Sal, overheads and expenses mostly.
You may make 30% from a transaction on your platform but it has to pay for buildings/ground rent, electric, water, staff, pensions, R & D, products parts, severs, infrastructure, manufacturing, shipping, work equipments & software, internet, marketing etc.
It’s such a long list it’s crazy and kinda scary.
Jez mentioned this on the Iron Lords podcast yesterday, that MS don’t mind putting games on Steam because the 30% they take is not much more than what it costs to have a game on their own store.
The fact Sony is literally raising prices on just about everything, pivoting hard to GAAS, jumped into the PC space and who knows really why Jim Ryan has left should tell you that Sony is not exactly happy with their profit margins.
We know for a fact that Microsoft wants to raise Xbox’s profit margins and they are seemingly better than PlayStation’s. This is an area where ABK will help a lot.
I’ve been saying for a while that their next console could possibly be their last, before moving everything to cloud gaming and mobile. I think we’ll see one more Xbox console and two more PlayStations. (Just an educated guess.)
And honestly, that would be fine by me. But I really wish they’d get their cloud gaming out of beta one of these days. It’s not good enough currently. Other services offer much better quality. (At least in my region.)
In all honesty, any worries should have been gone after Microsoft acquired Bethesda.
I’ll throw my two cents in on the profit margin debate. I’m not sure what got us going down this track, but this is my field so I feel almost compelled to join in on this topic…
Margins are industry specific, with some industries having high average margins (25%+) and some having much lower (10%). The graphic below gives some sense of the averages and dispersion for U.S. economic sectors.
Average operating margin across all non-financial firms in the S&P 500 is about 14.5% over the last 20 years or so. Average Operating (EBIT) Margin by Industry – 22 Years of Data [S&P 500] (einvestingforbeginners.com)
Microsoft’s operating margin has averaged about 35% over the last ten years.
Microsoft Operating Margin 2010-2023 | MSFT | MacroTrends
I don’t have precise numbers for Activision’s operating margins, but if memory serves they have average (ballpark) 25% over the last decade or so. I did a fairly detailed margin analysis of many of the big publishers (posted somewhere on this forum) a while back and Activision was by far the most profitable of the big western publishers.
Anyway, by all the comparison data above, PlayStation’s margins appear to be pretty anemic compared to broad market averages, much less to MSFT or ATVI. It’s harder to make direct comparisons between PlayStation and Xbox margins, but the recent leak from the court filings indicated Xbox margins were significantly better. (I know some have disputed these numbers but they are still the best we have to work with).
I have actually been very curious why this is the case. I have some hypotheses, but no data to back them up. Maybe I’ll get around to posting them at some point.
I think they’ve sort of paused the cloud developments. And in a way that concerns me more because it was the clearest tech link to console (as they were series X server blades) that kept MS in the console hardware business. It makes more sense to have server farms full of a high end console server blade that you can run multiples of games on a fixed spec on at varying quality levels. And in doing so it sort of preserves the need for them to make a physical console.
But say they decide cloud isn’t their gaming future or its more distant…what’s to stop them deciding to just make PC games and even sponsor some manufacturers to make Xbox gaming laptops/handhelds that are branded and come with some sort of basic proprietary OS on top (gamepass OS or whatever)?
If their console hardware business loses them $260 per unit just to be competitive with Sony performance wise - and their sales volume is at best half - then is there still an imperative to be in that market? The only thing is the revenue on third parties but again with such big hardware losses you need a lot of that revenue to compensate and if third parties try to squeeze their shares (as ABK did) or indeed just don’t bother with an Xbox version or at least parity with others then I don’t see its impossible that they drop consoles even by the end of this gen. Probably with something in their place but it wouldn’t be the same model for those of us who like a console.
I’m not saying its likely I’m just saying its not beyond the realm of possibility at this stage.
It’s funny Sony raises prices on their consoles AFTER launch, raises prices on their games to 70$, raises prices on their online services by alot but seemingly the only concern with Fanboys and the Media is Xbox might one day in the future raise Gamepass prices a dollar or so per month.
Even if Xbox double the price of gamepass it would still be hugely worth it and really over an entire year its not a big deal
Why worry about Xbox raising prices when Sony is raising prices on everything. But it’s sony so I guess that is ok?
I think/hope that they only put it on the back burner during the whole acquisition/regulator cloud concern business.
To me it’s crystal clear that cloud gaming is the future. Next gen will start 2028, so one more console would buy them time until 2036 or so. That’s a lot of time to sell most of your users on cloud (and a lot of time for internet infrastructure to improve where it needs to.)
But only time will time.
So why is it that so many people assume cloud gaming is supposedly the future of playing video games when the technology hardly works even when you’re next to a data center? Why would these companies build hardware just to put it in a data center when they could sell it directly to the consumer like they’ve been doing for years?
Why would a customer who plays on the cloud be more valuable than a customer who bought into a console?
I doubt cloud gaming is the future, too many hurdles and cloud data centers are not eco friendly.
Subscriptions when you do not own the games and piracy is dead is the future. Gamepass has much more future than Xcloud.
Cloud will be huge in the coming years. There’s hurdles to be sure. With time, they’ll work those out. Given enough time, they’ll probably replace consoles. Not for a while yet but I’m sure it’s in the cards…
Microsofts already expecting Cloud to be as big as their console business by generations end, so it will be.
Having an app that you can download from ANY smartTV is going to be big when you combine it with a free trial and a major AAA game release. Grandma will happily let the grandkids download a free app to entertain themselves all day… Free…Works on ANY SmartTV. It sells itself.
If it “hardly works” then it’s almost certainly your internet connection. Try cloud gaming on a solid internet connection and you’ll know why people believe it’s the future. I’ve played many hours via cloud on Stadia and PS (and a bit of Antstream) - I honestly can’t tell the difference to local play. Gameplay wise, Xbox is perfect as well. But their bitrate is often terrible, causing pixelation, etc.
Consoles are sold at a loss. If companies can use the same piece of hardware to get games to 20 people instead of 1, that’s like a dream come true. That alone makes a customer on cloud “more valuable.” But the main benefit is ease of access for the masses. Grabbing a controller to play on your TV (or any other screen) via an app is a much lower barrier to entry than a $500 console.
There are certainly some teething problems right now, and cloud is not a full-time option for many people. But as the tech improves, it will eventually dominate.
Being in Western Canada I might be close to a data center but it’s great over my gigabit connection. The latency is similar to what you get on most TVs that aren’t in game mode.
Because of this I was playing Series games on my VCR Xbox One.
With stuff like 5G rolling out and becoming more common (1ms latency from your device to a 5G tower) it will be more and more feasible going forward.
And keep in mind that no one said that one set of customers is more valuable than the other. You have to remember that this cloud server infrastructure is built on settled hardware spec. So as long as you have cloud you will have consoles. It just might be more like streaming versus physical copies for movies. Or digital versus disc copies of games. Where the former will be more popular than the latter, but both exist.
But to create this cloud infrastructure you need to settle on a hardware spec, look at making customized hardware, try to streamline those hardware costs through bulk purchases, and try to innovate so that you get a better power to performance ratio to not only increase value for customers but for your own servers.
Gotta get all that public positivity out after the circumstances of the Xbox departure (and equally yikes-worthy public response)…
For those who doubt, MS is going to put the Xbox logo on all ABK marketing
