Some people ask how I can be annoyed at video-game analysts. Is it because I am jealous of them or because I have a very high opinion of myself? No. The reason why is because these analysts get even the most basic business model of the game industry wrong.
The myth is that the Razor-and-Blades business model is the norm for gaming. In it, game consoles are sold at a loss while money is made on software and controllers. Despite being seen as ‘the norm’, only one console company uses this model.
Atari never used the razor-and-blades model.
Nintendo has never used it for any of their systems.
Sega doesn’t use it (with perhaps maybe the exception being the disastrous Saturn and firesale Dreamcasts).
Microsoft doesn’t use this model because Microsoft never gets any profit back.
The only company that uses razor-and-blades model is Sony. And now Sony is ending the model because it doesn’t work:
President of Sony Computer Entertainment Europe, David Reeves, has said that the priority for the PlayStation business in 2009 is to finally make a profit.
Speaking on the official PlayStation website, the exec noted that the company must reduce the pressure to turn a profit before concentrating on pushing games and services.
“The most important thing for us as a company in the very short term is for us to start making money,” he said.
“This is a pledge that was made last March and is something that we are still very much on target to achieve. Once we have achieved this, I think it will be a very exciting time for PlayStation.
If the razor-and-blades business model was working so well, then why is Sony abandoning it? Didn’t it work so well for Sony during the PS1 and PS2? Well, it is hard to lose money when you are the market leader. And the profit Sony made during the PS1 and PS2 has been far eclipsed just by the profit of the Wii. The razor-and-blades business model simply doesn’t work, and it is most certainly not the norm.
Now, a razor-and-blades business model could be argued if you say that the software are the razors (since, after all, that is why people buy consoles is to play fun games on them). A razor-and-blades model could be argued with bundling software with the console such as Wii Sports with the Wii, Super Mario Brothers to the NES, or Sonic to the Genesis. After all, the company is losing money on that hit software but making it back because people buy games once they buy the console.
But no analyst has ever argued that point. All they see is hardware and the costs for it. And if they did see software as the razor, then Sega and Nintendo would be the razor-and-blades companies, not Microsoft and Sony, since only Sega and Nintendo sell their systems with a bundled game. (Some Sony and Microsoft systems come with a game, but those are often special offers or a special sku.) You cannot get a Wii without Wii Sports. You could not get a NES without Super Mario Brothers (or another game until the latter days of the 8-bit generation).
The headline to this story should be: “Sony abandons Razor-and-Blades model”. But that would be contradicting the conventional wisdom of the PERCEPTION of the game console.
With the success of the Wii, there are still people out there who see the product of gaming as the hardware. They laughingly see software as an ‘accessory’. I’ve never met a gamer who wants to play ‘hardware’. (Word to Sony.)
