Console Manufacturers Get Competitive This Holiday
December 5, 2013

Console Manufacturers Get Competitive This Holiday

In the past two weeks we’ve seen the release of as many video game consoles. This is the first year that Microsoft and Sony have gone head-to-head with their next generation consoles, and we’re sure to continue to see some strong sales as the anticipated systems show up in stores. At this point, it’s up to supply to meet demand, and it is the supply that will determine who will win this race.

On November 15, Sony released its PlayStation 4, the successor to the PlayStation 3. Sony reported sales within the first 24 hours exceeded one million units in the United States. Microsoft released the Xbox One a week later, and also reported that more than a million units were sold.

The numbers may be a little massaged — the video game industry is good at that. Both companies are trying to keep up with demand, and hoping that demand is worldwide.

“Microsoft is trying to get that European action, but Sony has traditionally been the leader in Western Europe, notably in the UK,” industry analyst Billy Pidgeon told redOrbit. “So it is very likely that Sony beefed up the UK supply chain, at the detriment in the US. Microsoft thus had the advantage in the United States.”

In the early days of a video game console release, sales are restricted by supply. Console manufacturers ship a limited number at launch, then trickle out more consoles to retailers as fast as they can fulfill orders. It is up to the assembly line and shipping to keep up.

“If there were a lot of inventory, then that would be news,” IDC Research Director, Gaming, Lewis Ward, told redOrbit. “Stand back and let’s look at the holiday season as a whole. By the time the dust settles we won’t see this as two-to-one. The PS4 will edge out the Xbox One on a global basis, but the Xbox One could edge out the PS4 in North America.”

Historically, this was the case for the legacy systems. Ward explains that in mainland Europe the PC outsold the Xbox 360. However in the United Kingdom it was the Xbox outselling the PlayStation 3. “Dynamics could get very close to 50-50,” Ward said.

The next generation consoles are pricey. The Xbox One retails for $499.99, with bundle deals running up to $799.99. The PlayStation 4 retails for $399.99 and also has bundle deals such as a console with an extra controller and games for $569.96. Traditionally consoles have been sold at a loss. Manufacturers recoup the money by charging video game developers licensing fees, and make money on the sales of such games. This is the so-called “razor blade model” where a company sells the reusable razor at a loss in hopes that consumers will continue to buy the blades.

For the current generation consoles, the manufacturers are able to charge a retail price closer to cost for the consoles as gamers are sold on the idea of a box that plays games and provides entertainment in the living room.

“Both are putting out an unprecedented amount of hardware this time around,” said Pidgeon. “This is expensive on the front end for the systems. It is going to cost them, even if they are making a profit on the sales.”

Console manufacturers are still fronting the bill in order to get consoles into living rooms this holiday season. “The shipping and distribution costs are probably hurting the bottom line,” Pidgeon said.

Gamers and early adopters lined up for their consoles. However there will come a point when demand gives way to supply. “People are still looking for value given the state of the economy,” said Pidgeon. Consoles are sold at a price set by the manufacturer, with little leeway. It will be some time before either Sony or Microsoft adjusts the price of the next generation consoles that just hit stores in the past two weeks.

Image Credit: Thinkstock

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