But for the UMass students who have begun camping out on the sidewalk in front of Best Buy at the Hampshire Mall in Hadley, the highly touted next-generation game machine that also plays high-definition movies isn't primarily about movies or games.In fact, this is one of life's little enduring mysteries.
It's an investment.
For $600 plus tax and two days of waiting, the enterprising young men and women waiting in front of the store plan to reap at least $1,400 in profit when they resell the machines between now and the holidays.
As of Wednesday afternoon, on eBay, PS3s were being sold for as much as $3,000, two days before they hit store shelves.
Sony, like Microsoft and Nintendo, underprices the first run of its new gaming system by thousands of dollars. They leave hundreds of millions, if not billions, of dollars on the table. Nor is this unexpected. It is as predictable as the tide.
While it is easy to come up with possible explanations, it is difficult to come up with an explanation that can explain walking away from massive revenues that would fall directly to the bottom line. To put this in context, Sony's 2006 net income was a little better than $1 billion. Estimates of how many games systems Sony will sell this year vary widely, but 500,000 seems to be a good conservative estimate. If Sony could realize just an additional $500 per system sold this year, that would be an extra $250 million in profit.
So why is Sony walking away from an amount equal to nearly a quarter of its profit for the whole of last year? What ever the reason is, it's got to be better than having at least $250 million in Sony's pocket now.
So what are the possible explanations? Sony doesn't want to appear greedy. Is there anyone over 12 to whom this explanation applies? If this is really a worry, lead with the PS3 Premiere Addition. Throw in accessories that cost you $50 to make and include a gold-plated case. Sony is still ahead of the game.
The want to get the system into the hands of persuasive early adopters. This makes no sense at all. Identify the 1000 most persuasive players and give them systems. Sony would still be ahead of the game; it would hardly even notice that cost. Also, note that the current arrangement doesn't work that way. The systems are being snapped up by arbitrageurs, not by players.
7 comments:
M Ali: Have you priced a Gilette Mach 3 Turbo razor recently? Although the blades (cartridges) themselves are obscenely expensive, the razors are no longer a giveaway/loss-leader.
Ali: There certainly aren't 500,000 people willing to pay $2000-$3000. But at $1000 it seems more likely.
As to the games being where the money is, even if true the grey-market seems to indicate that Sony could charge substantially more than it does for the "Premiere Edition" without reducing the number of systems sold. The constraint here seems to be the number of systems they have available to sell, not the number they can sell at $500.
It's about risk management. The difficulty of correctly predicting market conditions well enough to capture the grey market premium outweighs the benefits of doing so. There are also PR downsides to such actions as well, plus blowback from retailers and distributers. Overall, too much risk for not enough gain.
AOG lends his rhetorical weight to the points made by Susan's Husband. (Ever noticed how those two always agree. Something odd there...)
These are good explanations, but I'm unconvinced. First, the new system premium is, at this point, perfectly predictable, at least for Microsoft and Sony. The distressingly badly named Wii system didn't cause all this uproar, but the introduction of the XBox 360 led to similar premiums.
Having bought a lot of Sony products over the years, I'm skeptical that Sony objects to having a reputation for price gouging. If so, they've done an almost perfectly bad job at promoting their desired reputation: they're known for good products at high prices.
Plus, it's hard to see how all the benefits SH/AOG describe, even if we assume they exist, out weight $250 million in Sony's pocket now.
The other interesting thing is that the retailers go along. Best Buy isn't auctioning off the first systems either. That's another reason to doubt the "the real money is in games" explanation. The retail market on games is pretty low.
I also do want to get back to the inventory issue. The system manufacturers seem to act perfectly reasonably in starting sales when they have enough units to sell without waiting until they are up to full production. That's what imposes the premium on their customers. Why impose on your customers if you're not going to benefit?
The retail "mark up" on games is pretty low.
Ali: Those are the arguments and you make them well, but I don't buy it.
On the gouging issue: As I'm sure you realize, this wouldn't be gouging. This would be pricing. As people are already paying the high prices voluntarily, I don't see why the game companies would get a bad reputation for sharing in money that other people are making off their product. But I don't think they care about their reputations (other than for quality gaming systems) as much as you assume. If they did, Microsoft wouldn't be selling their 360 wifi attachment for $88.00 when we can walk into any Staples and buy a USB wifi attachment for $30.00. They may make all their money on the games, but they don't seem to mind much making money in other places, too.
"this wouldn't be gouging. This would be pricing"
It doesn't matter if it's gouging or not, only whether the consuming public believes is. Why do oil companies get blamed for rising gasoline prices when the price of oil goes up?
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