Sony's Wacko Console Pricing

Sometimes you read the news and are surprised. Sometimes you nod at something you foresaw. And sometimes you scratch your head, wondering how people miss something obvious. In the gaming industry, there are some that understand pricing well, and then there's Sony.

For example, Nintendo president Satoru Iwata apparently had to come out and say that the company didn't plan a price cut on the Wii or DSi. Well, isn't that a shocker? Here they are, with the two top selling game consoles by such wide margins that it is almost embarrassing, and presumably someone was asking why they didn't cut prices. There's always the simple answer: They don't need to.

For some reason, many in and around the tech industry are so focused on features and whatever new version of media is in fad that they forget fundamentals. Pricing is something that can be tested and crafted to maximize any of a number of factors, including market share, profit, and product positioning. This doesn't have to be guess work, and a knee-jerk reaction is generally going to be the wrong one. Look at how Apple has managed its prices to maximize margin, even as some people say that keeping prices high can't work.

It's a matter of price elasticity. Sometimes people are driven by price. Sometimes they aren't. I remember back to my own days in the industry, seeing major companies just toss out a price on whim. In some cases, low price drove business, like with Borland during its fast growth days. But in the long run, low margin means you can't make any mistakes in operations, like depending on continuous upgrades that exhaust buyers, or you go from margins to marginal.

Then again, experimenting with price requires enough operational discipline to have the room to change prices. That's the problem facing Sony. No matter how "advanced" it wanted to make the PS3, the company is behind Nintendo and Microsoft because it hasn't the room to adjust prices, both because the cost of goods on the PS3 are too high and the corporate finances are too shaky. What is really sad is that Sony is dropping the price on the PS2 by $30 in North America, at least, to $99, because Sony noticed that almost 80 percent of PS3 owners previously had a PS2.

Clearly Sony thinks that if it pushes PS2 sales, it will fuel PS3 purchases. But this is where smart operations should kick in. Sony is actually looking at the wrong statistic. The number of interest should be the percentage of PS2 owners who then purchased a PS3. For the 136 million PS2s sold through the end of December, Sony moved 21.3 million PS3s. That means Sony is getting a conversion rate of only 15.7 percent, which seems pretty low.

To put it differently, even if conversion rates held and we ignore the time lapse between purchasing one console and another, for every 1000 PS2 units that the company sells, Sony might expect to sell 157 PS3s. Figure that Sony sees maybe half of the money paid at retail, so the $30 drop translates into $15 on its end, or a $30,000 subsidy. Now, consider that they could just as easily have dropped the PS3's price by $100 per unit. For those same 157 PS3s, the subsidy would have been $15,700, or nearly half of what they're going to give up now, and I'd wager that the uptake on PS3s would be much higher. Yes, they already lose money on every unit, but the company is clearly willing to lose even more in top line revenue, which has the same bottom line effect.