Why do companies do this?

[iSeriesCodePoet]

Check out the article on /. and give me your opinion. I don't see how you can ever plan on making money, when you are loosing money.

http://slashdot.org/article.pl?sid=02/11/15/1519234&mode=thread&tid=109

Mike Wills
IBM iSeries (AS/400) Programmer

http://www.koldark.net

 

[sleipnir214]

You've forgotten a Mi?ro$oft constant that was omitted from the article: Mi?ro$oft's marketing juggernaut.

______________________________________________________________________
TANSTAAFL!

 

[petermeachem]

What's the problem? They are making money overall, they can invest it as they like surely. Peter Meachem
peter @ accuflight.com

 

[iSeriesCodePoet]

It just doesn't make sense... I don't strictly mean M$ we know they have unlimited resouces to push into whatever market they want.
Mike Wills
IBM iSeries (AS/400) Programmer

http://www.koldark.net

 

[edfair]

This shows a complete lack of understanding of business and how they start and how they work.
You start a business with no product and no customers and you lose money until you have a product and enough paying customers to recoup the manufacturing costs and salaries you spent upfront.
If you are planning on providing a lot of something you'll lose more in the beginning. And if you are in a capital intensive company that depreciates equipment over the lifespan you are artificially forced to become profitable for tax purposes before you really are. Ed Fair
unixstuff@juno.com
Any advice I give is my best judgement based on my interpretation of the facts you supply. Help increase my knowledge by providing some feedback, good or bad, on any advice I have given.

 

[sleipnir214]

I'm still waiting for someone to explain to me how Enron can be solvent on one day and $6,000,000,000 in debt the next.

I read somewhere two weeks ago that Mi?ro$oft has on the order of 10 gigabucks in cash and liquid assets floating around. If they blow 2 gigabucks on Xbox, that would be only 20% of their on-hand assets.

The video game industry generated on the order of 4.3 gigabucks last year. If Mi?ro$oft can get 25% of the market, they'll make the money back in two years.

I just wish they'd blow that cash on fixing their existing software. ______________________________________________________________________
TANSTAAFL!

 

[petermeachem]

Ed quite right. People use a complete lack of understanding of how a business works to knock Microsoft yet again. They seem to have some bizarre idea that a product should make money from the second you think of it.

Enron weren't solvent. That was the whole point, they just said they were. Peter Meachem
peter @ accuflight.com

 

[iSeriesCodePoet]

But... how can you justify loosing money on the consol? I know you have to compete, but loosing money in one area and hope to make money in the other? I know about initially loosing money, but if a product costs (lets say) $300 to make but you only sell it for $199.99, that is a 33% (if my math is right) loss. So then you are counting on having developers design the next Final Fantasy series or other top selling games on your platform. That is $100 per consol that you have to make back in licensing and royalites. My guess is the average gamer will buy 20 - 30 games in the life of the consol. So based on a 10% number / game M$ gets, that is $5 they get which total is 100 - 150.. okay... so that might be okay. But still that is one HUGE risk. Mike Wills
IBM iSeries (AS/400) Programmer

http://www.koldark.net

 

[petermeachem]

Tesco sell a kilo of flour and a tin of tomatoes for around 10p each. They must cost more than that. Why do they do that?
Mobile phones are sold at a stonking loss, except possibly the dead flash ones. How do they make money doing that?
Peter Meachem
peter @ accuflight.com

 

[iSeriesCodePoet]

Cell phones are easy... the packages that you choose pays for it. Mike Wills
IBM iSeries (AS/400) Programmer

http://www.koldark.net

 

[CajunCenturion]

One thing that one must realize is that how a company actually computes profit.

Case in point: A company sells shoes. They buy 100 shoes for $2000 ($20 / shoe), and then sell them at $30 / show. After they have sold 70 pairs ($2100) they lower the price to $15 per shoe. You may ask how can they sell that pair of shoes for $15 when it cost them $20. The answer is that the company is tracking profit on the individual pair, but rather on the batch. The 100 shoe batch cost $2000, and after they earned the initial $2100, the batch was paid for and the rest, even if at only $15 / pair was pure profit, and it got people in the store. That batch of shoes was profitable, even if an individual pair from the batch was not.

My point is that unless you understand the granularity upon which the company is measuring profit, you cannot make judgements as to why they are selling at the chosen price. As in this case, the business decision was to reduce the overall profitablilty of a batch one the batch was in fact profitable, as an incentive to get people in the store. Good Luck
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As a circle of light increases so does the circumference of darkness around it. - Albert Einstein

 

[iSeriesCodePoet]

Those numbers make sense though. From day one M$ has been loosing money on the consols themselves. I remember reading an article on it. In the case of the shoes, they made their money when it was over cost, when it was on sale they made thier money, yes. But how do you make profit on something that you have always lost money. I realize there is more than just the consols that they are making money on.

Oh well, I don't care anyway. I just thought I would bring it up for some insight. Mike Wills
IBM iSeries (AS/400) Programmer

http://www.koldark.net

 

[cdogg]

Mike,
Are you sure that M$ is losing money on each XBox they produce? If so, please point me to the article you found on that.

My understanding is that M$ is only losing money "marketing" the product, not "producing" it. If this was the case, they could halt or reduce marketing funds at any time to bounce back.


~cdogg

"The secret to creativity is knowing how to hide your sources."
- A. Einstein

 

[CajunCenturion]

But again, is the P&L related to the consoles are the consoles consider one part of a larger P&L unit which is profitable?

I don't know, and until I know (and I'm not looking for the answer, but if it appears here, great) what the elementary P&L item in which the consoles are part of, then I cannot answer the question. Good Luck
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As a circle of light increases so does the circumference of darkness around it. - Albert Einstein

 

[johnwm]

To understand how volume sales affect a business you need to consider that the cost of an item generally has a direct element and an 'overhead' element.

Easy example:
Microsoft Office
Direct element is the cost of the physical product and distribution - say $0.20 for the disc, $1.00 for the book, and packaging.
Every one they sell as a physical package has that cost.

Overhead element is the cost to develop the product and support the infrastructure. No idea what, but probably $1 billion.

If you only sell one copy, you need to charge $1,000,000,001.20 to break even

If you sell 10 million copies and charge $200 a time you will make $998,000,000 profit

So what is the proper selling price?

I leave that as an exercise for the reader (or for BillG) !
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[Tarwn]

Koldark:
10%? I would assume that even after merchandising MS would have a larger percentage than that.
What are the expenses on the game? Cost to create (goes to creators), percentage of profit for creators and MS, and a couple bucks to produce the stuff? Add in a small margin that the store adds to the price you see for profit.

So we assume on a $40 game(before retail price increase), a couple bucks goes to manufacturer of actual disc. MS would probably look at the creators and tell them to lump profit and initial costs into the same percentage, so even if MS only wanted 20% of sales after production costs, thats still $7.60ish per game, leaving the creator with a $30.40 profit off each game (to pay off initial cost of creation and eat well with). Based on your 20 - 30 games (I think thats probably high, I've never bought that many). Thats $152 to $228 profit off each person. Much nicer. Oh, but we forgot rental stores...and the fact that they probably pay a higher amount than the rest of us just like they do on rental videos. Than there are all of the way overpriced accessories. But even with your original 10% number at 10 games per person, the rental fees and accessories would be nearly pure profit after the few bucks it cost them to manufacture the game or component.

Of course advertising would eat into this, but i would think if MS did all the advertising they would be requesting a much larger chunk than 20%, perhaps even as much as 40% or more.

Anyways, just my ill-infomed view point.

-Tarwn --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
For my next trick I will pull a hat out of a rabbit (if you think thats bad you should see how the pigeon feels...)