Rob Fahey 08:00 (BST)
02/11/2007

Figure Skating

Direct comparisons of platform holder financials are missing the point - and confusing the issue.

"The firms have business models so utterly different that putting their financials side by side is much like trying to compare apples with oranges"

The latest batch of financial results from Sony, Microsoft and Nintendo make for interesting reading - not a claim we make lightly about financial results, we might add. In this instance, however, the results reveal more clearly than ever just how different the business models and market positioning of the three players are.

What's arguably even more interesting, though, is the manner in which these results have been treated by the mass media - especially the business press. Being asked to commentate on the results for a couple of major news channels has granted us an intriguing insight into just how the media perceives the current console race - one which it is following more intently than any previous development in this sector.

Despite Microsoft's success with the Xbox 360, the firm's entertainment efforts continue to be a footnote to the overall Microsoft story - with a profitable quarter for the Xbox division, driven by sales of Halo 3, being granted vastly less airtime than other developments such as the firm's investment in Facebook.

No, what really interests the media lies elsewhere - in the perceived battle between Nintendo and Sony, a story which appeals to news desks and journalists far more than the real three-way tussle does. Nintendo and Sony is the story that has it all - as it's perceived on newsdesks around the world, it's a David and Goliath underdog story, a comeback story and a quirky technology story, all rolled into one.

October's financial results provided the latest opportunity to haul up the tale. With Nintendo reporting superb figures and increasing its sales projections for the full year, while Sony's games division's figures were downright miserable by comparison, it looked like the story was developing just as the media would like it. Plucky David, the comeback kid, has the upper hand; Goliath, the reigning champion, is staggering around with a black eye and a bloodied nose.

There's some truth to that version of the story, of course - but we're not particularly comfortable with how it's been reported in the mainstream press, lacking much of the subtlety which should accompany any examination of such complex financial results.

After all, Sony and Nintendo's financials don't tell a simple black and white tale of one company doing well, while another company does badly. In fact, the two firms have business models so utterly different that putting their financials side by side is much like trying to compare apples with oranges - while Microsoft, with yet another entirely different model, introduces pears to this unlikely comparative fruit-bowl.

Certainly, the PS3 has not lived up terribly well to expectations in its first year on the market - but even if it had met all its targets with flying colours, we would still expect to see Sony's games division's bottom line being hit with losses (or at best, looking very anaemic) at this point. On the other side of the coin, Nintendo's profits are hardly a U-turn for a company which managed to stay firmly in the black, operationally, throughout the entire N64 and GameCube era when it was being roundly trounced by Sony.

The reasons for this are obvious to those in the industry. Sony follows the Xerox model, selling a complex piece of hardware at a knock-down price on the basis that it will make a profit from ongoing sales of software (or toner, in Xerox' case). As such, the first year or two of a console's lifespan are essentially a loss leader, with the firm taking significant profit reductions on board as it works to drop the manufacturing price of its hardware, and grow its software tie ratio.

Nintendo, meanwhile, follows a model that's closer to Apple's iPod business model - selling a piece of hardware which makes a profit (at worst, breaking even), and then grinning all the way to the bank thanks to ongoing sales of software. The impact on Nintendo's bottom line lies purely in research and development, and even there its costs are lower than those for the PS3's cutting edge chips and technology. In terms of manufacturing and sales, Nintendo maintains profitability from day one.

It's clear from this simple comparison that while judgements can certainly be made based on the retail success of both companies, any judgement based on financial figures needs to be taken with a hefty handful of salt.

Adding Microsoft to the equation only compounds that fact; the firm is billions of dollars in the red overall on the Xbox project since its inception, with only two profitable quarters to show for its efforts. The first was at the launch of Halo 2, and again for Halo 3 - one might argue, based on that, that Microsoft's only successful entertainment product is actually Halo, with the Xbox itself being a costly disaster, but that ignores the vast benefits Microsoft hopes to reap for its business overall by being a major player in the gaming and media space.

The point remains, however, that the Xbox and Xbox 360 are financial black holes, and will take many years to recoup their losses. However, they're considered to be successful consoles by the media - and with some reservations, we concur. The financial losses are almost irrelevant compared with the market share that has been won, the brand that has been established, and the software line-up that has been filled out.

If we're going to consider Microsoft in that light, however, Nintendo and Sony must also receive the same treatment. Nintendo's DS, and to a lesser (but growing) extent the Wii, are vastly successful, but it's their sales and brand awareness that reflect that success, not the firm's profitability. The PS3, meanwhile, is a disappointment to date (albeit far, far less of a disappointment than the media heavily implies in its reporting), but the PS2 and the PSP continue to be hugely successful consoles - and the PS3 must be judged by its sales and market share, not by Sony's financial status.

This is, in essence, a note of caution. Recent financials from the platform holders are interesting, but not because they provide a yardstick by which to measure performance - they simply don't. Rather, they provide a demonstration of how different the approaches being taken by all three firms are.

The value of these figures lies in contrast, not comparison - and while we're resigned to the fact that the mainstream media will probably never appreciate that, the specialist press and the industry itself could certainly do with a little more recognition of that fact.