Rational gamers choose subsidized hardware, all else equal [update 2]
by Vladimir Cole 
{ Sep 14th 2006 at 7:41PM }
The reaction to our post about the Wii being profitable at launch puzzles.
If companies like Sony and Microsoft want to subsidize their consoles to the the point that they're losing money on every unit sold, shouldn't we (as rational consumers) want to take advantage of this built-in subsidy? All else equal, shouldn't a rational consumer choose the console with the largest built-in subsidy?
Sony and Microsoft are giving us free hardware when they sell each console at a loss. A gamer who wants the most computing power for his buck will naturally prefer the subsidized console, ceteris paribus. Whether this is ultimately healthy for Microsoft and Sony is another matter entirely. The ultimate profitability of a game manufacturer is no concern of ours, as gamers.
One final point: if a company doesn't believe in its product enough to take a small loss at launch, what does this risk averseness say about executive confidence in the long-run prospects of the product? A larger, up-front investment indicates stronger confidence that a product will eventually be successful enough to pay for initial investment.
Most comments below are ignoring the ceteris paribus stipulation of the argument. For this argument to work, one must assume that all else is equal. To put it another way, would you buy a Wii at $600 or at $100? You'd buy it at $100, because the $600 model is exactly the same. Most rebuttals are bringing in objections that violate the core stipulation.
[Update 1: Added last paragraph.]
[Update 2: This position has been further clarified in this followup post.]
Reader Comments (Page 1 of 8)
Chris Taran @ Sep 14th 2006 7:45PM
Best graphic ever.
superhookie @ Sep 14th 2006 7:47PM
love the graphic
Spuky @ Sep 14th 2006 7:48PM
can you smell it? is in the air
a flame war is coming
Thomas @ Sep 14th 2006 7:50PM
Although Nintendo doesn't say so, i think there still a little nervous. I would be too. I mean there taking a HUGE chance with the new controller idea and if people hate it, thats the end of it.
I am personally very very excited for the Wii. I will be there on launch day. Its a great innovation and It opens new possibilities for all sorts of games. But I think nintendo is just being cautious, so just incase it doesn't sell well they arn't screwed over.
JoseMiguel @ Sep 14th 2006 7:51PM
" A larger, up-front investment indicates stronger confidence that a product will eventually be successful enough to pay for initial investment."
It means nothing in this case. At the best it means the company is looking into its corporate survival, and is trying to differentiate themselves by offering something the competition can't, albeit at a lesser cost.
That's the lamest thing I've seen joystiq posting, and something that really takes away from your credibility.
fredrik dunder @ Sep 14th 2006 7:50PM
are these news or your point of views?
Muttley @ Sep 14th 2006 7:52PM
If the ultimate profitability of a game manufacturer is no concern of ours whats the point of this post.
Ask a Sony stock holder if he is happy with what you call "small loss".
vc @ Sep 14th 2006 7:52PM
Fredrik: we post a mix of news, views, interesting tidbits, trivia, tips, tricks, whatever. Don't box us in, man. That's the way the blog rolls.
j @ Sep 14th 2006 7:52PM
i disagree, theres another rationale. and that would be the thought to save the most money. its like when there are buy 2 get 1 free sales, even though you only need 1, u buy 2. i wouldnt call that rational. id go for whatevers fun, and could care less if they are making a profit or not.
Probot @ Sep 14th 2006 7:52PM
I hate to break it to you, but no one really cares if the console is sold at a loss. I certainly don't. I've never looked to an earnings reports to determine my gaming purchases.
Leemo @ Sep 14th 2006 7:54PM
"One final point: if a company doesn't believe in its product enough to take a small loss at launch, what does this risk averseness say about executive confidence in the long-run prospects of the product? A larger, up-front investment indicates stronger confidence that a product will eventually be successful enough to pay for initial investment."
Maybe it's more about the fact that the hardware in the Xbox 360 and the PS3 is so goddamn expensive that to sell it without making a loss would further push the price bracket out of people's reach - rather than the company's expectations for sales.
If Nintendo can sell a console at a reasonable price and *still* make profit then I'll happily jump on that bandwagon, and why shouldn't they do it? They're a business. The argument about console manufacturers giving us 'free' hardware when it's subsidised is ridiculous - I'm not denying that having fantastic hardware like that in the 360 and PS3 made cheaper is a fantastic option as a gamer, but to chastise a company like Nintendo for innovating in a different direction and being able to profit is a rather stupid argument.
I own a 360 - but I think I'll be picking up a Wii once I've played it myself. Status based on price (to me at least) is irrelevant, what I think this 'generation' is going to be about is gaming experience rather than how many polygons you can shift around - surely us gamers are more grown up than that now?
-Leemo
Vilhelm Smári @ Sep 14th 2006 7:58PM
Give me back my 30 seconds! This is the most stupid post I've read on Joystiq... ever.
Pikachelsea @ Sep 14th 2006 7:53PM
"All else equal, shouldn't a rational consumer choose the console with the largest built-in subsidy?"
I guess it's too bad that all else isn't equal, then, since all the games I want are exclusively appearing on the Wii, and Nintendo is giving me free wi-fi out the box.
You make it sound like if Microsoft/Sony were to offer us a theoretical game console that, say, cost them $1 million each to make but set the MSRP at a "mere" $10,000 dollars, then clearly the RATIONAL thing to do is to buy that console because hey, what a steal!! Think of how much money they're losing! It has no games I want but who cares!! Etc.
If Sony and Microsoft want to dig their own grave into the red, that's their problem, not mine. I'm buying a console based on the games it has to offer, not based on how much money the manufacturer is dumping into the console. I'm using it for gaming, not salvaging high-performance parts.
vc @ Sep 14th 2006 7:54PM
JoseMiguel wrote, "At the best it means the company is looking into its corporate survival."
Exactly my point. If a company is unwilling to subsidize, it means a subsidy is a matter of life and death for them. This is a play to decrease risk. If the Wii were a sure-fire money maker, Nintendo would be willing to take a loss. Because they are not taking a loss, we know that the company views the Wii as risky.
Blackmoon @ Sep 14th 2006 7:54PM
"are these news or your point of views?"
Who said joystiq was just a newsite.
I agree, I think it was a stupid move by nintendo to put outdated hardware in the Wii. That way it could do both.
Jeff @ Sep 14th 2006 7:54PM
Some pretty obvious flaws in this attempt at logic:
1. All else is never equal. "All else equal" would mean equal hardware, an equal game selection, etc. In that case, you'd be talking about different prices for the exact same experience. That never happens. Rational people always measure value - that is, cost vs. reward.
2. A subsidy is not the same as "free" hardware. If I'm paying $600, that's not "free". Sure, I may get a $400 *discount* off what the console really costs, but if I have to pay for it, it's not free.
It's an obvious but important point because a company could put out a console that costs $5,000 to make and sell it for $4,999 and they're technically subsidizing it. But $4,999 is hardly "free" and no rational gamer would choose it over systems costing more than 90% less. It would only be rational to choose such a system if the following two conditions are met:
a) You actually *have* $5,000 to spend (it is never rational to spend money that you cannot afford to spend),
*and*
b) Again, all else was equal - in other words, same hardware, same games, but the competition actually costs $5,000 to the consumer. In that case, the rational choice would be to spend $1 less.
It's false logic to try to make an argument that subsidized consoles are always the rational choice. They are the rational choice *given certain conditions*, and all of those conditions put together would be a practical impossibility. What it would always boil down to is simply the exact same consoles sold for different prices - that's the only way buying the subsidized system would always be the rational choice.
rokobungi @ Sep 14th 2006 7:56PM
Isn't the Psp a subsidized game system whereas the DS is not?
JoseMiguel @ Sep 14th 2006 7:56PM
I mean, you talk as if Sony and MS were doing a sacrifice, when in reality the three are just as greedy.
Why don't you post that as well, that the ultimate goal of these corporations is our money and that if they didn't have competition they would not have as much reasons to lose money on hardware to regain it with software sales?
yoschi @ Sep 14th 2006 7:58PM
uh-hum...
if you buy for example a PS3 for 600$ you will have to buy games for it someday or not?? O_o
i think it's rather stupid to argue about something like that. It sounds like someone "forcing" you to buy it just because it is worth some $ more.
if i'm not interested in it, i won't buy it, even if they give me it for 300$ less..
Tim @ Sep 14th 2006 7:58PM
Sorry Vlad,
Even if we SHOULD buy the PS3 to get the best computing power, most of us don't want to spend $600 for it. It comes down to actual dollars. Besides, computing power isn't everything. Also, since Nintendo is only a videogame company, they can't afford to take a loss. Sony and Microsoft have other areas of business that can prop up the gaming division for the short-term.
And to counter your only other point, I'd rather 'invest' my gaming dollars in a company that's making money because I don't have to worry about them going under or cutting support of their console.
Panadero @ Sep 14th 2006 7:58PM
Just because the cost of the hardware's individual parts is more than the price the company charges at retail doesn't mean it's "worth" any more other than in terms of statistics, nor does it speak anything about a company's belief in its own product.
The fact that I'd be charged "only" $600 for a PS3 when the individual parts of the system total more than that doesn't mean that by logic the PS3 is the system I should buy. Particularly if there are no games for it that interest me and I don't appreciate Sony's continued arrogance. That they're being so nice and cutting us all deals on their hardware means nothing to me if they don't have what I want in the first place.
j @ Sep 14th 2006 8:06PM
vlad yer logic is off. because nintendo makes a profit it means they are lacking in confidence? it could mean they want to run a succesful company and make a profit right out the gate and make their investors happy. read everyones comments, then read yer post, u are in the minority here, but im sure youll reply again and again trying to defend your position, which is your right. it just gets old after awhile.
christoph @ Sep 14th 2006 8:00PM
"Sony and Microsoft are giving us free hardware when they sell each console at a loss."
W...what? I do not understand this sentence. When I bought my 360 it cost me $400, whether Microsoft made or lost on the deal.
MetaHuman @ Sep 14th 2006 8:03PM
I think that since we all want videogames to be a supreme artform, that us gamers ought to know the fundamentals and techniques and appreciate the fine art of creating real-time interactive simulations.
Part of that involves CARING ABOUT THE DEVELOPERS and appreciating their decisions. Nintendo is a developer on top of being a hardware manufacturer.
You know, people we consider to be fine artists today such as Van Gogh and Rembrandt used to paint for a living. Their paintings didn't cost millions upon completion, many times they lived from painting to painting. Shocking I know.
gameclu @ Sep 14th 2006 8:01PM
Then where does Microsoft fit into this? Didn't they lose something like 4 billion on the xbox?
wii the people @ Sep 14th 2006 8:04PM
I'm going to build a console that is 5 feet long and weighs 700 lbs. Don't worry though because it will have blu-ray, hd-dvd, motion controls, microwave, best graphics ever, a small cell phone tower, washer/dryer, hair straightener (gotta get those girls), treadmill, wireless toothbrush, tampon dispenser, three wireless adapters (just in case), betamax player, mp3 player, digital camera, built in saddle for the bull-riding game, and pull out hyde-a-bed. It only costs 1500 dollars but don't worry because I believe so much in this product that I'll be taking a 5700 dollar hit on each unit sold. Holy shit Vladimir, learn how to fuckin' argue. Is this a real post? If you fired Summa for that hype shit last week then Vladimir is certainly deserving of a pink slip with this little gem.
Pete @ Sep 14th 2006 8:02PM
Let's look at it like this people. Somewhere along the line a console and its parent company that is losing money will have to even out the bottom line someplace right? Well, how many of you Ps2/Xbox/Xbox360 owners enjoy your system turning pale and floating to the surface and being told that YOU will have to pay for shipping.Now that they have your system, just what will you get back? Will it be a minty fresh unit returned to you within a weeks time like my friends Cube? Or will you get back a refurbished piece of shit that has 3 layers of dirt on it from its last owner? That is all of course assuming that they don't blame the failure on the end user and your warranty null and void. After all its all about making money and if you don't make it one way you make it another. Choose your poison appropriatly, and I choose robust hardware backed up by ass kicking customer service.
nothing dude @ Sep 14th 2006 8:03PM
Did you know that at the burger king you can buy any regular soda, and get a refill, for free.
schtum @ Sep 14th 2006 8:03PM
Nintendo has always sold their consoles at a profit. It's what they do. Make money, that is. They're a business. I feel stupider for having read this post.
vc @ Sep 14th 2006 8:03PM
Cristoph wrote, "W...what? I do not understand this sentence. When I bought my 360 it cost me $400, whether Microsoft made or lost on the deal."
You got for $400 something worth $600. You paid below the producer's marginal cost, meaning the producer gave you value worth $200 for $0. That's free stuff.
Nmaster @ Sep 14th 2006 8:05PM
VC, think about that statement: "All else equal, shouldn't a rational consumer choose the console with the largest built-in subsidy?"
Do you realize what you just said? You just said it was irrational to buy a console based on gameplay experience and fun factor and that a gamer should focus on who has the largest built-in subsidy...do you REALLY believe that the economics of the company behind a console should influence purchasing decisions of gamers? That's just plain stupid...
Nintendo's making a profit. Good for them! It's good to know I'm not buying a system for a company that's potentially going to go bankrupt...
Domo @ Sep 14th 2006 8:06PM
More cowbell?
Anyways on topic. Motion sensing tech is and always will be a novelty to ME. Beyond all the crap you would have to buy to make it a viable in home mulit-player machine I just can't see that kind of plunge even before buying games to take in 3x of one thing 4x of another so friends, family and "Mii" can enjoy this. I'm not going to do the math on what all the controller purchasing would add up to but I'd imagine somewhere close to 200 bones or better.
I'm guessing N doesn't take into account that a lot of people can't afford large sets to cram 4 people in side by side shoulder to shoulder all trying to wiggle, shake, swing and move around to control the on screen action. Should be quite an entertaining sight on a 27" (4:3 aspect) or less. Anyone for a Wiimote black eye?
JoseMiguel @ Sep 14th 2006 8:08PM
"If a company is unwilling to subsidize, it means a subsidy is a matter of life and death for them. This is a play to decrease risk. If the Wii were a sure-fire money maker"
I think you're taking my comment a little from the wrong point of view. What I meant is that the current business practice of selling hardware at a loss clearly isn't a good strategy, and the fact that Sony and MS are going to lose millions, or maybe billions of dollars(MS again and Sony maybe for the first time in this industry) is a clear sign of that.
Nintendo knows this, and as such they decided to change their business practice and market a product just in the same way they marketed the DS. A experience you can't get anywhere, albeit at a lesser price.
It isn't as if they're evil and want to sell us crap on purpose. For all I've seen the Wii will be worth it and I won't have to buy an expensive HDTV to enjoy it.
I mean, even the GC wasn't sold at a loss in its early days. It's a business practice
gehrig @ Sep 14th 2006 8:06PM
What a misguided post.
Consumers buy consoles to play games. Their #1 criteria for choosing a system is how much fun they think they will have playing the games. The production cost of the hardware can only tangentially inform a consumer's assessment of that.
Saying that pricing the system to sell for a profit shows a lack of faith in the system is just utterly ridiculous. Businesses set prices to maximize profits.
Dylan @ Sep 14th 2006 8:10PM
What is all this about again? Whos in the market to buy computing power? Games for me, please.
sizer @ Sep 14th 2006 8:15PM
This logic doesn't really apply to the PS3 unless you really really wanted a Blu-Ray drive. Otherwise Sony's just 'subsidizing' you for something you didn't want in the first place and you're still paying a hell of a lot more for their trojan horse effort to rule the HD market.
Daniel @ Sep 14th 2006 8:08PM
"A larger, up-front investment indicates stronger confidence that a product will eventually be successful enough to pay for initial investment."
I see that as weaker confidence in the product though, since they have to drop the price to encourage more buyers. VW doesn't add a premium on their cars because they're not confident in their product.
This whole post is so confusing.
Yamen @ Sep 14th 2006 8:08PM
@14 The hardware is not outdated. If it were made 3 years ago, it'd be outdated. The hardware is new.
On topic, this logic is a bit contridictory. If "The ultimate profitability of a game manufacturer is no concern of ours, as gamers" then what does it matter weather or not the cost of the system is subsidized? As purely gamers, with no forward thinking, it would make the most sense to buy the best gaming machine. "Best" is of course a matter of opinion, and does not inherently imply "most 'free' hardware".
That being said, as people who play games and want to continue to play games, we SHOULD think about a consoles ultimate profitability. If any company X tends to satisfy our gaming desires better than other companies, it is rational to devote more money to company X to a) obtain more satisfaction, and b) enable the company to create more satisfaction in the future.
Lastly, in the specific case of Nintendo, thier strategy is different because it has to be. Microsoft doesn't make money off thier game devisions (at least, not yet), but they make up for it with thier other market offers (OS, Software etc). Sony, similarly, can absorb the subsidized costs of thier gaming division with thier massive Home Electronics division. Nintendo only has a gaming devision. Everything they do is directly connected to gaming. Therefore, as a business, they chose to make sure everything they do results in a profit. Surely they have quite a bit of money to work with (Nintendo brought in more then all of Sony last year), but they don't have a backup plan. If they were to subsidize the Wii, and it failed terribly, then the would have spent money to lose money, which no business wants to do. You may call that a lack of confidence, but many people (especially economics analysts) call that good business sense.
CheekyLee @ Sep 14th 2006 8:09PM
So, I was just told that if I buy a Wii, I am stupid?
Daniel @ Sep 14th 2006 8:10PM
"The ultimate profitability of a game manufacturer is no concern of ours, as gamers."
Tell that to everyone who bought a dreamcast.
schtum @ Sep 14th 2006 8:10PM
Oh, and "all else being equal" is really the key, isn't it? NOTHING ELSE IS EQUAL! Different hardware. Different formats. Different games. Different experiences. If everything else were equal, nobody would ever have to buy more than one console.
nothing dude @ Sep 14th 2006 8:12PM
wow, "wii the people" sure own your shit Vladmir.
MosquitoControl @ Sep 14th 2006 8:12PM
Just because it has the great subsidy does not make it
the greatest value.
I could build a solid gold Atari 2600 at a cost of
$5000, sell it to you for $4000, and you'd still be better off buying a 360/PS3/Wii for above-cost.
A moron looks for the best deal.
A smart consumer looks for the best value for his needs.
Ryan LN @ Sep 14th 2006 8:13PM
"[S]houldn't a rational consumer choose the console with the largest built-in subsidy?"
Honestly, the fact that one company may be breaking even, turning a profit or suffering a loss in the sale of their product(s) has never, ever been a factor in my purchase of said product. When I contemplate investments in anything, I tend to foolishly consider factors like "is this item going to be useful to me" or "can I afford to buy it" or "do I actually want it". The fact that a particular item may be bleeding a company dry by its very existence plays absolutely no part in my purchase decision; moreover, if history is any teacher, consoles that are not profitable in and of themselves sometimes tend to negatively affect a company's bottom line (see Sega et al). If you posed the question "would you rather buy a product from a financially stable company that will be around to support it, or would you rather buy one from a risk-taking enterprise that may a year down the road either go through a severe restructuring or decide that supporting said product isn't financially wise"- I would venture to guess most people would choose the former.
Ultimately, I'm not sure what this all means- Sony, Microsoft and Nintendo are all multi-billion dollar companies who tend to operate in the black, and the notion of any of them closing up shop anytime soon due to financial malfeasance is kinda funny. But so was the notion of the shuttering/restructuring of Enron, WorldCom, Tyco, and a vast number of sacred cows that have been slaughetered and rendered over the past decade. It's not a question of how much you believe in your product- you had better f'n believe in it if you've invested hundreds of millions (if not billions) in r & d, design, manufacturing, and advertising- the question is what point is there in taking a small loss when you can still undercut the comptetition by hundreds of dollars and still turn a profit? To hell with confidence- that's just good business, and to company exec good business keeps your shareholders happy and helps you keep your job.
ambesound @ Sep 14th 2006 8:15PM
I'd rather make an investment in a company that has the intelligence to make a profit (Nintendo), rather than a company (Microsoft and Sony) that hopes, one day, to achieve one of the basic principles of running a healthy buisness (i.e. making money)
Yoshi Likes Boys @ Sep 14th 2006 8:15PM
"A gamer who wants the most computing power for his buck will naturally prefer the subsidized console, ceteris paribus. Whether this is ultimately healthy for Microsoft and Sony is another matter entirely. The ultimate profitability of a game manufacturer is no concern of ours, as gamers."
This is horrendously foolish and indicative of the hardware-centric nature that's ruining this industry. Vlad, I don't know if you've ever had a soft spot in your heart for Shining Force, or, hell, nearly KING OF FIGHTERS, but whether a company does good business can spell the end of games that you care about. This short sighted power-grab is nonsensical unless the only thing you care about is stroking yourself to theoretical polygon counts. I no longer have doubts that the moronic fanboyism that pollutes the comments section of this site has seeped into the blogging itself.
Nate @ Sep 14th 2006 8:17PM
I think rokobungi handily quelled this debate back at comment #17.
nick @ Sep 14th 2006 8:19PM
Overthinking, Vlad. Nothing you ask is remotely interesting and it makes no sense. Nintendo's a fiscally sound but very conservative commpany. It's kept them in good stead for a century. We know this. Why the hullaballoo?
Wait, are you the MBA dude? Ah.
Yikes.
Jon @ Sep 14th 2006 8:20PM
As rational consumers, surely we will gravitate towards whichever machine excites us most. How much it costs to produce is not an issue, especially if it crammed full of technology that nobody actually wants.
I bet you Joystiq staffers walk into a grocery store and buy everything that's on a '2 for 1' offer even if you don't want it because you're 'rational consumers' right ?
Doom3 @ Sep 14th 2006 8:20PM
Please Sony makes the blue ray...LOL They make the cell...LOL In a year or two both tech will be cheap as hell to make... Do you think the price of 600 is going to budge NOPE. I'd rather a company make a profit out of 250 rather than a cool 400 to 600 on tech we all know is going to drop over 50 percent in the future. Hell If you remember DVDs players cost around 300 to 400 dollars when the PS2 came out... now they are like 50 dollars... LOL Did the PS2 price drop that much...LOL NO Does nintendo have price drops yes...
SO if you are mad that nintendo is going to make a profit off out of 250 dollars and feel like 400 to 600 for high def gaming is a ok then your obviously trying to do two things. Prove your loyalty for another console or try and whine so that nintendo drops the prices...LOL please It's not going to work man...LOL
Plus too if you feel it's over price then go buy a game cube and then go and pick up zelda. If you really think that these games can be done on the xbox or game cube then go get your start up money and make us console players a crysis killer because you obviously know more about the hidden power of both systems to warrent that comment.
To bobby.. Yeah I want the specs too but they are going to make me feel like I should or shouldn't buy it. I'm more curious to know what it can really do and if they even added any cool tech that could be passed on the vid cards and workstations. As for gamers using specs to buy a system... not a good idea... Shouldn't you be hyped about games? Well I guess thats why nintendo is doing what they are doing because specs couldn't even get the old atari a sell before the crash... and the Neogeo blew every thing away it seemed but no one wanted to Pay money for the console...LOL a quarter to a dollar was all that system would get...LOL Now where are the arcades? I mean good luck with rushing out to the arcade because some ungodly game has been released and you just have to see and play it.
If you look at things... Sega dieing off as an hardware maker should have been a wake up call. Arcades dieing should have been a wake up call.
Sony and MS making consoles that basicly uses HD and movie play back to hang on to value should have been a wake up call. 3D bleed the industry... in a bad way... Lots of 2d producers went away simply because Comapnies would not let them make a profit off of what founded video games 2d game play. Atol of creative people where lost. This industry need creative people more than tech though. Any company can prodive tech.
Getting mad at a company that may have you pay for a new experience... Thats priceless...LOL Them making a profit off of it... What you though this industry was an art gallery or some thing
...LOL Pay to play... Go buy a checker board or some thing dang..
Well I'm off my soap box for now...