The internet took a victory lap when Microsoft announced a major policy u-turn regarding it’s next-generation video game system. Microsoft pulled back limitations on used video game sales and frequent online checks verifying the system. Key in their decision was massive consumer backlash. But also key to the u-turn was the presence of strong competition, specifically Sony, who announced their system would lack any restrictive DRM. The pressure of consumer backlash combine with a viable alternative compelled Microsoft to give consumers what they wanted.
The video game console industry is particularly unique. It’s a large industry with only three significant players (Microsoft, Sony, and Nintendo), but profit margins can be very tight, particularly early in a new console’s life cycle. Consoles are often sold at a loss in order to establish a larger user base and make up the costs from software licenses. Early values are valued, even when selling at a loss, because the lifetime customer value will be higher and third party game developers will be more interested in selling games on the platform (leading to greater license revenue).
Microsoft and Sony are heated competitors, even on many fronts. Both have comparably functional consoles. Exclusive games, mostly developed by Microsoft and Sony’s own studios, are the key differentiating factors. Nintendo, while also a key competitor, has been targeting a lower price point and more casual gamer, whereas Microsoft and Sony have preferred the hardcore gamer and all-around entertainment center market. Competition from mobile devices and the PC have further constrained the market size and profitability of the console market.
Compare Microsoft’s response to consumer demands for Apple to open up its iPhone platform, for example, allowing alternative default applications. Apple and Android are engaged in a mostly two-sided war. Android, in fact, is by far dominating in market share. But even with its lower market share, Apple is far more profitable. Incredibly profitable. Apple, who manufacturers both the hardware and software for its iOS platform, generates so much revenue, and commands such loyalty from its customers, that Apple has little incentive to respond to those customer demands. Rather, Apple can provide the product it wants to provide, not the product its customers claim they want.
Once again, we’re reminding how important competition is to improving the customer experience.