19 November 2006 by Ian Davis
Over on the O’Reilly Radar Tim O’Reilly has a post entitled Insight into Future Business Models which looks at how the loss-making PS3 is another indicator of the new business model of giving away the hardware to promote information services (iPod/iTunes being the other significant example). I’m not convinced. As far as I know, every console loses money in its first three years. For example the XBox 360 apparently costs $715 to make with an expected loss of about $125 on each system.
To explain this you have to look at the overall market in the long term. When a new console is launched it has to be quantitatively better than the competition (including the manufacturer’s own existing console) which means it needs to use bleeding edge hardware. New plants, fabrication techniques and specialist circuitry all push initial costs up sky high but over 2 or 3 years the costs fall radically as volumes and reliability increase. Those consoles will be profitable in their own right in 3 years.
But, that not to say that there isn’t more to it. Every game produced for the Playstation generates a licence revenue for Sony. Each game sells for about $60 to $80 and during the lifetime of a console the owner might buy 10-15 games which could more than make up for the loss on the sale of the console. So I don’t think we’re going to see free consoles any time soon, and this is much more a traditional razor and razorblades type of model than something novel for the information age.