So everyone is together up until this point, we're all mostly on the same page and agree. Many, though, argue that Nintendo needs to further cut the price on the Wii U, and this is where we split. Even if Nintendo spurred the growth of Wii U's install base at the cost of per unit losses, that's still a losing strategy for Nintendo
Originally Posted by facts
-Wii U is already being sold for a loss
-Margin of loss is within the reach of a single game per Reggie (means Nintendo is taking anywhere from a $7-$30 bath on each Wii U)
-Any additional price cut would add to this loss
-As of the Q1 results Nintendo has sold 3.61m Wii U consoles and 14.44m Wii U games (4.0 attach rate)
-Total attach rate for Wii, DS, 3DS, & Wii U is 6.65 games/console (1929.05m software/290.06m hardware)
Originally Posted by Some base assumptions:
-If we assume (for simplicity sake, also this is favorable to Nintendo for the sake of my projection) that Nintendo Land and NSMB U (essentially Nintendo's only first party software through Q1) have a 1:1 attach rate, that means half of Wii U's software sold is third party
-Nintendo makes roughly $7 (revenue) for every third party game sold as a royalty
-Nintendo makes roughly $30 (revenue) for every first party game sold
-We will generously assume that 10% of all software sales are digital (seems to be about the upper bound)
-This part is a wild guess, but I am assuming that Nintendo's cut doubles for both third party and first party digital software (because of no retailer cut) ($14 and $60, respectively)
-That means Nintendo earns an average of $20.35 in revenue per software sold (at full price)
So, how much price drop are we talking? Nintendo goes super aggressive and cuts the price another $100, pricing the basic model at $200 and the deluxe (packed with a game) at $250?
Originally Posted by relative pricing
-Wii U currently costs $300 ($300 w/o a game, $350 w/ a game, all comes out roughly the same)
-Both previous gen HD consoles currently cost $200
-PS4 is $400
-XBONE is $500
-Relative price (lowest to highest) is: PS3/360 < Wii U < PS4 < XBONE
-Nintendo cannot change the relative price of the Wii U without at least a $100 price drop (to match PS3/360) or more (to be cheaper)
(Personal note: I feel the relative pricing point is probably enough to have ever ruled out a price drop as the Wii U is already $100 cheaper than either other next gen system)
So, if Nintendo cut Wii U's price $100 prior to the holiday, each Wii U sold at that price would almost certainly be a net loss for Nintendo, even over the entire course of the generation. At the average attach rate of 6.65 units/console, Nintendo would likely never make this money back. The argument in favor of price cuts is generally "it increases install base" but the point of increasing the install base is to sell them games, and if you're still losing money even after they've bought all their games, what's the point? You were better off never selling them a console in the first place.
Originally Posted by price cut
-Nintendo is now losing an additional $100 per console sold
-That means Nintendo has to sell FIVE games (at an average revenue of $20/game) just to make up the loss (in addition to the one game they already have to sell to break even)
-Wii U's current attach rate is FOUR games
-If Nintendo sold 10m Wii U consoles after the price drop, they'd have lost approx. four hundred million dollars in revenue)
-If Nintendo sells half that many (5m) Wii U consoles but with no price drop (and the same attach rate and average revenue etc and still needing a game sale to break even) they'd bring in approx. two hundred and fifty million dollars in revenue
-This doesn't even take into account the number of copies each first party game (roughly half the units sold) have to sell in addition to the above to break even on their development costs
-Also the assumption for Nintendo Land and NSMB U at 1:1 each is pretty generous (meaning that the average $20 revenue/game is probably too high, meaning Nintendo would have to sell even more software to make back the $100)
Of course, the winner in this scenario is third party publishers, who don't have to eat the cost of the Wii U, and would see their gains go up with the install base. So there'd be some value (not sure how to measure that) in Nintendo "taking one for the team" and losing tons of money for the sake of third parties.
What is obviously a better idea is aggressive bundling (which is why we always see so many bundles). A $100 price drop translates into less than two games for the consumer, but giving away two games only costs Nintendo an average of $40 (this is why the Deluxe bundle has all the bells and whistles that add up to more than $50 for the purchaser). If Nintendo begins bundling Wii U consoles with a game (Wind Waker, NSMB U, Call of Duty, etc) + a pre-installed Nintendo Land that's only costing Nintendo an additional $20 but offering the consumer +$60 in value.
Obviously this all excludes normal price drops as manufacturing costs go down etc.
Sorry if this was confusing, I've been typing this (and double checking my numbers) for almost two hours now, just to make a thread that is essentially "tl;dr Nintendo would lose a ton of money they'd never make back by cutting the price $100"