A game console war is on between market leader Sony with their Playstation 4 and the struggling Microsoft with their Xbox One.
In the US Microsoft nudged ahead for the first time since a
one month lead back in late 2013 when Sony had supply problems.
Now both Companies are desperate to get sales with retailers
such as EB Games, JB Hi Fi and Dick Smith offering deals on both platforms.
The big thing about games consoles from Microsoft and Sony
is that they both last several years due to a lack of competition. Game systems
have a long life, Samsung does not sell the same phone for several years and
Microsoft is already on their third Surface Pro tablet in less than two years.
One of the key marketing tools is exclusive game releases
and new online multiplayer features, the other big wild card is price with both
organisations now desperate to hold onto margin despite big rounds of discounting.
The price cuts that Microsoft has resorted to in an effort
to get sales growth has not been good for Microsoft’s profit margins.
What they do make money on is royalties on game sales and
add-ons, such as annual subscriptions to Xbox Live and downloadable content.
It’s the reason many console makers are willing to take a loss on the hardware,
which Microsoft and Sony are both doing right now, according to researcher IHS.
Businessweek said recently ‘While there isn’t a precise
formula for the economics of game-console pricing, bargain hunters can look for
certain signals to determine when to buy a new system. The price is highest at launch,
when hard-core gamers are willing to wait in line and supplies are low as
hardware makers struggle to churn enough off assembly lines. Price drops tend
to happen more frequently in the first couple of years with each new generation
of consoles. And if you see an Xbox go down in price, you can expect the
PlayStation won’t be far behind.
Lowering the price isn’t generally the preferred option,
says Julia Miller, a former marketing executive at Microsoft and Sega.
“Price is always one of your marketing levers, but the ramifications of
that are pretty widespread, because you have the physical cost of goods to
create the hardware,” says Miller, who now runs a digital-marketing agency
called Digipowers where Sony’s PlayStation is a client. “You can only get
to a certain point of dropping price to be successful.”
Microsoft introduced Xbox Live in 2002 with an emphasis on
voice chat, which was new to the living room, and an exclusive shooter called
Halo that was an instant hit. Sony had a two-year window starting in 2001 when
it had the only game system that played the mobster breakout Grand Theft Auto
These exclusive games introduced a different way to sell
systems. Hardware makers cut deals with game publishers to bundle popular games
with consoles, a move that increased demand each time a new release in the
series came out. Microsoft and Sony liked doing this because it delayed the
need for a permanent price drop, and publishers liked it because they sold more
games. “Bundling allowed you to satisfy a consumer demand for value,”
Miller says. “Bundles help sell consoles.”
In the next generation of consoles, price was used more
aggressively. The Xbox 360 not only had a one-year head start on the
PlayStation 3, but it was $100 cheaper. During the new PlayStation’s first year
on the market, Microsoft cut the price of its cheapest Xbox 360 by $20 and then
by another $80 the next year.
Today none of the 10
top-selling games last year were exclusive to either system. Microsoft and Sony
have brokered for exclusive access to certain levels or weapons in some games,
which they’ll bundle with their consoles, but those distinctions can be harder
for gamers to make.
So price is becoming an even more important lever. Sony,
which didn’t respond to a request for comment, can’t afford to take as big a
loss as Microsoft in the game business. The Japanese company, which is in the
middle of cutting thousands of jobs, has $14.1 billion in cash and equivalents,
according to data compiled by Bloomberg. Microsoft has more than six times that
amount, which means it can afford to continue discounting.