The Rational Consumer and the Xbox One

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” – Murray Rothbard

My co-author wrote a couple of pretty spectacular and personable posts on the issues surrounding Microsoft’s botched messaging and shamble-ridden announcement of the XBOX One a few weeks ago.  I don’t want to retread old ground, rather I recommend going to read what he wrote here and here.  For the record though, and contrary to my illustrious co-author I will state that I had no problems with the DRM policies of the Xbox ONE, the always online requirement, or the price of the system.

What does bother me however is the reactions to Microsoft’s policies.  Let me be clear, I can understand being upset or angry at the aspects of the system that you either don’t agree with or lifestyle doesn’t support.  That’s cool and best of luck to you in continuing to voice your opinion and be heard.  But I think that the argument’s direction has ignored one key aspect, that is that we are in no way required or obliged to buy into Microsoft’s new ecosystem.  The price of the  Xbox ONE does not have any impact on consumers that are choosing to not buy it.  The price of the new Xbox ONE does not impact those consumers choosing to purchase a Playstation 4 solely.   We are not required to pay the price of admission and as such can exercise our right to choose to not purchase a new system.  The Xbox ONE is continuing Microsoft’s fight in a highly contestable market.  Sony and Nintendo are both strong competitors who can not only compete on content, but also on price.  So in short we are absolutely in control over whether Microsoft’s pricing structure allows them to meet demand forecasts and turn a profit.

The way the enthusiast press has discussed this issue has been nothing short of non-sensical on this matter.  There is no better example of this irrational discussion than Garnett Lee’s outburst on the most recent Weekend Confirmed episode where he derided Mr Don Mattrick and Microsoft for a level of complacency in pricing the Xbox ONE.  It was ill-informed and irrational and showed a high level of disregard and lack of understanding about how competitive markets work.

And the problem lays, I think, in the fact that there is a fundamental misunderstanding that Microsoft hold a significant position of market power (SMP).  Now whether this is due to their previous position in other markets where they most certainly had a position of SMP, or because of their successes in this console generation is unclear.  But what is clear is that Microsoft’s motivations are being interpreted with base assumptions that are wrong.   The fact is that Microsoft are, in the console market particularly, price takers.  That is they are not able to exercise significant influence over the prices of the market and the significant capital costs of building their hardware makes it difficult to engage in predatory pricing.  That is they are tied to make a modest profit, or a modest loss, depending on the pricing model they wish to employ.  The price it has set is what it as a company views as the point whereby it is palatable at launch for the market, but also at a level where the ongoing business case for the system is sound.  It is fact that it is in the best interests of Microsoft to have as many systems in peoples’ collective hands as possible.  Because one, it recovers costs associated with the development of the system, but two it also gives them greater bargaining power when negotiating exclusives with third parties.  Without third party support the Xbox ONE would be relying too strongly on its first parties and cross-platform titles, and would be have a harder time differentiating itself from its competition.  At a higher price point it is a hard case to make to consumers without exclusive content.  And the cycle continues leading to Microsoft having the incentive to maximise profits across both hardware sales and software sales, with regards to pricing for both and the resultant demand.  A position of SMP it does not have in this market.

For Microsoft the new Xbox isn’t Windows.  Where it had the clear advantage there, it doesn’t here and as a result Microsoft is forced to compete both on its feature set, its services and more importantly its price.  Consumers will make the decision based on the price and Microsoft in no way are obliged to meet the price of its competitors.  It doesn’t have to answer to any of us as to why it is AU$50 more expensive than its closest competitors.  It has shareholders that will hold it accountable to that end.  All you can do is make a decision whether or not your willingness to pay for the system lines up with Microsoft’s price and then, act accordingly.

And if you complain that it is too expensive now and still buy it, well that’s the very definition of irrational consumer behaviour and I will not shed a tear for that hole in your wallet.