The end of the loss leader

On the launch date of the iPad, it occurred to me that Apple and Nintendo have both created products that emphasize interface and usability over other considerations. Say what you will about the iPhone, the iPad or the Wii, but nobody disputes that they have more intuitive and easy to pick up interfaces compared to the competition. They have been amply rewarded for it, too. Apple has been reported at one point to make about $50 in profit for every iPhone sold, and the Wii is the only videogame console to have sold for a profit right from the beginning. The Xbox 360 and the PS3 both sell at a loss so that Microsoft and Sony can recoup the difference with licensing fees from software sales. And for all that Microsoft and Sony might feel smug about the technological superiority of their machines, you can be sure they would love to have Nintendo’s profit margin.

This is three times now that Nintendo has sold their console for a profit. The GameCube also reportedly cost less to manufacture than its retail price, and although consumers did not reward it as richly as they did the Wii, a quick look at Nintendo’s financial reports reveals that they were still raking in the cash. The DS is also sold at a profit whereas the PSP followed the traditional loss leader model. Interestingly enough, the biggest competition for the DS now seems to be another device that isn’t sold at a loss: Apple’s iPhone.

The point is Nintendo and Apple have demonstrated that electronic entertainment devices don’t have to be sold at a loss with the promise of a cut from content sales to make up the difference. And if they differentiate themselves from the competition with a unique feature or interface, they will reap massive rewards. Consoles have been loss leaders for so long that sometimes it seems that they are manufactured that way as an article of faith.

The truth is more complicated than that, of course. The most technologically advanced and powerful gadgets cost money after all. And up until now, consumer demand justified the expenditure. But today we are nearing the edge of processor speeds. At the same time, there is now a greater demand for products that technologically unsophisticated people can use to do otherwise complex activities. And the thing about good design is it takes care, attention, and imagination but it doesn’t necessarily take money.

It will take a few years, but I have a feeling that we may be nearing the end of the loss leader console. The way things are trending, it just won’t make economic sense any more. If there’s any justice in the world, that would mean a reduction in licensing fees since console manufacturers won’t feel such intense pressure to recoup their investment. Even if there is justice in the world, though, don’t expect a move like that to start with Nintendo.