One of the most annoying parts of the gaming industry is how
everyone thinks they are an expert and that, just because
everyone assumes something is true, it must be true. So
now The Gord will strike down with the horrible truth upon the
realm of lies!
The first proclamation on setting straight these false
truths, the mythological idea that consoles have always been
sold below cost.
Contrary to popular mythology, the idea of selling a
console at below cost
is a rather new phenomenon. It it not an ancient practice
through the ages.
To understand how this came to be thought, you have to step
back to 1994.
Late in 1994, there were two videogame systems introduced unto
the world. The Sega Saturn and the Sony PlayStation...and
these consoles were not cheap. With the exchange rate at the
time, both consoles were well over $500 US each.
When Sony had demoed the system a year before, the video game
world stopped and drooled. It was unlike anything they'd ever seen
before. Fully 3D texture mapped goodness at over 300,000
polygons a second. The 3DO by comparison which was released a
couple months prior clocked in at around 20,000.
Popular legend also has it that, when Sony unveiled the PlayStation,
the president of Sega walked down to the R&D department of
Sega where they were working on the forthcoming Saturn. The
Saturn was to be the ultimate 2D system. He spoke not so
"Why am I looking at that PlayStation and going 'god damn,
that is so going
to kick our asses?'"
"Fear not, our leader, for we have designed the ultimate 2D
system to crush
the scourge that is the 16-bit Nintendo and lay claim to all
that we see!"
"I'll repeat the question! Why do I see 3D prettiness over
in Camp Sony and none in Camp Sega?"
"Well, our arcade division has those $20,000 arcade
cabinets which are
better than the PlayStation!"
"Why do I not hear what I want to hear? When next I
return, I want 3D
"And Mr. Kim..."
"I never liked you. That's for bringing your GameBoy to
Anyway, the Saturn was basically the ultimate 2D machine that
had 3D slapped on at the end of the development cycle, and it
showed. Poor development software, unstylish motherboard
design, and all around 3D ugliness for it's launch games.
So there we were. End of 1994, the PlayStation and Saturn
were upon Japan at more than $500 each.
Curious note: In Japan (with exchange rates at the time),
minimum wage was $3000 US a month. So while $500 seems like a
lot, that's less than a weeks wage.
Flash forward to May 1995. The E3 Expo was having it's first
everyone showed up. Nintendo was telling us to wait for the
Ultra 64 as it
could do "real-time ray tracing" and was just so damn pretty
show it to us as we weren't ready to handle it. For if we saw
it, we would
At the show, Sega and Sony announced their launch plans.
Sega: "The Saturn will be $399US.... and it's out now! We
today! Remember Pearl Harbor? That's right! Strike when
don't expect it! Take that Sony! We are going to kill you
and dance about on your grave! You can't handle us! We're
Immediately following that press conference down the hall was
the Sony press conference. There was a big lead up to what
the price point would be, and when it would be launched.
Finally, the president of Sony walked out slowly on stage and a
silence fell upon the room. We all awaited his words, and
finally he spoke.
"Two hundred ninety-nine dollars."
Then he turned and walked away.
Back at the Sega conference room....
"Oh no! This can't be happening!"
Everyone was in awe. Sony was bringing the super console
known as the
PlayStation to America for almost half the price it was
selling for in Japan.
This brought force claims of dumping by Atari. Atari swore
that they would have the PlayStation stopped before it came
out at that price "because it
was being sold below cost and that's dumping!"
The myth was born.
By the time the PlayStation came out in North America 4 months
later, a lot
had changed during the year. RAM had gone from $50US a
megabyte to $20. The Yen had gone from 80 yen per US dollar
to 110. And Sega had dropped the price of the Saturn to
$299. At this point the PlayStation was indeed profitable,
and the Saturn was a minor money pit for Sega.
Sega was not only losing money on the Saturn, but asked
retailers to expect
the same. A "modest $15 per console" loss to help Sega.
Well, you can
imagine what many retailers said...
The Saturn was the first console that was actively being
marketed and the
company was losing money. While Sony was building the
PlayStation from parts they made themselves, Sega was paying a
higher price and buying parts from others.
The Nintendo 64 came out the next year at $199 US. Nintendo
they were not losing money on units sold, which I have no
doubt not to
believe. Nintendo has better things to do than sell a console
at a loss.
The Dreamcast was a money losing venture for Sega. Sega went
for broke in building the best console they could buy with
the Dreamcast, and sold them at less than cost. A lot less
than cost. The theory being that scale of economics
would catch up to let them rebuild their once glorious market
share and, that the margins on their own games would be good
enough to justify a loss.
$800 million lost later, Sega cancelled the Dreamcast.
Xbox. MS has decided to follow the Sega model. Buy off the
have someone else build it, and take a loss in order to push
units out the
door. The Xbox was to have been a super console that could do
200 million polygons a second... and then 300 million! Then
125 million.... then... well, tech demo's have it running at
Anyway, Microsoft is losing money per console sold, not
including what they are spending advertising and support.
Reports have it fall between $50 to $105 lost per console. MS
has only said that they are losing money, and
won't comment on how much.
Notice what isn't on that list? The PS2.
Unlike Sega and MS, Sony is an R&D hardware company. They
make a lot of things. In designing up the PS2, they spent a
lot of cash. Then they spent a hell of a lot more cash to
build things like the chip foundries to
produce the chips for the PS2.
In the end, before the first PS2 rolled off the production line
consumers, Sony had spent $2 billion! TWO BILLION!
Then we look at Sony's stock report for Oct-Dec 2000, and
there is an
interesting little blurb. It said that had Sony been able to
with another 1 million PS2 units, they would have pocketed
$175 million in
profits. $175 million divided by one million consoles equals
Now, that is a bit high. This assumed that the average consumer
continues to buy four games per console (so around $24 in
royalties), and 2 accessories (about $30 in profit total).
That reduces the $175 to about $120. Sony is making $120
profit per system.
Granted, they have to sell nearly 20 million PS2s to pay back
the $2 billion
they already spent, but that shouldn't be a problem since they
At this point, it's free money.
Also not on the list is the GameCube. I haven't got numbers
yet, but it would seem that at $199 it's a break-even for
since Nintendo is planning on being the top software producer
system, they could quite easily eat a huge loss per system if
Edit - 12/17/01 - Nick Maragos over at "Gaming
Intelligence Agency" sent me this link
http://www.thegia.com/news/0108/n23r.php that has this in
In more general matters, Mr. Main admitted
that the GameCube's pricing would not initially follow
Nintendo's rule of turning a profit on every console sold. "We
expect to incur a small loss on the GameCube hardware
initially, and you're right that it hasn't been our habit in
the past but we expect it to turn okay early next year."
So it appears that now Nintendo has joined the ranks of
console manufacturers that outsource their machine production
and takes losses.
So there we have it. The myth that was "all consoles are sold
has been vanquished! Go forth and spread the word of The Gord,
and may the
light of truth chase away the shadows of lies!
Follow-up: February 2003
It amuses me the amount of email I received from people
claiming that I was wrong about the PS2 and profitability.
That somehow I misjudged numbers or was making things up.
After all, mythology never lies.
Apparently this article was just a little too much reading for
some people who would rather conclude nothing was said than
actually bother to learn how this industry works. Fine,
here's the short version:
It's not I
saying that Sony has always made a unit profit on each PS2 sold,
but Sony themselves claiming that. In both the press
conferences for follow-up questions pertaining to the 2000 and
2001 stock report for investors, which were available online in audio files
on Sony's website for months after the publication of their
annual report, Sony openly discussed how the PS2 is profitable
on each unit sold.
End of short version. Everything else beyond that is the
how and why everything works the way it does.
Is Sony going to go out and make a press release about it?
"Hey! We're making $100 profit per console sold while MS
loses $100 on each Xbox!" Of course not. People
want their hardware as cheap as possible with the perception
that it cost a lot. Consumers want a deal. They
want their perceived value. It
helps to justify why games are $50 brand new instead of the
$19 they should be. Others want to believe that
companies like Sony made the PS2 because they love video games
and profit from a console sale goes against everything they
believe in. A number of people are offended at the idea
a console manufacturer would make a profit as they've lived
the lie of every console is sold below cost for years.
Plus others will say "there must be a price drop coming!" and
push off purchasing a console.
Plus for us to accept that Sony is lying and that they are in
fact losing money per console sold, that means we have to
accept that hundreds of employees are all conspiring to cover
the truth and risking their personal fortunes and possible
jail time to cover a secret that would be discovered
Let's keep our eyes on the ball people. Sony has sold
more than fifty million PS2s. Lets pretend Sony has been lying
to us all along and that the PS2 is a money pit. Assuming a
true cost/price different of $200 (from the originally claimed
cost of $100 below retail to $100 above retail) on fifty
million units, that's ten billion dollars. TEN BILLION.
People are going to notice ten billion dollars missing from
the bank accounts. Hell, let's say Sony isn't even
losing any money at all but instead are selling at cost.
Ok, so it's only five billion dollars missing from the bank
account. Don't dare to try and claim that this number
could possibly hidden as as a rounding error.
It's not like it's some great secret that Sony makes money
hand over fist on the PS2. While Nintendo, Sega, and
Microsoft all outsource production, Sony makes everything
themselves. Outsourcing means that someone else is in
the loop who has to make a profit. No one works for
Don't blame the messenger if you are angry that I opened your
eyes to the economic realities of this market.