Академический Документы
Профессиональный Документы
Культура Документы
focusing on Microsoft’s console market where the Xbox One competes with Sony’s PlayStation Commented [EB6]: “Of note is this market is” = nope and
...
nope. Condense this. I would say something like: “Of note in
4 and Nintendo’s Switch (and previously Wii U) as well as the PC gaming market as a whole. Of Commented [EB7]: What are the big three companies?
Are they the same three that you listed above when you ...
note is this market is a bit strange since it is an oligopoly with a branch or division of Commented [EB8]: Include some short descriptor here
please for the luddites in the audience. Also, should it be ...
monopolistic competition. Consoles not made by one of the aforementioned companies are Commented [EB9]: Are the handheld consoles smaller, or
is the industry smaller?
essentially unheard of and are almost entirely bootlegs or plug and plays. There is also a smaller Commented [EB10]: *industry, but this is
Commented [EB11]: Unnecessary word, because the
handheld console industry but is nearly entirely dominated by Nintendo’s 3DS line (especially word “dominate” already means “to control”. To state ...
Commented [EB12]: Unnecessarily wordy. I would say
with Sony’s PS Vita being discontinued on March 1, 2019) and aren’t as strong competitors to “especially after the discontinuation of Sony’s PS Vita in ...
Commented [EB13]: The word “which” would probably
the other consoles. The “wild card” in the console industry is the gaming PC market, which is make more sense here.
Commented [EB14]: Either add a comma, or add a period
very much a monopolistically competitive market both in games and computers. Gaming PCs are and edit them into two sentences.
Commented [EB15]: Add a comma, a period, or a
sold by various companies but there are far more companies selling prebuilt computers compared semicolon.
Commented [EB16]: Add something like “which sell” or
to the three main console makers. There is also a vast swath of companies dedicated to selling
“dedicated to selling”
every part and peripheral from mice to VR headsets. Most consumers choose to just buy Commented [EB17]: This is becoming a run-on sentence,
and it’s not clear that this last part is connected to the first ...
individual parts and build their own computer. This means that the companies in the PC gaming
industry face widespread competition without monopsonies. The games market is also much Commented [EB18]: Why does “this” lead to
“widespread competition without monopsonies”? I might
just have no idea what you’re talking about because I’ve
more competitive with very low barriers to entry due to the low requirements to make a video
never taken an economics class, but your train of thought is
lost on me.
game and the ease of publishing through online distributors.
Lobbying Firms
Microsoft has employed many lobbyists over the years and often many at once due to the
various technical industries it works in. The one most relevant to the games and console industry Commented [EB19]: Is it most relevant to video games?
Or to the industry or the economics of the industry or
something? Or to the video games that Microsoft sells?
is the Entertainment Software Association. Most notably, it lobbied against a “right to repair” bill
Specify more here.
that would limit the amount of control Microsoft had over their warranty terms and products Commented [EB20]: This is not a lobbyist, this is a
lobbying firm, right? I think the word lobbyist refers to a
single person. Also, capitalize “association”.
after being sold. This largely had little effect on demand due to not being a notable issue outside
Commented [EB21]: I would rephrase to “which notably
lobbied against…”
of certain communities and the fact that Sony and Nintendo were embroiled in the same
Commented [EB22]: Unnecessary parentheses are
clogging up the sentence, just list them out.
situation. If anything, it pushed more demand towards PCs amongst those who cared and didn’t
Commented [EB23]: Either specify that you’re talking
about the demand for Microsoft’s gaming products, or don’t
already have a console. include the mention of Sony and Nintendo in the previous
sentence, because you’re repeating information that the
reader already knows and making it difficult for them to
Supply and Demand know what’s important.
Commented [EB24]: *towards PC’s?
Items that have shifted demand are video game consoles, video games, and peripherals as well as
PC parts. For the purposes of demand, I will treat the PC side of the industry as a fourth
competitor. Imagine the collective PC industry combining into one PC that is put forward against
the other 3 companies. Generally, the things that shift demand the most are the releases of new
consoles or new versions of old ones. In the case of Sony’s release of the PlayStation 4 Pro,
demand for the product increased wildly until the release of Microsoft’s Xbox One X. This drew
demand away from the PlayStation and shifted Sony’s curve back to the left.
Notable games also draw demand, Red Dead Redemption 2 was a massive release that
drew huge amounts of demand to the Xbox and Playstation. Many games are released as Commented [EB25]: These two sentences are connected
enough for you to merge them, and that eliminates the
need for the “for example” cliché, because it’s mimicking
exclusives which helps to draw demand to whichever console creator they contracted with.
the previous “for example” in a followable pattern. I would
write “Notable games also draw demand: Red Dead
Bloodborne and God of War were games that drew demand away from Microsoft to the PS4, Redemption 2 was massively popular upon release and it
drew huge amounts of demand.”
while Halo and Forza drew demand back towards Microsoft. Advances in PC technology also Commented [EB26]: Just put in a tiny something for the
idiots in the crowd like me, “Bloodborne and God of War
have an effect, graphics cards (GPUs) and processors (CPUs) especially can increase demand. were games that…”
Commented [EB27]: “Graphics cards (GPUs) and
These are the most expensive components in a desktop computer but are also the most powerful processors (CPUs) especially can increase demand.”
and important for video games. They’re also much more powerful than console equivalents
which means a small advance in power or drop in price will disproportionately draw demand
away from other consoles. When a new CPU or especially GPU is released, older components Commented [EB28]: This can be condensed. “GPUs and
CPUs are the most expensive parts in a desktop computer,
and are most important for
drop in price to compensate for the substitution effect. This makes the cost of entry for PC
consumers much lower and will draw demand at all levels rather than just for the very high end
consumers. The last section of demand shifters are Nintendo games. Since every game they make
is exclusive to their systems (along with most of the games available, certainly the most high
profile), nearly any release changes Nintendo’s influence on Microsoft’s demand. Any game for
the Switch is most likely Switch-only and any game for the Xbox is most likely not on the
Switch as well. Anything they do can change demand either way since there isn’t as much
Items that shift the supply are components in the Xbox as well as the capital that goes
into producing the consoles and games. Recently there was a massive increase on the price of
RAM, a type of computer memory. When the price of bitcoin skyrocketed, people realized that
desktop graphics cards intended for playing video games, rendering video, and running servers
and billboards were also very good at mining bitcoin due to using a type of RAM called GDDR.
This caused a huge spike in RAM prices and actually wreaked havoc on the consumer graphics
card market with the resulting shortage and prices. This also hit consoles since they also use
RAM (GDDR in the case of the Xbox One X, the high performance model). The console market
runs on narrow margins while in the early stages of a release. For example say a fictional console
Gamesquare 3 is just released and it uses fictional RAMv.5. When first released, the demand for
RAMv.5 is high due to being a component in the new Gamesquare and is therefore quite
expensive. However over time, they lower their price due to decreasing demand. Maybe
Gamesquare’s producers even realize they can use older RAMv.4 that is even cheaper without
sacrificing any performance. This lets Gamesquare 3 be produced more cheaply and can start to
increase its profits, even though demand for Gamesquare has also declined in the same time.
This is the pattern that Microsoft uses when releasing consoles. The Xbox One X was released in
November 2017, just before the average price of RAM roughly tripled. This meant that it was
producing at razor thin margins and was in danger of being sold below cost at times. Microsoft
also couldn’t raise the price to compensate since sales would decrease too drastically. Granted,
the other competitors were also affected with PC consumers being hit the hardest, but this did
adversely affect the supply of the Xbox. The amount Microsoft can supply has been steadily
increasing due to decreasing costs in machinery and labor costs in China as well as RAM prices
The Xbox One’s price elasticity of demand varies depending on various factors. Time is
one, the price is far more inelastic during release and Christmas season and more elastic as time
passes from those periods. However even in times of higher elasticity, the demand isn’t very
elastic. There is an element of investing or buying into an ecosystem with devices, people
typically buy devices with the intent of keeping them for a long time and won’t be as receptive to
changes in competitor’s prices once they buy it. This goes doubly so for the video game market
since the heart of the industry is the games themselves. Video game copies are very nearly
always console locked (i.e. if you buy Call of Duty for your Xbox, you can’t play it on a
PlayStation even though it’s available since the game disks are specific to the format the console
uses) and can get very expensive, particularly for consoles. After investing in system-specific
games, consumers are much less likely to be receptive to price changes if they have to rebuy
The Xbox and its games are complementary goods towards each other. The price of the
console obviously is a demand determinate but so are the games you play on it, possibly more so
once you add up the cost of buying more games at $60+ each. The price of console games has
long been a demand repellant compared to PCs where average prices are far lower sometimes
even for the same titles as on consoles, even before sales on distributors such as Steam, Good
Old Games, or Humble Bundle push down costs even further. The substitution effect also takes
effect but not as much as one would think between consoles. Since consumers end up investing
in consoled locked game collections, the companies are effectively less of effective substitutes
for each other after considering the costs of switching. The big three console producers also
intentionally try to reduce substitution in ways by differentiating their product from each other
through exclusives. Having large sections of their game catalogues exclusive to one system or
another eliminates a lot of substitutability that would be present if all games could be played on
all systems. At the same time, each company can’t let the others get too far differentiated or else
they might lock in consumers that the other two can’t get to. The release of the Nintendo Wii
was a huge change for the video games industry due to the innovations of the system. The Wii’s
use of motion controls and simplified ergonomic controller layout allowed people that weren’t
into video games to much more intuitively learn how to play, while also allowing less casual
gamers to connect older more conventional controllers. It’s far less intimidating for Grandma to
use a Wii remote by pointing and clicking or miming actions than for her to navigate a full
console style gamepad. Sony and Microsoft immediately began developing extensions for their
consoles with motion controls and simplified layouts to reach the market that Nintendo had
reached. Each company is constantly trying to differentiate themselves with exclusive games and
features while simultaneously trying to prevent the others from doing the same.
The closest experience with creative destruction the Xbox line has faced was the rise and
fall of the Kinect. The Kinect was Microsoft’s answer to the Wii’s revolutionary motion controls.
Rather than having IR sensors triangulate the controllers position in 3-D, the Kinect was
essentially a camera that would track the silhouette of your body, especially the hands, feet, and
head. However while the Wii sold by far the most units during generation 7 (the games era
dominated by the Wii, Xbox 360, and PlayStation 3) and made lasting changes to the industry,
the Kinect never gained much traction as a game system and was discontinued in all consumer
forms by 2017. This was less of creative destruction and more failing to inflict it on something
else. The Kinect was very buggy especially in its earlier versions and was locked in its own mini
ecosystem. While the Wii’s controllers (the “Wiimote and Nunchuck”) were very much designed
with motion controls in mind, they still were able to be used in non-motion games, even the same
games as on the Xbox or PlayStation (albeit sometimes with unorthodox control mapping). It
was also relatively easy to integrate the motion into existing games, for example instead of
moving and aiming with two different joysticks like on the Xbox, the Wii version of Call of Duty
had you moving on one joystick and aiming by using the pointing feature. This type of cross
compatibility wasn’t possible for the Kinect. Games designed for the Kinect required buying one
(it didn’t come standard initially as the Wii’s motion did) and could often only be controlled
using body movements. It would also be impossible to adapt most existing games to motion with
Kinect especially with the technology of the time. You wouldn’t be able to jog in place miming
shooting a gun or even look away from the TV outside of your narrow field of view. While the
Kinect did introduce new technological advances and possibilities, it wasn’t able to be
effectively applied to video games. Note that it is still being sold to developers and researchers
Accounting
The gaming division of Microsoft has generated $4.23 billion in Q4 2018, 8% more than
last quarter’s revenue. However, hardware sales (consoles and accessories) fell by 19% while
software and services revenue increased by 31%. The Xbox One S model cost around $324 to
produce at release, compared to a selling price of $399 leaving Microsoft only $75 of profit per
console. Once other costs are taken into consideration (such as marketing or licensing), this
profit dramatically shrinks, possibly running at a loss. The real profit generator are the games
with the console being close to a loss leader. Microsoft earns $7 in royalties for every game sold
Resource Demand
The resources demanded for Xbox and game production are primarily human capital,
manufactured electronics, and the raw resources that go into those electronics. The direct
components going into the console include RAM, a motherboard, a CPU, hard drive, fans and
heat sinks, and the case. Each of these components are in turn made of progressively more
granular parts such as capacitors, transistors, or semiconductors. At the most basic stage, most of
the internals are made of the same basic resources – silicon for the microchips and motherboard,
as well as semiconductors, copper for wiring, and various other metals for odds and ends such as
aluminum in the CPU casing and heat sinks or tantalum in a capacitor. Each of these products
requires its own manufacturing machinery and knowledge which in turn drive more markets
hidden behind consumer and industrial electronic markets. The human capital comes in the form
entrepreneurial skill isn’t needed in the same quantities, software needs a lot of capital to be
produced. The programming and engineering (both hardware and software) require very specific
knowledge and skill sets that are only applicable in other programming fields whereas general
Bibliography
microsoft-reports-largest-gaming-revenue-quarter-ever
Wood, Julia. “Teardown of Xbox, PS4 Reveal Tight Margins.” CNBC, CNBC, 27 Nov.
2013, www.cnbc.com/2013/11/27/teardown-of-xbox-ps4-reveal-tight-margins.html.
Corden, Jez. “Estimates Suggest the Xbox One S Manufacturing Costs Are around $324
www.windowscentral.com/estimates-place-xbox-one-s-costing-microsoft-24-more
Bakken, Cole J, and Bakken, Timothy W. “Calling My Dad For Industry Knowledge.” 13 Mar.
2019.
I was having a hard time finding specific numbers for things like revenue, costs, marginal costs,
component price, etc. so I called my dad for help. He is the senior director of northwest
sales at Samsung and manages the team that sells RAM to the Xbox division (among
other things) and was able to give me vague numbers and industry information but
couldn't get too specific without giving away corporate secrets. A lot of information in
this paper is public enough that companies will divulge it but secret enough to only do it
within the industry or through paywalled websites, so these "interviews" were helpful in
getting leads.
price-investigation-ddr4-same-price-as-initial-launch
“World Leading DRAM and NAND Flash Market Research Firm, with More than a Decade of
Accessed using Dad's work account, may not be verifiable online so I've attached screenshots.