November 8, 2008 // 8:09 pm
- A short time ago Sony Computer Entertainment executive Ray Maguire
in response to a question about a PlayStation 3 price cut.
"Well the pressure comes from the consumers obviously and so therefore there's always pressure on price," admitted Maguire, "but you know we have a business to run, and we have to make sure we're doing the right thing for the shareholders as well."
I am sorry, what? I know I am not a CPA, a high ranking business analyst, nor a senior executive at a multi-billion dollar company, but I can do basic math. Microsoft recently had some major price cuts
on their hardware and has seen a big hardware surge in North America and especially Europe as a result. So let's break out some hypothetical numbers shall we?
Let's say Sony reduces the cost of their standard 80GB unit from $399 to $325, I know this is a big drop but work with me on this. Let's assume with this price change they are no longer making $75 per unit on the console, but in fact break even on it.
Again this is all me making up numbers, but bear with me. Let's assume that Sony at its current price point could sell 1 million PlayStation 3 units over the holiday season. At my suggested price point, they could push 3 million units over the same period. This would be a net loss of 50 million dollars for Sony on hardware sales.
Looks gloomy and that certainly would not be doing the right thing for shareholders...but wait, according to the NPD the PlayStation 3's attach rate is 4.6 pieces of software per console sold. Let's make another assumption and say that Sony makes $15 per game sold.
$69,000,000 profit on the games sold to their 1 million new customers at their existing price point plus the $75,000,000 from hardware equals a total profit of $144,000,000 on hardware and software alone.
$207,000,000 profit on the games sold to the 3 million new customers at a lower and aggressive price point. Again, I am not a big financial genius, but rough number shuffling shows me that Sony could stand to make an additional $63,000,000 by having an aggressive price cut in this crucial time period.
Everybody knows that hardware is not where the money is, but in fact it is software sales from which all the profits are generated. From my perspective, making 63 million dollars of EXTRA profit is the right thing for the Sony shareholders.
In this time of a global economic crisis, parents shopping for gifts, teenagers saving up their money, or regular people making a buying decision will be focused on cost. The way Sony is approaching this price discussion is bullheaded, short sighted and just plain wrong.
Sony if you are listening, please change your mind on no price cuts. You have turned around your software issues, your online presence and Blu-ray titles keeps getting better and better. You have a chance to pull yourself out of last place every month with a strategic hardware cut in time for the holiday season. Put this together with the great lineup of games and you could be a true contender again.