So the recent announcement of the Wii's release has caused a sort of uproar among the gaming community. As with any surge of information, there are people on both sides of the tracks, fighting over whether the news is good, bad, or completely irrelevant. Sometimes, their arguments contain detailed, well-thought-out logic, and sometimes, they just throw combinations of words at the opposition and hope they connect with a full sentence that somewhat resembles their native language. So before I begin picking apart one such editorial, let me first present the facts of the current situation:
- Nintendo will release the Wii in NA on 11/19, Japan and other areas will not receive it until December.
- MSRP: $249.99. This includes one Wiimote + Nunchuck.
- The PS3 will release on 11/17.
- MSRP: $499.99/$599.99 depending on the version.
- Xbox 360 already has been released.
- MSRP: $299.99/$399.99 depending on the version.
Alright. Now that that's out of the way, let's begin the dissection, shall we?
If companies like Sony and Microsoft want to subsidize their consoles to the the point that they're losing money on every unit sold, shouldn't we (as rational consumers) want to take advantage of this built-in subsidy? All else equal, shouldn't a rational consumer choose the console with the largest built-in subsidy?
Sony and Microsoft are giving us free hardware when they sell each console at a loss. A gamer who wants the most computing power for his buck will naturally prefer the subsidized console, ceteris paribus. Whether this is ultimately healthy for Microsoft and Sony is another matter entirely. The ultimate profitability of a game manufacturer is no concern of ours, as gamers.
If they're losing money on every unit sold, then there's more of a problem here than just worrying about people purchasing the system. Regardless of how you define 'free hardware,' it doesn't apply in this case, since we still have to purchase the system. Just because they are producing such advanced technology that their prices are going to soar above the competition's doesn't mean that if they reduce their prices a smidgen, I will purchase it.
A 'rational' gamer doesn't make purchases solely on the fact that they are saving money. I agree that their profits aren't relevant to us, but at the same time, their ability to produce quality products is. Let's analyze the following scenario, ok?
Scenario 1: A gamer believes that Nintendo produces better-quality games than Sony does, and also cannot wait for the release of the next Zelda and Metroid games. He has no real interest in Sony products, as they bore him. From working, he has been able to save up $600. He has no HDTV, and does not plan on getting one. What does he purchase?
He purchases the Wii. But, according to the editorial, it would be much more cost-efficient for him to purchase the PS3, due to the subsidy!
(Note: The author of the editorial consistently uses the words "ceteris paribus," which effectively translates into, "all things equal." Aside from the fact that he's trying to sound intelligent by using it several times, the fact remains that these items are not equal, and in fact promise different things based on each of their platforms. Honestly, "ceteris paribus" really only applies to ideal situations, littered throughout scenarios in college final exams in economics classes.)
So why is his logic flawed (and not only flawed, but taking up valuable internet space)? It all stems from the fact that he's taking a hypothetical situation and assuming that because it applies to one aspect of a purchase, it applies to all of them. The fact of the matter is that the Wii is the cheapest console that will be on the market, regardless of the proportional cost of the other consoles. Despite the fact that money definitely is a factor, value is subjective. Period. In the above scenario, the gamer "values" the Wii more than the PS3, and regardless of the fact that he possesses the money required for the high-end version of the PS3, he simply doesn't care, because he wants to purchase the Wii. He doesn't give any thought to the fact that Sony is failing to profit from their hardware, he wants to play games on the Wii, plain and simple.
One final point: if a company doesn't believe in its product enough to take a small loss at launch, what does this risk averseness say about executive confidence in the long-run prospects of the product? A larger, up-front investment indicates stronger confidence that a product will eventually be successful enough to pay for initial investment.
Er...what? Ok, let's take a look at another scenario:
Scenario 2: I've created a new console that doesn't possess the same daunting technological power as the competition, but I know that consumers will purchase my product because I already have an established userbase with my previous systems. I know that those systems have been successful in the past, and I have confidence that gamers are ready to make use of my new controller scheme. My console costs $200 to make. In order to show my confidence in my product, what should I sell the system for?
According to the editorial, probably around $150, because losing money at the beginning of a venture apparently ensures that I will make money later on. Now, I'm not a person with a BS in Mathematics (but I will be in three months), but I'm pretty sure that the equation
Losing Money Now = Gaining Money Later
makes absolutely no sense at all. If I was confident that my console would sell, why not make a profit on it? If I sell my console for $250, and I know that people will buy it for the following reasons:
then I can stand to make $50 on every single unit I sell! If I don't have to lose money, why should I? Later on, when I can afford to take a profit hit, I can lower the price of my system, possibly to the point where I break even on each unit, because at that point I'm also making money by selling games and accessories.
- It's still cheaper than the competition,
- Gamers who have played my previous systems can expect the same level of quality or better,
- Innovative control setup attracts players,
For this argument to work, one must assume that all else is equal. To put it another way, would you buy a Wii at $600 or at $100? You'd buy it at $100, because the $600 model is exactly the same. Most rebuttals are bringing in objections that violate the core stipulation.
This is 100% correct, every word of it. However, it doesn't apply to anywhere but "The Land Where Everything is Perfect," which, in case you're a little out of touch with reality, does not exist.
He then tries to clarify his initial editorial with this editorial, since Penny Arcade was unable to find any logic in his first statement.
It seems the point was missed because I mixed too many different issues into one post. If I had instead posed the hypothetical as follows, I doubt many would have objected:
Assume Nintendo is selling a white-colored Wii at a profit of X and the tangerine-colored Wii at a profit of X+Y. That is, the price (and hence, Nintendo's profit) on the tangerine Wii is greater than the price (and profit) on the white Wii. Which of the two devices would a rational consumer choose, all else equal? He'd choose the one with lower factored-in profit margin. That is, the lower-priced console.
Unless he likes the tangerine color of the other one and has the money to cover the difference, in which case, he purchases that one. At this point, "all else equal" equates to, "disregarding the fact that I failed to produce a logical argument." Moving on.
In the comments below, [some readers] wrote: "I believe the black MacBook outsells the white one, and yet Apple charges a $200 (might even be $300) premium for it. They are the same system, save for the color."
For that to be true, you're assuming inequal demand for the colors. "All else equal" means equal demand for different colors of the console.
Yes, inequal demand for colors. Why does Apple do this? It's a newer color. Newer = different = better, to some people. These people are willing to pay the extra amount, and Apple knows this. At that point, it's the consumer's fault for purchasing a product that doesn't provide any better technological advantage, but it is not a problem that they value one item over the other. Technology is not the only factor in purchases, but let's continue on...
Hopefully, the elimination of mention of "Sony" or "Microsoft" from the thought experiment makes the point amply clear. So why make such an obvious statement? Isn't this like saying that consumers will buy the larger candy bar if the price and taste of all candy bars on the shelf are the same? Yes, but this question is a required first step before digging into the following question: if gamers are showing a preference for undiscounted hardware, then what else is at play here? What are people paying for, if not for hardware?
He points out that there was really no actual reason for writing this editorial. And because he failed to say "ceteris paribus" or "all else equal," then there are plenty of ways to dissect this. What if the consumer is on a diet? What if they just aren't hungry enough for a large candy bar? If for some reason the larger candy bar cost less than the smaller candy bar, then purchasing the larger one would be a sound investment.
He mentions "undiscounted hardware." Referring back to Scenario 1, it's apparent that there are obviously other forces at work here. Just because something sells at a discounted price, does not make it worth something to everyone.
The fact remains that gamers will ultimately purchase the unit that provides them with the largest benefit overall, whether that boils down to cost, color, game quality, etc. They have their own minds to make up, and while they will probably consider cost in as a large factor, they will not base everything on it.
In the end, most gamers will agree with logic over lack of logic, ceteris paribus.