Game Theory: How a CES Announcement Provided PS3 Another Year of Profits

Way back in the 20th century, 1994 to be exact, a price war was raging between the Daily News and the New York Post for the price of New York’s Daily Tabloid Newspaper. The lessons of this exercise in game theory provides insight into the ongoing console wars between Microsoft, Sony, and Nintendo. In addition,  Sony’s CES announcement that it will not be launching PS4 at the 2012 E3 conference (E3 is the video game industry’s largest conference) is one of the best illustrations of game theory seen in recent years.

(Disclosure: At the time of writing I was employed by Microsoft. I neither worked on Xbox nor had insight into their product marketing, product strategy or product roadmap at that the time of writing. This blog reflects my personal opinions as a practitioner of business strategy.)

Game Theory and The Newsstand Price War of 1994

When applied to business, game theory provides a set of tactics to change the players, values, rules, perceptions, and scope of a given industry. In the case of the 1994 newsstand price war, the price war began with The Daily News, and Rupert Murdoch’s New York Post priced at 40 cents a paper. (The following case study is adapted from Harvard Business Review’s The Right Game: Use Game Theory to Shape Strategy)

At the time, the newspaper industry was quite familiar with newsstand price increases. For example, In 1992, when the Chicago Tribune increased its price to 50 cents, the Sun-Times remained at 35 cents and gained substantial share. Much as Pepsi and Coca-Cola mirror each other’s price increases, in the newspaper industry when one competitor raises prices it is a signal to others to do the same.

In 1994 newspaper operators were facing costs for newsprint that jumped as much as 37% in a single year, accounting for up to a third of operational expenses (David Lieberman, Newsprint Costs Roll Up: Newspapers Raise. Prices, Pare Stuff, USA Today, Dec. 5, 1994, at 1B). To respond newspapers laid off staff (evidence that it is not a new phenomenon of the internet age) and increased newsstand prices across the nation. However, in the summer of ’94, the NY Daily News was not in a spirit to comply. When Murdoch’s New York Post raised its newsstand price to 50 cents earlier that year, the Daily News did not follow suit.

With the Daily News priced at 40 cents and the Post priced at 50 cent, the Post was losing subscribers and ad revenue to the Daily News. Whereas Murdoch saw an untenable situation with increasing expenses and a lower readership, the Daily News, with its increasing readership and advertising base, did not see the same problem.

Price War or Profits: Lifting the Fog

To convey the implications of their actions- Murdoch announced his intention to drastically lower the price of the Post to 25 cents. An unsustainable price for all involved. The Daily News, doubting the Post’s resolve and believing they were gaining readership because of their superior paper- ignored Murdoch’s threat.

When Murdoch lowered the newsstand price to 25 cents as a test limited to Staten Island, The Daily News saw its sales plummet. As Newsday reported in 1994 (Nov. 17, 2994):

During the recent six-month reporting period, The Times and Daily News each raised their newsstand prices in the metropolitan area by a dime and Newsday increased the cost of home delivery. The Post, on the other hand, boosted its Staten Island circulation by halving the newsstand price in that borough to 25 cents.

Seeing the implications of a price war, and the possibility for mutual profits at a price of 50 cents; the Daily News raised its price to 50 cents and equilibrium was restored.

Sony Lift’s the Fog

So what does this have to do with Sony’s CES announcement? In 1994, the New York Post lifted the ‘fog’  surrounding the video game console industry by announcing a price decrease and demonstrating its resolve. In the case of the newspaper price war, lifting the ‘fog’ communicated to the other players that there were profits to be had at 50 cents a paper and losses to be had at all lower price points.

In turn, Sony President Kazuo Hirai’s comment during a Consumer Electronics Show round table, demonstrated Sony’s resolve; announcing Sony will not be discussing PlayStation 4 at E3 this year:

“Andy is absolutely right in that we are not making any announcements at E3,” said Hirai. “I’ve always said a 10-year life cycle for PS3, and there is no reason to go away from that.”

This single statement lifted the fog that encompassed the video game industry by communicating to Microsoft specifically, that Microsoft will not be under competitive pressure to announce its next generation console this year. In general, the big threat all companies in the video game console industry face, is being late to or missing a hardware upgrade cycle. Xbox lost big when when it launched in 2001 late to the upgrade cycle and the PS3 was late in 2006 and has been playing catch up, with some success, since.

Why Sony’s Strategy Makes Sense

By communicating to the entire industry that Sony’s stance is that 2012 is not the year for ‘next generation discussions’- Sony hopes to convince Microsoft to extend, at least for another year, the profits of the current generation hardware. As every hardware refresh traditionally brings uncertainty, intense competition, and red ink for the first few years. Sony believes it is likely to succeed with this gambit for two reasons:

Sony’s Tactic: Beautifully, Common Cents

With more to lose than gain, by starting the next round of console wars, Sony beautifully executed a common cents strategy to reduce needless ambiguity for consumers, industry trade press, and most of all its competitive environment. Depending on how Microsoft responds this should enable Sony to recuperate more of its PS3 investments.

16 thoughts on “Game Theory: How a CES Announcement Provided PS3 Another Year of Profits

  1. Only problem is, this article doesn’t take the Nintendo WiiU into account. Nintendo has been playing at the casual market, but if the WiiU were truly something for both sides of the gamer spectrum, Sony AND Microsoft would be late to the ball. Sure, both have their own fanbase, but fans are only as loyal as long as they get their latest product fixes.

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    • looking at the WiiU it seems that nintendo are only playing catch up to both sony and microsoft and not pushing any new boundries. Yes the controller is new but how expensive will it be to buy a 2nd controller for the system? If the vita links to the ps3 as a controller then even this new feature for the WiiU is matched (if not bettered considering the power of vita). I dont think that ms or sony will really be troubled by nintendoes announcment but then again they didnt se the wii coming and look what happened there.

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      • I’d think the WiiU won’t interest the casual market 100% the ‘casual consumer’ or say for example, the soccer moms that know nothing about the console would go into a store and ask, what’s the difference between a Wii and a WiiU? The name would confuse them alone, what would a rep say? It’s like the Wii, but with better graphics and its controller has a screen on it. The interest rate won’t be as great as merely the Wii was on its own and its pricetag and all the rest that attached people to the casual fun-vibe it gave off.

        Wii sold great for all ages, WiiU will sell to those that will see ‘Wii’-U and be like, Oh! So the people who made Wii made WiiU? Sure, I wanna get it(If money isn’t a concern) but the question above will still be a huge hitter on ‘Why as a consumer(Not a gamer) would I buy this for me or my kids?’

        WiiU market is definitely trying to aim for the casual and hardcore, Casual-obviously by Nintendo using the Wii name in WiiU’s name to ensure the stupid-casual-market who don’t do their research understand that it’s LIKE the Wii and it’s from the MAKERS of the Wii. Just like how it’d be bad if Nintendo made  a ‘Gamecube 2’, people would be like, Whats that? Oh? It sold like crap? Nevermind that console then.

        If WiiU is to be a ‘hardcore catchup with a sideorder of what made Wii good for casuals'(Minus the blatant shovelware problems) I think the fanbase to WiiU will be scattered, confusion will be a primary problem unless Nintendo has great marketing up their sleeves on being able to know what to say in order to make the casual-soccer-mom market and kids think that they NEED the WiiU and that if they don’t have a PS3 or 360, why WiiU would be fine to grab instead of the ‘current’ gen console. The ‘underground-hardcore’ fanbase that are lurking around that are the Zelda lovers and Metroid and lastly, Mario-lovers and so on will take high interest on the WiiU that much is certain….but, the casuals won’t care about upgraded graphics or the controller, the pricepoint is still unknown, customers will go under the “If I have a Wii, what is the point of getting a WiiU?’ the answer for us now is, there IS no reason, unless you love the hardcore games and better graphics….. I personally don’t see it doing as CRAZY-well as the Wii did.

        Also – Future reference. it’s not WiiU, it’s Wii – Police Noise.

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      • I see your point but in the bigger picture there is many more factors that go in to if this in fact was a good choice. If you are interested we can discuses it more over skype some time.

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      • The wii is simply a different animal than ps and xbox.  It becomes hard to compare a console like the wii to the others when they even admit they are not trying to compete with Sony and Microsoft.  They are going for a different demographic than the more powerful consoles are so it isnt really a fair comparison.  And then on top of it the Wii-U from what I’ve read isn’t even as powerful as current gen Sony and MS consoles.

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    • Fair point- as Adrianw and others have echoed below. I didn’t include WiiU because it didn’t seem to be Next Next Generation in it’s specs (drastically better than Xbox 360 + PS3) — and because since the SNES, Nintendo has promised that each subsequent version of their platform would also be for “hardcore gamers”. After the criticism of the N64 not having a strong slate of 3rd party games- they went as to get Resident Evil on Game Cube before seemingly abandoning the market all together with the Wii. Historically, Nintendo just hasn’t been able to capture the ‘core’ gamer market and ‘core gamer’ software titles- so I’ve in the mean time viewed WiiU as a complementary platform to an Xbox or PS3. I may be proven wrong.

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  2. I’m sure the launch and mere existence of Vita has influenced the decision as to when PS4 will be made official.  Microsoft basically relaunched the 360 with the release of Kinect, so I would imagine the next Xbox will not be made official this year either.

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  3. Too bad the Vita won’t deliver as promissed and be Mors instead of Vita in a very short time. It’ll go the way of the dodo much much faster than the PSP. That’s my two cents of common sense right there. Nobody wants a portable port box. Let’s hope the the hacking scene can make something useful if the device.

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    • The Vita is going to do very well. The PSP was an incomplete device and was also Sony’s first time in the handheld game. From what I seen and used with the Vita I don’t see how it can fail. There is really not a thing I  or my studio could find that was bad or lacking about it. Its very easy to make games for and offers more player input options then any other gaming device then a PC. The key will be good software and making use of the social network. Which they are doing. 

      I was never a fan of the PSP, I did like a few of the games but found the system itself kind of in limbo in what Sony wanted from it. The Vita however is not only priced right and ready to make a profit with in the first year (Profit off of hardware) but it also has much more going for it then the 3DS. People forget that thing was tanking day one, and the PS3 was also not doing too well when it came out but things change fast. With Sony putting there must play games like Uncharted on the system is going to be very hard for any one that is a fan of that game and many others that are on the PS3 not to pic one up. Worked with God of war and Metal Gear Solid for the PSP for me.

      People always for some reason like to say that phones and tablets are in competition with the handheld space. If you are getting a phone to play little 10 min game experiences then you where never in the market for a PSP or Vita in the first place. 

      We have never had a handheld like the Vita that has so many communication options and ways to play your games. This really opens the door for Devs like us to be creative and do things that just where too hard to do on other systems (Touch Screen <3) that and being they took a page out of MS's play book and made the thing very easy to code for is huge. Getting a playable prototype up and running is like clock work on the Vita.  For those simple reasons alone it will do very well.

      Now what I think won't do well is the cross play between the PS3 and Vita. It is a very cool tech but its very limited in that you have to own two systems to make it work. Now. Sony of the Big three are the only ones who can really do something like this. Which that in of it self is the issue why its not a more populare feature. Maybe the Wii U can make better use of it but I don't really see that happening.

      You would be hard to find many Dev's that don't love the Vita. The talk at GDC last year was basicly Devs bitching that the next Xbox and PS system better be as well thought out as the Vita. I am sure this year in March it will be much the same speak. Devs that never consider making a hand held game are now working on many new IP's and new spin offs of there bigger brothers on home systems. Not because they where asked to do it but because they want to and they see it as a place to make $$ and grow there business. 

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    • How about i buy you a PS VITA and watch you enjoy yourself… Do you even know what the PS VITA is and what it is capable of doing? 

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    • The PSP actually has sold quite well and made Sony a lot of money. It’s sold more then the PS3 and 360 actually. So saying the PSP was a failure is just not true.

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  4. pretty sure this was the plan all along…it just makes more sense now, also XBOX is still making profits and Sony is still playing catchup let us also not forget that due to the PS3, Sony won the “Format Wars” although with the way the world is trending towards cloud computing this may not be as huge as they had wished.

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