Desperation Mode?

by Jonathan Metts - October 4, 2003, 11:40 am PDT

Some people see the new GameCube price cut as a sign of weakness and a precursor to the system dying early. Jonny explains why the GameCube isn’t and won’t be another Dreamcast.

When it comes to system price cuts in the gaming industry, there are two basic patterns. First, all competing systems can cut their prices at the same time. These cuts tend to be reactionary rather than coordinated, but as far as consumers are concerned, it just means gaming is cheaper than before. The second type of price cut is unilateral (forgive the term), in which one system lowers its price and the others do not immediately follow.

Nintendo just took the second kind of price cut for their GameCube console, and it may be one of the best business decisions they’ve made this generation. System sales have skyrocketed, and people who never seriously considered this platform are now saying, “It’s hard to ignore an offer like this.” Yet whenever a move like this one is made in the industry, there are always pundits who mark it as a sign of weakness and even a mistake. They say GameCube is now so much cheaper than its competitors that people will compare the prices and assume something must be wrong or inferior with Nintendo’s system. Other critics even predict the cut as a sign that GameCube is headed the way of Dreamcast: a slow spiral into obscurity which will lead to the eventual abandonment of the platform.

Let’s do a little comparison. GameCube has been out for almost two years in Japan and North America. It has currently sold well over ten million units worldwide. (Source: Yahoo News) Nintendo just posted its first-ever quarterly net loss since going public decades ago, but with boosted GameCube sales and the release of Mario Kart: Double Dash, turning a profit for the next quarter shouldn’t be a problem. Now look at where Dreamcast was two years after its launch. Dead. Completely discontinued. Sega had posted net losses for four years in a row; they were in debt before the system’s release and only dug in deeper as the world failed to embrace Dreamcast. The system sold just eight million units in its entire lifetime, one quarter of which wasn’t sold until after production stopped forever and prices were slashed to clear inventory. (Source: USA Today, IGNDC) Going into its third holiday season, the Dreamcast price was dropped to $50 in the U.S.; Sega openly admitted that the move was designed to clear out all remaining stock and get Dreamcast systems off the shelves completely.

The Dreamcast was a “make or break” venture for Sega from the very beginning. The company was practically broke when DC launched in 1999; horrific marketing and support of the Saturn had drained the company dry. Compare the situation to Nintendo’s, who went into the GameCube launch riding on the last days of their moderately successful and extremely profitable N64 console, which lived a full five-year life span (though with few new releases in the final year). Nintendo could have withstood an utter, dismal failure with GameCube and still gone into the upcoming generation with enough money to back up the system and give it a fighting chance. But GameCube hasn’t forced its maker into such a position, because it is holding its own against Xbox with no clear worldwide trend in either direction. And unlike Xbox, GameCube is a profitable system.

Compare Nintendo’s quarterly loss of $27 million to the yearly losses on Microsoft’s home entertainment division, of which Xbox accounts for the vast majority of business. Last year, that division posted a loss of over $900 million, with just under that amount posted the year before. (Source: Puget Sound Business Journal) Even if Nintendo’s quarterly loss was normal for an entire fiscal year, which it isn’t, it still wouldn’t come close to what Microsoft is losing on the Xbox. GameCube and Xbox may be neck-and-neck in sales, but Nintendo’s system is actually making money. And Sega never posted a profit during the Dreamcast days.

So if GameCube is keeping the pace with its closest rival and actually making money in the process, why has Nintendo cut the system’s price? As always, it’s about making more money. Nintendo knows that the GameCube will be a huge seller this holiday season at $99, and because it’s so easy for people to afford the system, they will be even more likely to buy the new GameCube titles like Mario Kart, on which Nintendo rakes in considerable per-unit profits.

Dropping the GameCube price is also of strategic importance, in that Nintendo can be confident that the move will not and/or cannot be matched by its competitors. Sony could eat the difference and announce a PS2 price-cut, but there is little reason for them to do so. Sales of PlayStation 2, though still the highest of the three systems, have slowed considerably in the past year. Most of the people who want a PS2 have already bought one; Sony can be pretty confident of that fact when there are more than 60 million units being played around the world. The PS2 business always has depended on software sales, because the system has to be sold at a loss. Sony wants to concentrate on selling games from now on, so they are not eager to lose even more money on the hardware just to sell a few more units. Microsoft, on the other hand, is in a prickly situation with this price cut. Financially, it would be risky for them to compete with Nintendo in price. The Xbox is already selling well below its manufacturing cost; dropping down further could be financially risky even for Microsoft. The company is ultimately in the hands of its investors, and at some point they expect Xbox to break even or at least slow down the money leak, not speed it up. Microsoft also suffers from the fact that it has painted itself into the same league as the dramatically stronger Sony, in an attempt to segregate Nintendo from the pack as an also-ran candidate. (Source: Yahoo News) Though perhaps a smart business move in terms of public perception, being aligned with Sony means that Microsoft is expected to sell at a price point closer to PS2 than GameCube.

The net result is that Nintendo’s price cut will almost certainly go unmatched for the next few months, and the competitors will be stuck at the same price while GameCube makes headway into the marketplace. Eighty dollars is a lot of money, and consumers with no strong prejudice for any of the systems (read: casual gamers and parents) are going to look hard at GameCube this holiday season, especially if they already own a PS2.

Look, I’ve got my own gripes about how Nintendo has handled the GameCube in the past two years. Promises of new franchises and must-play connectivity features have gone largely unfulfilled. It’s insane that companies can’t make online titles for GameCube, even using their own server infrastructures. Marketing is still out of tune with the American public, letting great games go by practically unnoticed. But with this price cut, I think Nintendo is making one of the smartest decisions they’ve made in a while. The timing is perfect, the price is perfect. If GameCube were on a five-year clock like all of its predecessors, I’d be worried about the pacing of all these bundles and price cuts. But with the new systems launching in just two years, GameCube is now a fully matured platform with established consumer support. Yes, Nintendo is preparing for their next system. But they’re doing it by making sure as many people as possible fall in love with GameCube and transfer that enthusiasm in 2005, not by pulling resources and asking people to wait for launch. So tell your friends to go out and fall in love with their own GameCube for the low, low price of $99.

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