Jason posits that MSRP estimates made by analysts for the next Sony and Microsoft video game consoles may be a bit low. While we may find the answers next week at E3, what do you think?
By now you might have heard that Michael Pachter has expressed his belief that Microsoft’s Xbox One will be available later this year with an MSRP of $400, while the PlayStation 4 is seen as likely launching for $350. Jeff Grubb wrote about it at this very site.
I can’t recall the last time Michael Pachter was right about anything important relating to video games, but presumably there have been many such instances in the past or we wouldn’t see his name pop up as often as it does. Be that as it may, I believe that his predictions for the Xbox One and PlayStation 4 price points serve as two more check marks for the “predictions that Michael Pachter got wrong” column. Not only that, but they’re troubling suggestions with the potential to do some real damage.
What do I mean by that, exactly?
Now that Pachter has told the public to expect $350 and $400 price points (based on assumptions about manufacturing and distribution costs that could be entirely wrong), that also sets expectations for any investors who still listen to his predictions. If Microsoft comes on stage at E3 and says that $500 is the price point it’s going with — as I believe a company spokesperson very well may do — that’s $100 more than what Pachter said it would be, and investors are potentially going to recoil from that. You’re going to see the price of Microsoft’s stock drop because people are selling based on faulty expectations.
Meanwhile, Sony looks like a company that is out of touch if it tries to charge $400, the same price point that Pachter anticipates and practically endorses from Microsoft. In other words, Sony has reason to fear for its share prices if it doesn’t discount its system, despite offering hardware (including costlier RAM and technology not entirely dissimilar to Kinect) that, from the looks of things, is capable of producing better games.
Pachter’s scenario also spells trouble for Nintendo, though. If you head to the store right now in search of a Nintendo Wii U, you’ll find that the model any reasonable gamer would care to take home (the one with a charging cradle and 32GB of internal RAM) costs $350, the same price that Pachter expects Sony to charge for the powerful PlayStation 4 console, and only $50 less than the potentially inferior Xbox One that Pachter has now portrayed — with or without cause — as the top of the line.
In Pachter’s defense, he does expect Nintendo to also drop the price of the Nintendo Wii hardware; this price drop could be indicated by discounts that some retailers such as Target have already begun offering on the hardware. However, I consider it more likely that Nintendo will simply offer bundles when the holiday period arrives rather than jumping immediately to a price drop. Then again, Nintendo has used price drops as a means of moving units in the past (most notably with the 3DS, which worked beautifully). All we can really conclude is that Nintendo will find a way to make the Wii U price point more attractive ahead of the holiday shopping season than it is right now, and there’s every possibility that Nintendo will do so only after E3, once it sees what consumers think of new first-party software and Xbox One/PS4 pricing. There’s no reason such an announcement would have to happen at E3 itself.
Michael Pachter didn’t make his most recent prediction alone. Nick McKay also is confident in the $350 and $400 figures.
“For [Xbox One], we believe a starting price of $399 makes sense given that the Xbox 360 Pro debuted at that price point in November 2005,” the analyzing duo said, as quoted in Jeff Grubb’s report.
That was 2005, though, and this is now. Money doesn’t go as far as it once did. A gallon of gas cost a lot less in 2005, and so did a movie ticket or a candy bar. Now we’re looking at a much more powerful unit, and we’re supposed to believe that the dramatically improved technology will effectively cost consumers less? That seems unlikely, at best.
Michael Pachter does make one point I agree with, however. He argues that the PS3’s high MSRP affected its long-term popularity. While that system has at various points been the best-selling HD console in the world (ahead of the Xbox 360), it still suffered a lot compared to its predecessor. Consumers like to spend the least amount of money possible just on principle (unless they’re buying expensive smartphones), so it’s easy to see how a $600 price tag would have put people off. I wouldn’t have jumped in at that price myself, except I knew that I had to if I wanted a unit that was backwards-compatible. So yes, it makes sense for Microsoft and Sony both to bring their systems to market at low prices.
However, Pachter appears to be quoting numbers based on what he believes consumers would most like to see, and he’s not paying much attention to other slices of reality that Microsoft and Sony can’t afford to ignore.
Consider retail markup. When a new piece of technology arrives at a site like Wal-Mart or Best Buy, there’s margin. The store might pay $360 for a console that it sells for $400, for instance. And the distributor gets a cut too, which means that Microsoft can’t expect to make much of anything with a $400 MSRP if each unit costs $325 to produce. Furthermore, Pachter’s analysis is for “bill of materials,” which may not even include the cost of assembly and transport. The numbers he’s throwing around could very well mean loss for Microsoft and Sony both, and loss isn’t something that either company is anxious to accept right now.
In other words, Pachter’s numbers don’t seem realistic. Not only that, but they’ll make a challenging situation — the launch of necessarily expensive new hardware — more difficult than it has to be if too many investors buy into the unreasonable numbers that have begun circulating. And of course, those numbers also work toward the consumer perception of the value a system might have, which could doom promising new hardware before we even make it through the holiday season.
E3 takes place next week. We’ll have more information then. In the meantime, let’s try to remember that Pachter’s numbers are pure speculation (and let’s hope that investors do the same).
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