In Theory: Can the PS5 Digital Edition deliver a cheaper next-gen console?
Removing the Blu-ray drive adds options, but the economics are still challenging.
The recent PlayStation 5 showcase climaxed with a rendered debut of the console's final form factor - showcasing a somewhat controversial, and indeed gigantic design. But what nobody predicted was the reveal of two PlayStation 5 consoles. Arriving alongside the standard model is a new digital edition, which is essentially the same but lacking the UHD Blu-ray drive. Crucially, Sony didn't share pricing, with CEO Jim Ryan categorically shutting down the topic in a post-reveal interview with the BBC. We should expect an expensive console, but to what extent can the digital edition bring a more affordable machine to the market?
Let's discuss the baseline costs first. Based on initial specs, I had high hopes that Sony would deliver PS5 at the same $399 price-point that served PS4 and PS4 Pro so well - but now I find that harder to believe. Xbox One X launched three years ago at $499. PS5 has more memory that's more expensive to buy, its processor (though likely physically smaller) is using a more expensive fabrication process, the cooling is clearly more substantial and that's before we factor in the SSD and a more advanced joypad, and a much larger case.
Costs reduce over time of course, but looking over the consumer electronics market as a whole over the last three years, prices seem to be static or even rising with new product launches. We've seen flagship smartphones break the $1000 barrier (and go higher, even) for example, while closer to home, the move to 7nm semiconductor fabrication did not deliver a disruptive impact to pricing in the PC graphics market: AMD's RX 5700XT is comparable in some respects to PlayStation 5, it has less memory, and it still sells for $400.
Bloomberg has discussed the challenges facing Sony pricing-wise and they're onerous, and that's before we factor in Jim Ryan's comments to the BBC, which seem to suggest that the platform holder wants to focus more on value rather than sticker price. Costs-wise, the economics look daunting, and delivering a $399 PlayStation 5 while doable, would involve Sony subsidising the machine substantially - more so, perhaps, than initially thought. Historically, huge subsidies haven't worked out well. Between 2006 and 2008, Sony lost an astonishing $3.3bn in subsidising the price of PlayStation 3. PS4 addressed the balance with a relatively conservative design, but the next generation consoles are much more forward-looking and ambitious by comparison.
The PlayStation 5 digital edition gives Sony some latitude and the chances are it will be a cheaper machine, and if the platform holder removes a component that represents so much value, it has to give some of that value back to the user in terms of sticker price. The alternative would be to double down on storage, and charge more for the machine - and I'd argue that a premium SKU with fewer features than the main unit in any dimension would go down like a lead balloon. If the digital PS5 is to be a cheaper machine, this presents something of a problem: build cost will be essentially identical to the standard machine minus the cost of a UHD Blu-ray drive. Our understanding is that this component would only shave $20 or so from the BOM (bill of materials) meaning that apples to apples, Sony would lose more money by offering a discount any higher.
Of course, the cost of a console is not just defined by how much money is required to construct. It's long been established that the platform holder's cut of game sales is used to partially offset console costs, while the arrival of online gaming subscriptions and initiatives like PlayStation Now and Xbox Game Pass adds to the overall revenue Sony and Microsoft accrue across the generation. By offering a full digital console, the price of it could conceivably come down by more than the cost of the optical drive alone by tapping into those future revenues and giving a certain percentage back to the user. The challenge is in getting the balance right. The more Sony or Microsoft gives to the user to begin with, the lower the chance it recoups the amount across the generation. Certainly, profit margins can dramatically alter.
Shifting users to the digital ecosystem is a huge win for the platform holder and the game publisher. When you purchase a physical disc, there are a number of costs attached that do not exist in the digital realm - retailers and distribution take a cut, plus there is the cost of physically making the disc and its associated packaging. These costs effectively vanish, with only the minuscule cost of download bandwidth to offset it. In practise, the average $60 price for a digital purchase is split just two ways: the platform holder receives 30 per cent of the price, the publisher 70 per cent.
Based on information from our sources, the estimate is that a digital purchase yields the platform holder an extra $8 or so - so in theory, just three of four digital purchases plus the saving from removing the optical drive means that conceivably, Sony could offer a $50 saving on the cost of a PlayStation 5 console. Any more depends on how confident Sony is on how many games will be bought and how much it wants to take away from its profit-per-user across the generation.
However, there may even be an extra 'digital dividend' for Sony here, because users of a discless PlayStation 5 will be completely locked out of the used game market - and presumably at least some of the money spent there would be re-diverted in some way towards PSN purchases. In fairness, Sony has kept up an impressive cycle of digital sales and many of the prices are tempting. The trouble with factoring in this potential extra income is that it's difficult to quantify - I can't think of a mechanism by which any of the platform holders could track how prevalent the use of used games is, and therefore how to factor that realistically into their spreadsheets. However, it is definitely extra revenue of some sort that Sony can expect - but quantifying it and giving it back to the user in the form of a larger subsidy to the console price seems like a stretch.
Of course, it goes without saying that while Jim Ryan is talking about an all-digital console as an extension of choice for the user, obviously the reality is that it's an enormous reduction in options for sourcing your games. Certainly in the UK, the cost of physically owning a new game is significantly lower than purchasing a digital license. On day one, The Last of Us Part 2 cost £54.99 on the PlayStation Store and £49.99 on Amazon UK. On top of the reduction in choice in sourcing your games, you cannot resell a digital purchase. If you're looking to port over your existing PS4 library and access it via backwards compatibility, again, a disc drive may be essential depending on the make-up of your current collection.
On the face of it, transitioning across to an all-digital ecosystem seems to have a lot of downsides and it's not the route I'd personally want to take exclusively in sourcing games. With that said, there are clear plus points to digital. What you're getting is an online repository for your games with no potential degradation of media plus the ability to easily switch between consoles without needing a physical 'key' disc. The 'primary console' setup also opens up valuable options in sharing a purchase across the family.
Regardless, the point is that the concept of offering two SKUs could potentially soften the blow of an expensive console - possibly we'll see a $450/$499 price split. If our assumptions about the BOM are incorrect, conceivably it could be $50 lower - and while welcome, this seems unlikely. And of course, it could skew the other way - and if we are looking at $499/$549 instead, at least some form of PS5 console will be available at a price-point we've seen in the past - Xbox One X was 2017's $500 console, after all. This sounds daunting enough though and if we go any higher than that, the spectre of the PlayStation 3 launch, consumer dissatisfaction and billions in losses over the coming years could cast a long shadow over the business.
All this takes place with a background of unprecedented economic uncertainty brought on by the global coronavirus pandemic. Jim Ryan talks about the games business being somewhat recession-proof, and a launch allocation of PS5 consoles would likely sell out at almost any given price. However, pushing traditional console prices higher is risky in gaining mass market adoption and doing so now even more so. All of which brings us back to Microsoft's Xbox plans. Whether its Project Lockhart console comes to market is still not officially confirmed but its sheer existence - flagged up again recently in Windows 10 - suggests that the platform holder was concerned about pricing for some time, even before the economy ground to a halt.
The case has yet to be made for a cheaper, presumably smaller 1080p/1440p-orientated next-gen console, but if the alternatives are large, expensive boxes, the gambit may yet pay off. To what extent a discless digital-only PlayStation 5 can act as a middleground remains to be seen - but the economic wiggle it offers to Sony can only go so far.
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