So, apparently Microsoft is selling its new XBox 360 for less than it costs?! While this is not a new business practice, usually being the first product out (Playstation 3 and Nintendo Revolution aren't due out until 2006) equates to higher costs for those first adopters who are not normally considered bargain shoppers. For those of you wondering, they make up the profit on game pricing and licensure agreements with game developers. What does this tell us then about Microsoft, and probably Sony and Nintendo?
Clearly they are crack dealers, providing unwitting customers with a dangerously addictive product at cut-rate prices in an attempt to hook lifetime customers. Due to the fact that none of this product (XBox 360) is gaining dust on shelves, wouldn't it have been a better business decision to price it closer to cost? Its clear that people would pay for it. Thoughts?
Far more devious and unique of Microsoft is it's constructed shortages to increase buzz. I really hope that backfires.
ReplyDeleteWe've discussed this a great deal irl. Gaming systems are often sold at a loss, or nearly so.
ReplyDeleteThe economics is interesting, but hardly devious, and likely an ingeniously efficient way to distribute the costs of production.
Because of this setup (underpricing of hardware recouped by software licensing), systems are slightly less expensive while games are slightly more expensive. Therefore, anyone buying a system for one or two games can do so relatively cheaply; while those buying tons of games for one system bear the burden.
It's probably fair that those who benefit more from their system essentially pay a higher price for it. And a gaming system probably becomes more valuable in direct proportion to how many (quality) games you have for it. This correlation is almost always true.
The correlation (number of games::system value) breaks down when a gaming system does something else, like play DVDs (or mp3s, for portable gaming systems). In those cases, you can increase the value of your system in other ways (by having more DVDs or mp3s), without paying the extra licensing fees via more games.
I originally thought this meant that a portable gaming system would be capable of displacing the iPod (because it could underprice the iPod and float on licensing). But I've since realized that if enough people are cheating the system by using the portable gaming system as an mp3 player, the company that produces the portable gaming system would just go out of business. (Thermodynamics of econ: you can't get cheaper goods just by shuffling numbers around.)