Nov 18

Tim O'Reilly

Tim O'Reilly

Insight into Future Business Models

Paul Kedrosky points to an amazing analysis of the costs of the PS3 based on a teardown. He notes that "Sony is losing an astounding $306.85 to $241.35 in manufacturing and component costs per PS3, depending on the configuration." He adds: "The size of the loss per unit is, my recollection, the largest in the history of the gaming industry. It is a fairly remarkable demonstration of how the industry has changed, especially when you consider that the PS3 is delivering supercomputer levels of performance."

What I find fascinating is that this is not merely news about the gaming industry. It's potentially news from the future of all information-services-infused hardware. I forget who I heard ask me a year or two ago, "how long will it be before we can give away cars for a multi-year commitment to the information services embedded in them?" That question is increasingly on the horizon.

Just as software is rapidly becoming free, while the services provided by that software are monetized by other means (advertising, subscription, or even, in traditional companies, maintenance), so too may "stuff" of all kinds (not just cell phones and gaming consoles) join the ranks of products supported by new business models.

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Comments: 17

  Mukul Kumar [11.18.06 10:14 AM]

Very interesting thought. I agree 100%.

  Hamish MacEwan [11.18.06 10:40 AM]

I think you'll find it was Jonathan Schwartz, and its a tribute either to his position or reality-distortion capability that the idea got any traction.

After all, a console can be, to the degree inertia and the forces of the state enforce it, a closed system.

What plans did any one have in the vehicular example to prevent me taking my cellphone, laptop, PSP etc into the car?

Perhaps a Faraday cage and no windows would help ensure, "the information services embedded in them" are the only ones you use. Might adversely affect operation, but how else do you establish a content provision monopoly?

No, a console and a car are completely different in scale and usage. If it were possible, it would speak very clearly of the margins in the content business...

So, I suggest the answer to the question is never.

  Olivier [11.18.06 11:23 AM]

Just compare business concepts of PS3 and Nintendo, as presented in "The Economist":

- My 60+ old neighbour (woman!) bought one for brain-jogging stuff.

- The have many "girls" games (Animals, Horses, etc.)

- They ship in "pink" - imagine a pink PS3 :-).

- New "sportif" games are to come (mum will kits let longer play, if it is good for the body.

- ... .

My bets are clear: Nintendo will not win the technology prize. But certainly the one for intelligen ROI !

See also:

  Gerald Joseph [11.18.06 03:41 PM]

Slowly, but, surely software is facing a future similar to broadcast television content.

Additionally, alpha geeks and hackers (techies/programmers) are becoming divas and rock stars with cult followings and multiple brands.

Software's becoming embedded in browsers and requires no installation.

I'm beginning to wonder:
Why should servers and desktops exist?

  Tim O'Reilly [11.18.06 06:15 PM]

Mukul -- I fail to see what open or closed has to do with the automobile discussion. If someone offers a free or heavily discounted car in return for a five year commitment to the car's information services subscription, you're locked in by contract, whether or not the user could access alternative services. And why would the average user then seek out alternative free services if he's already committed to the ones he pays for?

It's not really a free car, any more than a phone under contract is a free phone. But the perception of where the economic value lies does shift, and with it, the set of players who are extracting value out of that particular economic ecosystem.

  Srini [11.18.06 07:15 PM]

An interesting trend; similar ideas are creeping into other businesses.

For example, there's an article in the last BusinessWeek about Rynair, a European discount airline.

They give away about 25% of their seats and the rest are really cheap. They still manage to have higher margins than most other airlines - their new business model is to sell you stuff while you fly.

  adamsj [11.18.06 07:48 PM]


What if one of the information services in the contract involved making the driver/owner/passengers findable, and the contract had terms of strict exclusivity?

It may seem far-fetched, but consider the value of such a service to competing wrecker services or on-site mechanics. What about fast-food restaurants and motels that want the travelers' business?

  Henrik [11.19.06 06:51 PM]

The big difference is that you do not agree to a subscription when buying a console. The lock-in only works if we actually choose to buy the games.

  Dan [11.20.06 03:45 AM]

Well I for one, am hoping that an intelligent company like Apple release the much rumoured iPhone as a mass market electronics device, thus avoiding customers the pain of paying vast sums of money and being tied into long contracts.

  michael schrage [11.20.06 08:53 AM]

umm, you might want to check this :-)

  Tim O'Reilly [11.20.06 10:15 AM]

Srini, Michael -- great pointers to related ideas. The idea that "free" is really cross-subsidization is an important one. A product need not be paid for by subscription to information services. It might well be some other form of monetization.

  Tim O'Reilly [11.20.06 10:33 AM]

John Adams -- you're right. People will try all of these models, and some of them will work. We already see lots of models based on the idea of trading off privacy for various economic benefits.

  Martin Edic [11.20.06 02:59 PM]

This is not future speculation at all. We're dealing with it in real time right now, having figured out an ad-free means to monetize an online app so we can give it away. It's not a single purpose web 2.0 app, its a business application with hundreds of thousands of paying users.
Once you figure out how to monetize, the challenges are building as large a base as possible and then learning how to drive usage, a completely different set of marketing issues when compared to paid. This is where some of the 2.0 start-ups have to find a partner because you need to scale up really quick and that's not easy to without infrastructure.
As for the car example, I remember when billboard companies tried paying the payments on cars if the owners would let them wrap the car in a message. Turns out the vehicles ran afoul of signage ordinances in residential communities. Otherwise we might be barraged with even more messaging every time we went out to the street...

  David [11.21.06 02:50 PM]

I have a cell phone that I got for "free" though I give them $49.99 a month to use the service.

I'm not sure this is really any different than getting a car for "free" and giving them $399 a month to "use the service". I think we're already there...

  Tim O'Reilly [11.21.06 09:44 PM]

David -- I think you're absolutely right. But how offers are framed makes a lot of small differences. If you think you're paying a "lease" on your car, or paying off a loan, you think about it one way. If you think you're buying services, perhaps you think about it another. More importantly, if the vendor is able to frame the deal such that you think *they* own the car, they have more freedom to tie in various kinds of upsells and other services. If your phone was $49.99/month all inclusive, it would be one thing. But because you're buying "the service," they get to add lots of upsells. So how the deal is framed can involve a lot of subtle shifts of power between vendor and consumer.

  ian holsman [03.22.07 03:51 PM]

digitimes doesn't take into account how many games a 'average' person will buy because of the PS3.

sony's biz model is based on

- licensing fees to game developers
- a cut on each game

so I'm guessing they probably assuming the average buyer will buy around 6-10 games during the console's lifetime.

I don't have access to the original article, but so I don't know what cost-base they are using for their figures.
and was wondering if it took into account the bulk-discount on the components sony would be getting, and the likely cost-improvements sony will be performing in the manufacturing process as time goes on.

I also wonder if you should take into account the benefit it has on blu-ray sales, and it as a tool to become the tipping point in the HDDVD/bluray way

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