irrelevant. What is relevant, I think, is which console is making money for 3rd party devs because that's the console that seems like it would have the most support in the long run. I'd love to see real data as to which console that is.

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According to wikipedia (http://en.wikipedia.org/wiki/List_of_best-selling_video_game...), there have been 618.24 million XBox 360 games sold, and 863.53 million Wii games sold as of December 31st 2012. Nintendo is bigger on the 1st party games, though, so who knows whether it's made more for 3rd party devs or not.

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All you need to do is look where the big money is invested. Of all the major publishers bar Nintendo, the majority is pumped towards the 360/PS3.

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You also have to consider average selling price and DLC sales. Higher ASP + DLC could easily make a 360 version far more profitable for devs than a Wii version, even at half the units.

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Marginal cost for a software copy isn't high enough to make a $10 price bump and some DLC result in twice the profit. I don't think DLC is that big a factor except on the mega-hits that people play online for a year after purchase.

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I fully agree. But I think that this is, what the original blog post called:

" Touting strategic and market success when you’re just experiencing your competitor’s stumbling failure[...] "

The problems of the PS3 where the exotic hardware, the problems of the Wii were the exotic HID. Because of this, Microsoft won this generation, but actually it does not tell us anything about the next generation of consoles. And I think it is a bit disappointing, that this round of the console war was not won by doing anything right, but by fumbling least.

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Oh yes, it very much is, for the most part. Some things MS does which are legitimately better than the competition, and that helps along with in general just making fewer mistakes than Sony/Nintendo.

However, if you look at, say, Valve/Steam vs. Microsoft, especially now that Valve is moving into the console market, that should terrify people at Microsoft. Valve is starting at a disadvantage, but the future of gaming on any platform is digital distribution and they have by far the most experience and the most connections in that area. Most importantly, they have a long history of helping game publishers squeeze the most revenue out of games through sales and promotions. At the end of the day game publishers follow the money (indeed, one could describe that as an almost darwinian process), and the most profitable platforms for 3rd parties are going to be where the development effort and player base will end up coming to rest.

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Thank you for the thoughtful and spot-on response. I completely agree. My draft was nowhere near as well-put, I have discarded it post-haste.

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If you look at what Microsoft has actually said about it's gaming division it has lost a lot of money that's yet to be paid back. (Not to mention plenty of internal cost shifting that makes things even worse.) Based on the size of there investment in both R&D and other company's it's been a horrible investment that's unlikely to ever be paid back when you include basic opportunity costs.

If you really want to look at sales, games are far from the only revenue source, accessory, downloads, XBOX live are all significant. Nintendo has made a lot of money reselling legacy games. They may be cheap but there is no R&D costs and they get everything not just a tiny slice of a 3rd party game.

As to loyalty, that's next to non existent in the console market. You get a slight bump on the next generation and that's about it.

PS: From a pure ROI standpoint Nintendo crushed the completion this round. Unfortunately the Wii U does not seem to be making the same headway.

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The idea that Nintendo always sells at a profit is a long standing one, but with Wii U it's known to be false.

Nintendo themselves have confirmed it:

"With Wii U, we have taken a rather resolute stance in pricing it below its manufacturing cost, so we are not planning to perform a markdown."

1 - http://www.nintendo.co.jp/ir/en/library/events/130131/04.htm...

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If that's the case, either MS and Sony take MASSIVE loss or hardware is going to be incredibly disappointing this generation.

The Wii U has 2006 PC level hardware at best. If you need to take a loss to sell it at these prices this is going to be really bad (unless the controller is taking the lion's share of the cost).

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The Wii U controller does seem to be the bulk of the cost, but Sony were willing to take a massive hit on the PS3 cost at first to make Blu-Ray the standard disc format, so we'll just have to wait and see how much the next generation costs

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