Xbox One X and PS4 Pro: The Mid-Cycle Strategy Explained
Including a history of previous mid-cycle console revisions
The Xbox One X, formerly known as Project Scorpio, is Microsoft’s most powerful evolution of the Xbox One console and releases on November 7, 2017 for $499. The X will share its software library with the Xbox One, and Microsoft has assured the market that it does not plan to offer any X specific games. The understanding now being that all previously released Xbox One games will run on the X (with upgraded performance for some) and all future Xbox One/Xbox One X games will run on both the X and previous iterations of the Xbox One.
The first revision of the Xbox One, the Xbox One S, slightly increased Xbox One power, adding HDR support and the ability to play 4K Blu Ray discs for those so inclined,although one would not call it a significant upgrade for the console. The X on the other hand, is a serious step up from Microsoft. The laundry list of additional new features includes native 4K gaming support, Dolby Atmos support, in game supersampling, and a bigger hard drive weighing in at 1 TB to account for ever expanding game download sizes.
The Xbox One X is able to push all of these graphical fireworks by Microsoft packing more horsepower into the box. Key callouts are a more powerful AMD CPU (2.3 GHz in the X vs. 1.75 GHz in the Xbox One and the S), 50% more RAM (12 GB vs. 8 GB), and a much more powerful AMD GPU in the X across a host of speed metrics. Long story short, this is a real mid-console cycle upgrade from Microsoft, equivalent to the upgrade between for example an iPhone 6 and an iPhone 6S.
The PS4 Pro was released by Sony late last year, taking a similar, but less ambitious, console upgrade path. The Pro also offers 4K gaming, HDR support, increased performance across the entire PS4 library, and a bigger hard drive just like the Xbox One X. There are a few less upgrades in the Pro as opposed to the X however, including the fact that the Pro doesn’t play 4K Blu-Rays (curious as Sony is one of the platform holders of the Blu-Ray format) and generally less of an increase in power across the board. Nonetheless, for consumers who want to play PS4 in 4K with HDR enabled, the Pro is up to the task. Along with less graphical horsepower than the Xbox One X, the Pro also offers a lower price at $399.
Previous mid-cycle console upgrades
This isn’t the first time that the games industry has seen console makers launch major mid-cycle upgrades. In the early 1990’s the Sega Genesis and the Super Nintendo were in a highly competitive battle for market share. In 1991 Sega launched the Sega Genesis add-on called the Sega CD which plugged into the Genesis and added the ability to play games via CD-ROM. At the time this was a huge upgrade, the cartridges that Genesis and Super Nintendo games came on had 32 MB (or less) storage available while CD-ROM’s could hold up to a whopping 900 MB of data. Greater space enabled Sega CD games to feature memory intensive CD quality audio and video playback, allowing developers for the first time to incorporate real video in games. Like the Sega CD, the 32X was an add-on for the Genesis and launched in 1994 with enough additional graphical horsepower to enable developers to include rudimentary 3D graphics in 32X games.
Both the 32X and the Sega CD were largely unsuccessful. Not only did they sell poorly, they served to fragment the Genesis console base. Games developed for the 32X or the Sega CD, only worked for a consumer who owned a 32X or a Sega CD in addition to a Sega Genesis. Given that Sega eventually sold 30M Genesis consoles, 2M Sega CD consoles, and about 600k 32X units, the math never worked for developers to get strongly behind Sega CD or 32X. The nature of the half step console increase worked against Sega. Sega was simultaneously supporting the Genesis, Sega CD, and 32X all at the same time. The user base was on the Genesis, so Sega and other developers had to make games for the Genesis to sell enough software to remain profitable. However as long as a steady stream of releases continued for the Genesis, consumers were disincentivized from buying a Sega CD or 32X. And since developers for the Sega platforms were primarily focused on the larger number of users who owned a Genesis (but maybe not a Sega CD or 32X), Sega CD and 32X software didn’t typically reach the breadth of offerings required to drive Sega CD or 32X console sales in significant quantity.
Its important to notice that Microsoft and Sony have learned from Sega’s biggest misstep with the Sega CD and 32X, which was to fragment the customer base. Games developed for the 32X or Sega CD were only able to sell to the small number of consumers who owned a Sega CD or 32X. This put developers in an immediate uphill battle to recoup their development cost by reducing potential sales. Microsoft and Sony on the other hand are ensuring that any games developed for the Xbox One X or PS4 Pro are compatible with the Xbox One and PS4, respectively.
The 32X and Sega CD were driven by a defensive strategy from Sega to position the Sega CD to compete with new CD-ROM enabled platforms (PC, the Sony-Nintendo partnership that never came to fruition, Philips CDi, and others) and to be able to compete 32 bit gaming on offer from the 3DO, Jaguar, and upcoming Sony PlayStation by offering the 32X. In 1995, Sega quickly moved on from the failure of the recently (1994!) launched 32X by releasing the brand new console Sega Saturn, totally unconnected from the Sega Genesis platform.
Even old industry stalwart Nintendo has played in the mid-cycle game. Nintendo released both an upgraded Nintendo DS called the DSi, and an upgraded Nintendo 3DS called the New 3DS. These console refreshes were similar in that they offered slight hardware improvements, and a handful of DSi/New 3DS exclusive games that will not function on the DS/3DS. Neither the DSi or the New 3DS set the world on fire sales-wise, but the impact to Nintendo was not nearly as negative as with Sony due to the mostly shared libraries between the upgraded DSi/ New 3DS and the original model DS/3DS.
Of all the mid-cycle console upgrades, the Nintendo 64 Expansion Pak might be the most interesting. It cost about $30 and plugged into the Nintendo 64 console unit. The sole upgrade of the Expansion Pak was to double the available system RAM from 4MB to 8MB. There were a few games like Donkey Kong 64, Zelda: Majora’s Mask, and Perfect Dark which required the Expansion Pak, and a host of games which offered improved performance with the Expansion Pak. However an N64 with an Expansion Pak was never marketed as a new console, rather the Expansion Pak was pitched as a cheap accessory that enabled the N64 to run a few highly taxing games it would otherwise be unable to run and enable other games to run with improved performance.
Strategy driving the Xbox One X and PS4 Pro
Pricing: First lets walk through the concept of Good, Better, Best pricing. There are many common examples of this in the marketplace. Take a look at the Apple iPhone. Currently Apple sells the iPhone SE (MSRP starts at $399, 4 inch display, Apple’s most basic smartphone product offering), iPhone 6S/6S Plus (MSRP starts at $549, 4.7+ inch display, a more advanced feature set than the SE), and the iPhone 7/7 Plus (MSRP starts at $649, 4.7+ inch display, the most advanced smartphone feature set currently sold by Apple).
In this example, the SE, 6S, and 7 represent “Good”, “Better”, and “Best” respectively. By offering multiple products between the prices of $399 — $649, Apple is able to address a wider swath of smartphone buyers than with a single price point. If a consumer has a limited income, or is not interested in breaking the bank on a new phone, the SE will suffice. If it is important for a different shopper to have the highest spec iPhone available today, the 7 is available for a premium price point. And for those in between, the 6S represents a blend of price and performance.
Offering “Good, Better, Best” pricing provides a number of advantages to Apple. Were Apple to have a single SKU, say the 6S, they would be missing out on being able to serve customers looking for a less expensive device. Likewise, as sales of the iPhone 7 show, there is a large segment of the market who are willing to pay more for a more advanced smartphone. Were Apple to only have the 6S on sale for $549, it would be missing out on the higher profits from consumers buying the $549 model, when they would have chosen to pay $649 for a more premium model instead. Not only that, typically the higher you go in “Good, Better, Best” pricing the higher the profit margin, so it is most likely that a greater percentage of the $649 paid for an iPhone 7 is profit to Apple than the percentage of the $349 paid for an iPhone SE. In addition to “Good, Better, Best” pricing providing Apple increased profitability, it also allows the company to maintain competitiveness with other flagship phone companies (Samsung) while also appealing to the lower end of the market. Smartphones are not the only place “Good, Better, Best” pricing exists in the marketplace. Companies use this pricing strategy in fast food, automobiles, razors, etc.
Competition: The PS4 Pro and the Xbox One X are each positioned against two competitors, one direct (for the Pro, the X is competition, and vice versa) and one indirect (the PC).
The PC, traditionally the abode of Western developers and genres like first person shooters, flight sims, strategy games, and RPG’s, has broadened out to include nearly every genre and developer found on console. Japanese developers in particular have lately jumped fully into PC development, including companies like Square, Capcom, and Konami. Many console games not made by platform holders (Microsoft, Sony, Nintendo) release PC versions day and date with their PS4 and Xbox One launches. Couple the comparable PC library with the relative user-friendliness of modern operating systems and the PC provides a more compelling alternative to owning a console than ever. Doubly so when one takes into account that forthe best performance, the PC will nearly always provide it if to those willing to pay cash for top of the line components.
A recent survey by the Entertainment Software Association states that the average age of a male gamer is 35, and the average age of a female gamer is 44. That age has grown in recent years, with the generation that grew up with the Atari and Nintendo Entertainment System continues to get older. Gamers at the age of 35 are more likely to have a salary than a teenage gamer, and the disposable income that goes along with it. The $1,000+ gaming PC may not be as far out of reach as it used to be for these gamers (as evidenced by the rapidly growing gaming PC market), and Microsoft and Sony have to ensure that they don’t lose higher income customers to high performance PC’s. Enter the PS4 Pro and the Xbox One, much more affordable than a gaming PC and positioned to take advantage of your 4K TV that is lacking in 4K content. By offering high spec consoles at relatively affordable prices, Microsoft and Sony offer an inviting alternative to more expensive gaming PC’s.
The other main competitor for the PS4 Pro is the Xbox One X, and vice versa. When Sony announced the PS4 Pro in mid-2016 to launch in November 2016, Microsoft quickly rushed to announce that they would be launching a 4K console as well (then called Project Scorpio), although it would not launch until a year later in late 2017. Microsoft and Sony have been in a highly competitive battle for the high spec gaming market since the launch of the Xbox 360 in 2005, and the two have competed largely tit-for-tat in feature and exclusive software since then.
Extend the Life of the Console Generation: Videogame consoles typically sell at somewhere between a loss to a small profit when they are first released. The intent being to build an initial beach head install base of users, then as the number of users on a particular platform grow, they attract quality software (games), which attract more users, creating a virtuous cycle. The real profit for a console maker comes from the mid-later years of a console, with a healthy install base buying games and paying for online services (Xbox Live and PlayStation Network) which offer generous profit margins. As an added bonus, as the console life cycle continues the components that make up the consoles become cheaper, and manufacturing processes become more efficient. This drives down the cost of making the console, allowing the console manufacturer to lower the price of the console (attracting more users) and/or take a healthier profit margin on each unit sold. The key here is that the more time that Microsoft and Sony can spend in the mid-later years of a console cycle, the more profits they can generate. It is in their interest to extend the console life cycle as long as competition (namely Sony, Microsoft, Nintendo and the PC) permits.
By releasing 4K capable consoles in the Pro and X, Sony and Microsoft can extend the profitable part of the life cycle. As of 2017 the PlayStation 4 and Xbox One are already four years old. The previous generation of consoles (Xbox 360 and PS3) lasted eight years, from 2005–2013. Were this cycle to be of equal length, the market would be halfway to the next next generation of consoles.
Reset the marketplace: This applies solely to Microsoft, as Sony is currently the market leader with the PS4. The release of the Xbox One X allows Microsoft to redefine their place in the console market by launchingthe most powerful console released. With Sony taking a strong first place in market share thus far it is in Microsoft’s interest to have a clean start. And launching a new high spec 4K console provides an opportunity to achieve that.
The goal
Microsoft and Sony have a number of key justifications driving the release of new half step consoles with the Xbox One X and the PS4 Pro.
- By extending the life of the current console generation and offering higher end consoles to take advantage of consumers who are happy to plunk down cash for the latest and greatest, both companies are able to offer new pricing at the high and low end which will maximize profitability and reach. Profits will flow from both the likely higher margin high end consoles, and and the longer more profitable mid-to-end period in the console cycle.
- As long as one of the two competitors is releasing a half step console, the other has to release their competitive product for fear of being left behind.
- The Xbox One X offers Microsoft an opportunity to reset expectations and brand perception mid-cycle, a rare opportunity indeed.
Luckily greater choice, a longer console life cycle, and strong competition are all good for the consumer as well.
This article was written by Super Jump contributor, Mike Bruner. Please check out his work and follow him on Medium.
