Console Subsidization

September 15, 2006

There is a funny “battle” that I want to chime in on real quick. First, some history:
[*][url=]Joystiq writes an article[/url][*][url=]Penny Arcade comments[/url]
[*][url=]Joystiq responds[/url]
The bottom line of the Joystiq issue says that consumers are more likely to buy a console that has a higher subsidy built in, all other things equal. If you aren’t familiar with the practice of subsidizing, it’s the concept of selling things at a loss, which I just mentioned in another news post. Basically, the article equates selling at a loss with getting a discount and saving money. Penny Arcade rips on the article and basically calls it crap, which I am going to have to agree with. Joystiq didn’t find that funny and responded.

The basic premise boils down to, what is the biggest determining factor for you purchasing a new console? Is it how much Company A is losing on it, factored in as a discount, or is it the overall price of the system?

For illustration purpose let’s say the MS loses $100 per 360, Sony will lose $200 per PS3, and Nintendo makes $50 per Wii. That would put the consoles priced like so:
[*]Xbox 360 $399 ($499 before loss)
[*]PS3 $599 ($799 before loss)
[*]Wii $249 ($200 before gain)
Do you buy the PS3 because it has the biggest subsidy despite the $599 price tag? If so, do you feel like that $200 is a discount and you scored a deal? I personally think, all things equal, people gravitate towards an overall lower price despite “discounts”. The article builds into thinking a major fallacy that consumers factor in the loss the manufacturer takes on the hardware when looking at the price.

Since the original article factors in [i][url=]ceteris paribus[/url][/i], Latin for “all other things being equal”, so let’s go back and pretend the pricing is equal across all systems:
[*]Xbox 360 $299 ($399 before loss)
[*]PS3 $299 ($499 before loss)
[*]Wii $299 ($249 before gain)
Does the price before the profit or loss make a lick of difference? Again, do you buy the PS3 just to “save” $200? I personally think the loss is not factored in to consumer consideration. Now that I have thrown a ton of match and hypothetical situations at you, which console would you buy?