Looking at the next generation of consoles is a little scary to me.  We are in a position where there just isn’t an abundance of cash flow and yet shiny new hardware costs a lot of money.  It is not unreasonable to think that a next generation console (Wii U not included) could cost in upwards of $499 or more.  With this new found power we could see $150M development costs that translate to $90-$100 price tags per game.  The entire model just can’t continue to grow along the same trajectory that we’ve seen in the past couple generations.  Every time the barrier to entry is increased like this mobs of potential buyers walk out of the store empty handed and hearts crushed.

An interesting note about mobile phones is that their cost is subsidized.  The carrier (AT&T / Verizon / etc.) subsidizes the phone such that the vendor is receiving full dollar for their hardware and the user is dispersing the cost of their phone through a 2 year contract.  There is a reason why that $500 Blackberry only costs $100 when you sign a 2 year agreement.  I personally think that there may be some benefit to this model if it were implemented for home consoles.

Imagine for a moment that the XBox 720 is released at an affordable price of $149 with a 2 year contract to XBox LIVE for around $100 / yr (or roughly less than $10 a month).  Now, at the end of that contract you are looking at a total of $350 that the consumer has spent for hardware and contract alone.  If you take into account that the $200 contract is at a much higher profit margin (given the low overhead of LIVE), it greatly outweighs the lower price point.  Less money is given to retailers and more money in the pockets of the vendors.  The idea is that the console could be sold at a loss for $149, but the profit margin at the end of 2 years (and beyond) would actually be greater than trying to cut costs with redesigned hardware that strips features.

I can see all of the bitter mobile phone users out there, holding their $150 / month bills and screaming about how terrible this idea is.  But keep in mind that I am only proposing a plan that is $100 / year and would give ALL users Gold Member access to LIVE.  It would also open the door to giving more “free” services to LIVE users instead of additional charges for streaming video and music services.  A contract plan like this would also give developers more success on the digital download services that may be restricted to Gold Members only.

Given that console cycles are converging on nearly double that of previous generations, it wouldn’t be outside of the realm of possibility for Microsoft to pocket around $1150 ($149 console + $100 * 10 years) in the life of that console.  Let’s face it, right now they are on track to pocket about the same with ($349 average + $60 [LIVE Gold] * 10 years) $950 for the life of the XBox 360.  Yes, yes I know; for all you math junkies this only makes sense for the small group of early adopters but keep in mind that I am really only talking about the overall profit margin of the first 2 years after the purchase of that console.

In the end, I am only trying to propose a solution that is an overall lower cost to the consumer (ME) and still reaches profitability for the vendors.  I must admit that I am not the biggest fan of yet another monthly bill but this might be the compromise that sets me at ease.  Of course if they get greedy and charge $249 for the console and $150+ / yr for a 4 year contract then it kind of defeats the purpose doesn’t it…