Yes, Santa Claus is coming to town soon, but for all the good little boys and girls, is he upping the ante with the new advances in technology? Has he figured out how to combat the escalating production costs? Has he worked out a deal with the elves’ union and adjusted to the shift from a blue-collar to no-collar workforce? Normally, I would just check the annual report of a company for answers, but, as we all know, the North Pole is not exactly traded on NASDAQ.
Years ago, it was enough for Santa to leave a bike for Christmas, but times have changed. Now, children are looking for the latest and greatest technological items such as the new Sony Playstation 3. At first glimpse, this Sony game system seems to be extremely over-priced when compared to the rival system, Xbox 360. Perception, however, is far from reality.
In November, the company “Isuppli,” disassembled the Playstation 3 and made some quite interesting discoveries. Not only is the system the poster child of gaming evolution, Sony is losing more than $300 on every unit sold. This normally would be a bad business decision, but here are a few theories for why Sony would take such a hit on their latest and greatest achievement.
Some speculate that if sold at the extremely high production cost, Playstation 3 would lose the market to the already maturing Xbox 360. Thus, pricing the product a bit lower would allow for other consumers to purchase the product. This pricing strategy is known as penetration pricing and is designed specifically to get more of a particular product, in this case the PS3, into homes. Unfortunately, this pricing strategy is designed for products that are similar, which is not the case of the Xbox 360 and PS3.
The engineering of the Playstation is revolutionary and is far above any system that has ever hit the market. Andrew Rassweiler, the tear-down manager of Isuppli, said “with the PlayStation 3, you are getting the performance of a supercomputer at the price of an entry-level PC.” Rassweiler then goes on to say that the components of the PS3 are of the same caliber as network computers that serve as the framework of the Internet. “If someone had shown me the PS3 motherboard from afar without telling me what it was, I would have assumed it was for a network switch or an enterprise server.” Thus, comparing the PS3 to the Xbox 360 would be like comparing Rudolph to all of the other reindeer. The PS3 is simply in a league of its own. This puts the PS3 on the top of Santa’s sleigh when it comes to technology, thus an $800 price tag could easily be justified in the marketplace.
Another possible reason for Sony’s loss on each unit is that the company plans to make a majority of its losses back from video game royalties. This could be true in the future. However, in the short run, game royalties just do not add up enough to account for losses, especially considering that retail analysts suggest that only 200,000 systems were released stateside. Combined with the fact that are only 22 games are currently out with only four scheduled for release until February, video game sales probably won’t save Sony’s Christmas. For all of you math majors, in the unlikely event that everyone who buys the PS3 buys every game from now until February – that’s only 26 games. Sony would have still only sold approximately 5.2 million games. If current royalty pricing is consistent with Sony’s previous system releases, they are only making $8 per game. That is approximatly $41.6 million in video game royalties. If retail analysts are correct, doing the math on how much Sony is losing on the 200,000 released units would reveal a loss of $75 million in production costs alone. That $75 million does not include advertising costs, which always are a significant portion of any new product launch budget. Indeed, a portion of the cost can be recovered through game royalties sales, but, in the short run, Sony is still losing a significant amount of money on their system.
Certainly market insertion pricing and royalty revenues explain why such a successful corporation like Sony would endure such significant short-term loss on one of its flagship products. But I propose an alternative theory. This one takes a bit of a believer and involves a man who wears a different colored suit during the fiscal year. Holiday spirit is quite possibly the main revenue of the North Pole, and this time of year, that spirit is higher than ever. But there is a problem. Around September, St. Nick probably received reports that his product mix is becoming weak because, by not producing the PS3, he has neglected the technology-sensitive youth of today. Or, maybe the engineers of the North Pole told Santa they could not reproduce the new Sony unit because Santa’s corporate spies were unsuccessful. Or it could be that the spies were successful, and Santa’s accounting division said they needed a partner to put the units into production. Santa’s debacle grew as he realized that if the PS3 sold at Sony’s high production cost, it would be too expensive for parents to buy. As a result, many children would not receive the units from their parents, ultimately lowering their holiday spirit. Bearing in mind the North Pole runs on spirit revenues, this could dramatically impact their bottom line. So how has Santa planned to distribute the new PS3 without taking spirit losses and scolding from the North Pole board of directors?
Originally published in the “Rebel Yell” 12/11/2006
