Please ensure Javascript is enabled for purposes of website accessibility

Sony and Microsoft's New Consoles Will Be Big Loss Leaders

By Leo Sun - Jun 18, 2019 at 8:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But that’s just the way the video game console market works these days.

Sony (SONY 1.90%) and Microsoft (MSFT 2.76%) both recently pulled back the curtains on their next-gen video game consoles, set for release in late fall of 2020. They'll both sport solid-state drives (SSDs), use ray-tracing technology, and support 8K resolution graphics. However, both companies stayed mum about their launch prices.

In a recent interview at GamingBolt, Wedbush analyst Michael Pachter suggested that Sony's PS5 and Microsoft's "Xbox Scarlett" will both launch at $399. However, Pachter noted that their hardware specs suggested price tags of "$500 or so," indicating that both companies will likely take losses on each console sold.

A group of friends play a video game in a living room.

Image source: Getty Images.

Companies usually take losses on gaming consoles

That loss-leading strategy for gaming consoles isn't new. At its launch in 2013, Microsoft's Xbox One had a production bill of $471 for manufacturing and materials according to IHS, compared to its launch price of $499.

Sony's PS4, which launched at $399, cost $381 to make. After factoring in marketing, shipping, and other operating costs, Microsoft and Sony likely lost money on each console sold. Both companies also subsequently lowered the prices of their consoles several times.

Anchors for software and subscription sales

Sony and Microsoft don't mind selling their consoles at a loss since they recoup the costs through software and subscription sales. For every $60 game sold, Microsoft and Sony retain about $7 in platform royalties. They also retain about $27 in publishing fees for first-party games.

Sony and Microsoft are also launching more subscription services to squeeze out more revenue per gamer.

Microsoft offers Xbox Live Gold, which costs $60 per year; Game Pass, its unlimited gaming option for $10 per month; and the new Xbox Game Pass Ultimate, which combines Xbox Live Gold and Game Pass for $15 per month. It also plans to launch its new cloud gaming service, Project xCloud, with the new Xbox next year.

Sony's PlayStation Plus, its answer to Xbox Live, also costs $60 per year. Its cloud gaming platform, PS Now, costs $100 per year and lets gamers stream over 750 PS2, PS3, and PS4 games to PS4 consoles and Windows PCs. To set up the anchor for those subscription sales, it wouldn't be surprising if Sony and Microsoft launched their new consoles at $400 -- even if the devices cost $500 to make.

The prices could still be too high

Sony and Microsoft might be aiming at $400 as a "sweet spot" for console sales, but the arrival of new subscription-based services -- like Alphabet's (GOOG 4.16%) (GOOGL 4.20%) cloud gaming platform Google Stadia and Apple (AAPL 4.08%) Arcade -- could throttle demand for dedicated gaming consoles.

Google Stadia running acrossa a wide range of devices.

Google Stadia. Image source: Google.

Google Stadia will run on a wide range of devices, including phones, PCs, and Chromecasts, while Apple Arcade will run on all current-gen iOS devices. These single subscription services could be more attractive alternatives to Sony and Microsoft's platforms, which rely on customers buying both dedicated consoles and subscriptions.

Microsoft is aware of that threat. That's why it might launch two versions of the Scarlett in 2020: a cheaper "Lockhart" version for streamed games, and a pricier "Anaconda" version for high-fidelity gaming on locally installed software.

Sony hasn't revealed any plans for a cheaper PS5 yet, but it plans to move some of its media and gaming assets to Microsoft's Azure cloud platform. That move, which was part of a broader cloud partnership between the two companies, could be aimed at countering Google's aggressive moves into the gaming market.

Meanwhile, sluggish sales of PCs could force computer makers to sell cheaper gaming PCs, which would narrow the gap between high-performance PCs and cheap gaming consoles.

The bottom line

Microsoft and Sony both reported slower gaming hardware sales in their most recent quarters. Those declines were partly offset by stronger software and subscription revenues, but demand for current-gen consoles has clearly peaked.

That's why the jump to next generation consoles next year is crucial. If Sony and Microsoft price their consoles poorly and gamers flock to other decentralized platforms like Stadia or Apple Arcade, both companies could see their thriving gaming units wither into money pits.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$273.24 (2.76%) $7.34
Sony Corporation Stock Quote
Sony Corporation
$92.26 (1.90%) $1.72
Apple Inc. Stock Quote
Apple Inc.
$149.64 (4.08%) $5.86
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,246.33 (4.20%) $90.48
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,255.98 (4.16%) $90.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.