Will The PS4 Be Profitable On Day One?

Earlier this week Sony revealed the price point for its next-gen console the PS4, the $399 retail price blew the audience away and spurred a deluge of pre-orders on Amazon and Blockbuster.

The Xbox One’s light dwindled as the audience cheered with passion, not only because of the price but also because of the consumer-friendly policies (no used games DRM, no on-line game authentication). The fear that both the Xbox One and the PS4 would have some form of used-games DRM and that Microsoft and Sony were in cahoots with third-party publishers to take down the secondary market was a malaise that lingered among gamers. After Sony’s media briefing our minds were put at ease knowing that Sony wouldn’t try to dictate what we can and cannot do with our games.

Profitability? No one cared, we were all happy with the results, $399, a reasonable price for a console that represents freedom instead of a digital chain. As people walked out of the conference room the internet was being bombarded with positive messages and bold statements “The PS4 Won the Console war” ; but now that the dust has settled I think it’s time to ask the question. Is $399 too low for Sony’s own sake? Will the PS4 be profitable on day one?

Sony has stressed the fact that the PlayStation division HAS to be profitable; they cannot sell anything at a loss n this generation of hardware due to Sony’s brittle financial structure. Normally console manufacturers set a price point lower than the actual production cost, not only in an attempt to undercut competitors but also to ease the transition period from one generation to another, only after the fledgling console has mustered a reasonable amount of users and gathers a decent market share to attract third-party publishers can they expect to start making a profit from software (games) licensing.

But Sony has taken a different road this time around, a riskier one, and yet they came out on top, they have a hardware that is slightly more powerful than Microsoft’s and according to Michael Pachter Sony is almost certainly making a profit from the $399 price point which, by the way, is $100 lower than the Xbox One’s.

Wedbush Morgan analyst Michael Pachter

“I think they are almost certainly making a profit there. A $399 retail price tag is about $370-375 at wholesale… our add up on the costs of materials is about $325, so I think they make a little bit of money, $25-55. And I think Sony has to make a profit, the corporation is not doing well financially, I don’t think there’d be any tolerance internally to sell anything at a loss.”

Consumers and press have reacted positively the price of the new system which will retail for $399 in the US and £349 in the UK. However, stakeholders seem to be concerned about the price and whether Sony will take a loss.

Sony’s UK MD Fergal Gara explained that “There’s no point in looking at the console in isolation. Is PlayStation going to be a profitable business? It needs to be and it intends to be a profitable business over the next year.”

“The balance of everything we do, whether that’s the console, the software, the accessories or the digital business, it all needs to be profitable and we expect it to be profitable in the short term and the medium term.”

Last year Sony’s profits took a nose dive with profits plummeting from $310 million to $18 million; as a result the company reduced the expected profit margins from 8 per cent to 2 per cent.

Regarding Sony’s conference Gara stated that:

“You have to hit that combination of price and performance in power. I’m delighted in the horsepower per pound that we’ve delivered, it genuinely is one very high powered machine. It’s uncompromisingly built for one purpose above all other. Gaming, and performance around gaming, is front and centre. It’s been a considered effort for seven years, not a knee jerk decision in the last days and weeks.”

The competition is not over yet. In fact, this is just the beginning. You can be sure that Microsoft will do everything in their power to capture a large market share, we just don’t know what their next step will be.

Another issue is the price of games, when asked if first-party titles will see their prices increased Gara said:

“We haven’t announced our pricing yet, we’re still looking at it. We’ll make our minds up to as exactly where that will sit. Expect premium games to carry a fairly premium price tag. But expect a lot more in between. We’ll have the full breadth of games both in terms of content and price,”

I’m convinced that AAA games will launch at the same $60 retail price point during the first year but as we move further into the new cycle I believe that prices are likely to increase due to the fact that publishers will try to boost their average revenue per user through DLC and micro-transactions which could add up to $80-$90 per title.