Analysis of Video Game Systems
According to some specialists, the value offered by these consoles has not been fully appreciated for the intended target and untapped opportunities exist to exploit the features offered in the most advanced consoles. For example, Sony could promote more the blue-ray playback capabilities of its console, but the lack of a remote control puts this option out of the picture for them. What is clear is that a console per se is not a competitive advantage to be the leader. Other factors such as price, games library, and consumer experience needs to be combined to have a winning proposition.
Technology and Strategy
The technology supporting the delivery of the promise of each company, has resulted in delivering products that has cutting edge technology in each of this components aimed to maximize the value according to the core benefit promised for each console.
Sony PS3: Sony is focused on deliver performance. To achieve this, it offers the console with the best processing power and top quality graphics video. PS3 has cutting edge component, such as Cell chips (IBM) running 3.2GHz and Nvidia graphics card. The cost of this strategic set of components is calculated to be in $352. Additionally, it offers blue-ray playback capabilities to complement his additional promise of a home entertaining center. The cost of this segment is estimated to be $125.
Microsoft Xbox 360: Microsoft relies on first mover advantage and aims for a compromise between cutting edge technology and a larger library of games as well the online capabilities of their console. It’s processors runs ad the same speed of the PS3 console and it chooses ATI graphic cards. The components in this segments accounts for $204 of the manufacturing cost of the console. The online experience is better with the Xbox 360, as Microsoft incorporates its strengths in this area. As a result, it is easier for players to connect, interact and interact with online services. Microsoft will have to redefine its strategy regarding the high definition players, since its first consoles supported HD-DVD format and this format has “lost” the high def war.
Nintendo Wii: Nintendo strategic technology unit is a sensor-motion remote controller. Retail price of this component is $39.99. Nintendo basically went in the opposite direction of the leaders of the industry. The manufacturing cost (including components) of the whole system is less than the component cost of the processing power of Xbox or PS3. Comparing $154 vs. $352 (PS3) and $204 (Xbox 360). This coupled with the simplicity desired for non-core gamers, who don’t have advanced playing skills, has become the best selling point of this strategic unit of this console.
The strategy of pricing, the value offered, and the market share capturing strategy varies according to each manufacturer. In the short-run, Nintendo has the lead in cost structure and sales. It’s up to the companies, especially Sony, to develop the strategy that maximizes the value of this console.
Manufacturing costs Breakdown
PS3 (60GB) Xbox 360 Wii
Motherboard, CPU, chipset, graphics processor $352 $204 N/A
Graphic tip/chip $29.60
DRAM $48 $7.80
Optical Disk Drive $125 $19.45 $31.00
Power Supply $37.50 $25.50 $11.30
Assembly $40 $6.10 $19.50
Chassis and Related $61.75 $25.25
Other Components $150.60
Hard Disk Drive $54 $43
Cost Total $840.35 $323.30 $158.30
Retail Cost $599 $399 $249
Sales and Revenues
“For the first half of 2007, while Nintendo sold 6 million units a quarter and Sony shipped 2 million per quarter, Microsoft was only about to push out 600,000 units a quarter, in large part because the retail channel is already full of unsold Xbox 360s” . Sony had an operation loss of $446 million in his game division; this coupled with the sales of PS2 outselling PS3 increases the challenge for Sony.
Up to now, the disruptive technology strategy followed by Nintendo where the experience is not focused on the screen but in the gaming experience is paying off. The video game industry has been very dynamic and a counter attack on Nintendo is expected from Microsoft and Sony to protect its turf. As explained earlier, Sony has been the indisputable leader in the last decade in this industry and has the technological and financial resources to contest any new player. These are critical factors that will shape the console war in the long term:
Cost: It is expected that the manufacturing cost of console will drop. According to Merrill Lynch, the cost for the PS3 will be around $350, with a drop in prices, especially in the CPU and blue-ray components (See Appendix 1). This cost reduction of almost a third on the original price will represent a unique opportunity for Sony to reach price-sensible gamers, which are looking to exploit the advanced features of the PS3 at an affordable price.
Technological Lead: The situation between Sony and Nintendo can be compared with the one of GE’s aviation unit and Pratt & Whitney. GE’s initial overspending in the creation of a new engine for a specific plane design. P&W (GE’s competitor) modified an existing engine and won the contract because of its low costs. On the other hand, GE in the long run was able to use the new engine in another plane contract, which brought them more profits in the long run. Although Nintendo has the best selling console for the moment, Sony has the technological lead, and it is up to them to make it more valuable and appealing to consumers. Sony PS3 has the advantage over other consoles, which is the blu-ray capabilities playback. This feature can act as double-edge sword as many predict that the market will prefer online downloads to physical disks to play movies.
Consumer Experience: Nintendo’s key component to enhance customer experience is the “nunchuck” (motion-sensor) controller. Sony is working in a controller with similar features. Whether this will grab market from Nintendo or expand into traditional non-gamers using the strengths of Sony trademark will be up to the market to decide.
Development: As the gamers demand more features the complexity of developing a game will impact the costs. Up to date, some games have been developed for a specific console. In the future, games publishers might try to leverage the risk by creating games that can be played in different platforms.