There's No Such Thing as Free

There's No Such Thing as "Free"

Reuters recently published an article that examined the pressure the three console manufacturers are facing from publishers and analysts to lower the price of their respective home consoles for the upcoming holiday season.

The author addressed the side requesting price drops - noting that NPDFunworld showed declines in hardware sales of up to 42 percent compared to June of last year. The article did not however touch on why the console manufacturers may prefer to keep prices as is.

Some believe Nintendo, Sony, and Microsoft have an obligation to the development community to lower the prices of their consoles. Afterall the more consoles that are available in homes, the greater the opportunity publishers will have to sell their software. This presents more benefits for those producing games than it does for those producing the hardware. Console technology doesn't come cheap - it costs millions of dollars for initial research and development and hundreds of dollars for each set of chips. One must keep in mind, the console makers also have an obligation to their company and shareholders.

Even now the console manufacturers are relying on the sale of their in-house software to make-up for the significant losses in hardware. They are losing money on each hardware unit sold. And to rub a little more salt into the wound, prices of games at retail have lowered significantly.

Of course, much of that has been attributed to lowered licensing fees. Nintendo recently lowered the fees it chargers publishers to make games for GameCube.

Although licensing fees were lowered by only a few dollars, it's quickly becoming standard for games to be sold from anywhere between $20 - $40 (a nearly $30 deduction from the standard $50 price tag). If a hardware price drop occurs, the trio of console manufacturers will be losing even more money which may not be compensated by software sales. Since software prices are already so low, it will be difficult for them to replenish the losses.

Of course if more hardware units are sold, there's the potential for the sale of more software. However, with consumers demanding lower and lower prices, it's going to be tough for the console manufacturers to make a substantial enough return to offset the continued expenses.

Sony is currently the leader of the pack and the manufacturer in the position to offer lower hardware prices. It is afterall the market leader with over 50 million PlayStation 2s sold worldwide. The Xbox and GameCube are trailing far behind with just over 10 million each sold worldwide. If a hardware price drop occurs, such a decision will be initiated by Sony.

When Sony and Microsoft cut the price of their consoles by $20 at the recent Electronic Entertainment Expo, Nintendo followed a strategy of its own. Nintendo has opted to continue its free game promotion and in another deal offer its GameCube bundled with the Game Boy Player. (Both the Game Boy Player and a standard video game retail for $50. Do the math. While priced at $150, both deals essentially make the GameCube itself $99.)

Microsoft has done similar deals with its Xbox, offering two "freebie" games with the purchase of a console. Since Microsoft is shoving online gaming down everyone's throat (a simple observation), it might be a better idea to bundle its network adaptor and an online game.

Sony is already doing this with its PlayStation 2 - bundling its network adaptor with the console and selling it for $200. Sega also once did this with the Dreamcast.

Those who don't want all this extra product aren't always offered a second choice. Luckily for the consoles makers, whenever someone says "free" to an American, they'll come-a-running.

Despite the apparent positives, would the console manufacturers be better off offering consumers zero "freebies" and instead only their base console? Should Nintendo axe its free game/Game Boy Player strategy and sell the GameCube alone for $99?

It's no doubt something they've considered. For one reason or another they've chosen their current route. Is Nintendo being selfish for essentially forcing consumers to make the choice of buying its Game Boy Player or one of its published games? Most likely but with continued lowered software and hardware prices, Nintendo has found an ingenious way to make-up some of that lost money.

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