Ah, the excitement of buying a new video game console — there’s nothing like that feeling of anticipation for better graphics and the whole library of new games that soon await you. But first it’s gotta be available! And second, you’ve got to be willing to part with several hundred dollars for the privilege of staying up way too late most nights, lost in a new game. Why are consoles so expensive, though? (The brand-new PlayStation 5, for example, starts at $399 for a digital edition, or $499 for one with a Blu-Ray drive. Meanwhile, the Xbox Series X and S are $299 and $499, respectively.)
Are the consoles very profitable? And why is there always a new one coming around the corner every few years? Alongside Tom Corbett, a teaching professor at Carnegie Mellon University’s Entertainment Technology Center who specializes in game development production and spatial computing, we’re speed running some answers.
So, why are consoles so expensive? How much profit do they make?
No profit! At least at first. In the beginning, they’re actually sold at a loss. “Eventually they’ll start to make money,” Corbett says. “But at launch, usually you’re losing a significant chunk. At launch it’s about getting the hardware out there, at a price point that the consumer will tolerate.”
How come they don’t make money at first, but then do so later on?
Two words: Moore’s Law. This rule of thumb more or less states that the processing power of microchips doubles every two years. And while the exact parameters of this theory have recently been called into question, the fact remains that technology moves astonishingly fast. As microchips continually improve, the price drops for all other microchips not on the bleeding edge of innovation.
In other words, the price of microchips (the stuff you find in any console’s graphics card and CPU) will be significantly cheaper in two years than what the same microchip costs today. And if a console maker can sustain interest in the machine over several years — meaning sales — eventually the manufacturing of consoles becomes profitable (even on a per-unit basis).
In just three years, Nintendo has sold 65 million Switch consoles. And since 2013, Sony has sold 113 million PlayStation 4’s. The big ones get around to becoming profitable eventually — wildly so.
Do the companies mostly make money on the games themselves, then?
Not really. The consoles make money eventually, again, thanks to falling prices of components. But there is a lot of money to be made on the other stuff — the lesser regarded revenue streams. These include subscriptions to their online services, plus royalty money they earn from the game developers for the right to produce a game on their platform. On top of that, there’s also distribution! If you buy a game from a console maker’s online store, they’re getting a portion of the actual sale as well.
How much does all the research and development cost?
According to Corbett, that’s hard to say, because these companies are constantly working on it. A lot of projects, he points out, never see the light of day. Here’s how development generally goes, though: Console makers will work on a new system for two or three years before releasing it to game publishers. These game publishers will generally get a test console a year and a half to two years ahead of the console’s launch — this gives developers a strong idea of what the chip set and the operating system is going to be like. Meanwhile, the console is still constantly being fine-tuned, including a lot of work on the controllers: the haptics, the resistance on the triggers, everything.
“Then, by the time the system actually launches, console makers are already working on, ‘Okay, what are we doing next?’” Corbett says.
What’s the product life of a console?
Generally six to seven years these days. In fact, some will continue to live on. “Sony will keep making PlayStation 4’s for a couple more years, probably,” Corbett says. “It depends on what your competitor’s doing and where you need to go to keep up.”
What are the most expensive parts of a console?
The graphics card is the most advanced piece of technology inside, Corbett says, and the most expensive. After that, it’s the CPU or the solid-state drives that new systems have in them. In the past, the Blu-Ray drives ate up a lot of the cost, but some machines don’t have disc drives anymore.
How much of a cut do third-parties take?
Nvidia and AMD are the main graphics card manufacturers — that’s all they do. And console makers pay a sizable fee to these companies to have their components in the console, though Corbett says it’s hard to know exactly how much the console makers pay to the graphics card manufacturers.
This business model makes the launch super important, then?
It sure does. If you’re going to lose money in the beginning, you’d better create a lot of lasting demand for it. A launch can make or break a console — that’s why the flagship video game titles are always lined up: Mario and Zelda games for Nintendo consoles, Halo for Xbox launches. These are examples of intellectual property owned by the console makers themselves. Meanwhile, Sony tends to secure first rights for third-party PlayStation games: the Grand Theft Auto series (for which Sony pays the video game studio for the rights) and Spider-Man are two big examples. Although lately, console makers are buying up video game developers and putting them under their own umbrella, Corbett says, which is what Sony has done with the Spider-Man developer.
So, all in all, consoles are kinda expensive, but… kinda not?
Video game consoles are funny items. They’re priced in order to sell units at the beginning, even if that means taking a loss, but with the knowledge that they’ll be profitable one day —that day being when technology has decisively moved on. Evolution, then, is completely baked into the whole video game economy. And since the consoles aren’t configurable, what you’re essentially buying is a snapshot of what was cutting-edge technology at a certain time. “When you’re playing a PlayStation 4, that was pretty good [when it was released] in 2013 — and when they started working on it in 2011, it was state-of-the-art,” Corbett says.
But even though the shelf life is less than that of a two-term president, a few consoles — and their games — occasionally become cross-generational. And if you’re still playing a console a decade or two later, well, that’s worth the initial investment.