For the hardware makers, the video-game business has followed the model of razors and blades. Microsoft (NASDAQ:MSFT), Nintendo (NQB: NTDOY), and Sony (NYSE:SNE) are willing to sell their consoles at a loss (the razors) in exchange for royalties from the software makers on each title sold (the blades). Ladies and Microgents, I introduce you to the third variable in the mix -- the shaving cream.
According to a story out of News.com yesterday, Microsoft is asking peripheral makers to pony up a piece of the action on Xbox 360 add-ons when the machines hit the market later this year. Until now, third-party makers of controllers, steering wheels, and other Xbox plug-in components didn't have to pay Microsoft a thing unless they wanted to feature the Xbox logo. This time around, Mr. Softy is incorporating security mechanisms into the promising, spec-heavy 360 that will be made available only to paying peripheral makers.
That will cut deep into the already tattered pockets of small companies like Mad Catz (AMEX:MCZ). Mad Catz has signed the contract with Microsoft, but with the software giant taking its cut off gross sales, it doesn't look as if Mad Catz's troubled income statements will get better anytime soon.
Paying royalties is no big deal on the software side. A company like Motley Fool Stock Advisor recommendation Electronic Arts (NASDAQ:ERTS) lives off such fat profit margins that it can afford to pay the format providers. Peripherals work on much leaner margins, so this move may backfire if there is a lack of affordable third-party peripherals out there. That's the risk that Microsoft has to take to make its hardware business less of a bleeder.
Being first to market matters. It was an advantage that Sony took advantage of brilliantly when its PlayStation 2 rolled out a year before its competitors' models, and this time around, it's Microsoft that has the head start. Let's hope it doesn't blow its lead by upsetting third-party ambassadors.
Shaving-cream pies? Trust me, they're just not as tasty as they look.
Longtime Fool contributor Rick Munarriz has an Xbox. He may pity the third-party hardware developers, but he will probably still buy a 360 later this year. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
