Analysis: A Close Look At Console Pricing Strategies

[As part of his monthly analysis of U.S. video game retail sales, Gamasutra analyst Matt Matthews compares the pricing strategies of the last-gen consoles and the current-gen, with overall U.S. hardware spend "nearly doubling" to $21 billion this generation.] With hardware fortunes in flux, we find it worthwhile to examine what role pricing is playing, and will play, on sales of current and future game systems. We begin by looking at the history of the last generation of consoles and comparing it to the current generation. For this discussion, we will take the October 2000 launch of the Sony PlayStation 2, at $300, as the beginning of the last generation of hardware. The Nintendo GameCube ($200) and original Microsoft Xbox ($300) followed the next year, in November 2001. Each system got a price cut in May 2002, with the Xbox and PS2 falling to $200 and the GameCube to $150. In May 2003 the Xbox and PS2 had their prices cut to $180, and in September the GameCube dropped to $100. In March 2004 the Xbox price dropped to $150 and the PS2 price followed suit in May 2004. For the current generation, the Xbox 360 started in November 2005 with $300 and $400 models, and now has two basic models at $200 and $300, with a variety of game and Kinect-focused bundles. The PlayStation 3 launched in November 2006 with $500 and $600 models, and now offers $300 and $400 models, again with a variety of bundles. The Wii also launched in November 2006, but at $250, and did not cut its price until September 2009, when it fell to $200. Nintendo just announced its second price cut to $150, effective 15 May 2011. We can make this more concrete. Using sales figure from that generation and the price cuts above as a guide, we can estimate the average price of last generation's consoles (PS2, Xbox, and GameCube) to be $188 at the point 5.5 years into the generation (i.e. approximately the same point the industry is now, measured from the launch of the Xbox 360). Moreover, each system's price had been cut in half since launch. Compared to last generation, the current generation of systems launched at higher prices and have cut their prices less quickly. Moreover, price cuts have generally happened independently, whereas Microsoft and Sony fought directly on price in the previous generation. We estimate that the average price of hardware this generation, for just the Xbox 360, PS3, and Wii, is $265 and possibly more. That represents a $77 increase over the average for the same point in the last generation, and $10 more than the launch price of the Wii. That price differential in itself is remarkable, but even more remarkable is that more systems have been sold this generation at the higher prices than were sold during the same period in the last generation. Here's how it breaks down: -From November 2005 to the present, 79.2 million Xbox 360, PlayStation 3, and Wii consoles have been sold. This compares to 58.2 million Xbox, PlayStation 2, and GameCube consoles during the comparable period from October 2000 to March 2006. That is, the hardware base is 36 percent larger this generation. -Because of the price differential, the current generation of systems has generated an estimated $21 billion in hardware revenue since November 2005. For the comparable period from October 2000 to March 2006 during the last generation, the three big consoles generated an estimated $11 billion in hardware revenue. That is, the money spent on hardware has nearly doubled. It would be very interesting to know the driving forces behind these changes in the console market. Certainly, it appears that Nintendo's Wii, and motion gaming in general, have introduced (and reintroduced) many millions of new consumers to the console gaming experience. Moreover, it is possible that consumers who came of age in the 1980s are more amenable to game systems as a standard part of home entertainment, and are more likely to buy systems for themselves and their children. While lowering the price of a console may increase its sales, it is not necessarily the case that a less expensive console sells better than a more expensive one. We have merely to look at the GameCube last generation and the Wii this generation to see that pricing is but one factor in a system's success. Moreover, the effectiveness of a price cut depends on when that cut happens in a system's life. For example, Sony's PSP just got a price cut to $130 in March 2011 after maintaining its standard $170 basic price and $200 bundle price for many years. Sales in March more than doubled from the rate in February, and were up 55 percent over the figure for March 2010. However, sales dropped back to just above their previous rate again in April, and we estimate that they will continue to erode until the system is discontinued within a year's time. This is an example of a price cut that came too late in the system's life to actually make a meaningful contribution. The successor to the PSP, known only as NGP, has already been publicly announced, and this price cut fits more with the ending of the system's life than with a move to reach a wider audience and substantially increase the installed base. Likewise, we speculate that Nintendo's announcement that the Wii is now $150 could follow a similar trajectory. Wii hardware sales are already accelerating downward, and the price cut could briefly forestall the inevitable collapse of the platform as the system known as Project Cafe comes to the fore. Nintendo and Sony must also keep in mind how they intend to price their future systems. Take the current example of Nintendo's 3DS, which has sold just under 600,000 systems since its launch in March. We believe its $250 price tag is responsible for the much slower sales during the second month. The system, as defined by its features and software, simply does not offer enough value at this point to justify its price. Whether Sony's NGP can avoid that same predicament is unclear at this point. We think that Sony and its third party partners may be able to deliver with a strong slate of software at the system's launch, but we are very dubious about Sony's ability to price the system competitively. More details should arrive around E3 in June, but at this point we expect the NGP to launch eventually in the U.S. with slow sales similar to those of the 3DS. Finally, if Nintendo is serious about making Project Cafe a system at or above the specifications of the Xbox 360 and PlayStation 3, then it may have to price the system above the $250 price that the Wii launched at in 2006. At the very least, the company may have to sell its hardware with a smaller margin than it has enjoyed with its last two consoles. The full analysis of April's U.S. video game industry retail sales is now live on Gamasutra.