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Editorial: The Case Against Console Price Cuts

Let me start off by saying I don’t know if the PlayStation 3, Xbox 360 or Wii will get a price cut this year.  Sony, Microsoft and Nintendo may very well decided to drop their prices before Christmas as many analysts have predicted.  The point of this editorial is not to predict price cuts, but to point out one possible reason why console prices have remained at the current level and why it might be a good idea for the companies involved to keep them there.

Despite all the recent industry calls for console price cuts the Wii and PS3 have remained at their respective price points from 2008.  With Wii sales slowing, Nintendo has dismissed price cuts as a means to spur sales saying that they are a “short term incentive“.  Sony has repeatedly stated that they need to get the PS3 to a break-even level, even when Activision recently threatened to pull support for the system.  In Sony’s case the fact that they have and are continuing to lose a tremendous amount of money on the PS3 is certainly one reason for their refusal to drop prices.  But this doesn’t explain Nintendo’s position.  They have always sold the Wii for a profit and should have plenty of wiggle room to lower prices.  The answer, for both of these companies, may have less to do with their current state of the video game industry and more to do with the value of the U.S. dollar.

Back in September 2008 the Fed drastically increased the monetary base by almost $1 trillion dollars in an effort to encourage banks to ease up on credit.  That increase in the monetary base is by far the largest in U.S. history and when combined with the current Federal Government’s never ending appetite for new spending programs the end result will be either high interest rates,  massive inflation (possibly even hyperinflation) or both.  If you want to read more about this there are a couple of good articles here and here.

What this all boils down to for the video game industry is that inflation is not a friend for anyone who imports goods into the country experiencing it, like Nintendo and Sony.  To put it simply Nintendo and Sony sell their consoles in the U.S. but they are based in Japan.  Being Japanese companies they want Yen for their products and not dollars.  So, when a Wii or PS3 gets sold in the U.S. the money is converted into Yen at the current exchange rate before Nintendo or Sony can mark it down in their books.  At stable exchange rates this is all fine and dandy but if the Yen appreciates against the dollar they are going to loose money in the transaction.

For example, lets say the current exchange rate is 100 Yen equals 1 Dollar and a Wii sells for an even $250.  At this rate when a Wii gets sold in the U.S. Nintendo gets 25,000 Yen (250 dollars times 100 yen).  Now lets introduce U.S. inflation into the transaction and the new exchange rate goes to 50 Yen equals 1 Dollar.  At the new rate when that same Wii is sold for $250 Nintendo only gets 12,500 Yen (250 dollars times50 yen), half of what they got before.  This is an extreme (and overly simple) example but you can see how Nintendo and Sony, or any exporter to the U.S., would have some concerns about a weakening U.S. Dollar.

I can’t say for sure that this is what is holding Sony and Nintendo back from dropping their prices but if I was the CFO for either company and watching the current mismanagement of the U.S. economy by the Feds I would certainly have it on my mind.

-Justin

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