Understanding the PS5 vs Xbox Series X/S

Sony and Microsoft have been competing for gamers since 2001, when the Xbox was released in the US. At that time, Sony had already been selling the Play Station for 6 years in Japan, and 5 years internationally, and has even brought out the PS2 already. I personally have very fond memories of the PS2, as do many other people – the PS2 is still to date the biggest selling game console ever.

It was because of the enormous success of the PS2 that Microsoft reacted strongly enough to create the Xbox. Microsoft initially feared that the Japanese created Playstation would take market share away from the PC market as a home entertainment system. In fact they were so worried that the project name for building the Xbox was “Project Midway”, a reference to the Battle of Midway – a battle in World War Two where the Americans turned the tide of the fight with the Japanese.

Microsoft were so keen to compete with the Playstation 2, released 2000, that they sold the Xbox in 2001 at a $125 loss per console so that they were able to meet the PS2’s price point. This was the start of the console wars. Just four years later Microsoft released the Xbox 360 again at $299 like the previous generations. The next year the PS3 was released at $499, battling it out with processing speeds, graphics quality, storage, and exclusive games.

But this seems to be where the battle ends. In 2013 and 2020, the next generation from both Sony and Microsoft were released within days of each other – early November both times, in preparation for a Christmas purchase. This year they are at the same price point, seeming to fight over graphics quality and processing speed. But are they really in competition?

If we examine the market that they are both competing in, there doesn’t seem to be a reason for them to fight eachother. In the console gaming market, there are large barriers to entry because of the innovation and cost of bringing a console to market, as well as the difficulties of getting games studios to produce games for your console. Also, there are network effects benefiting both Xbox and Playstation – a factor in the decision of which console to get is which console your friends have.

So the market is heavily fortified against new entrants. But how fortified is each of the brands in this market? We can try to measure this by thinking about how easy it would be to switch from one to the other, and what factors stop this from happening. These factors include past investments of money and time, and friendship networks. First, Xbox and Playstation have different controls – a childhood spent learning how to use one controller doesn’t necessarily mean that skills carry over to the other. Second, back-compatibility means that continuing on the same console means that your old library of games still has value, but wouldn’t if you switched. Finally, the online subscription to Playstation Plus/Xbox Live means that you have access to play with your friends – a friendship list that has built up since joining the service.

The market is fortified, the companies have their moats. How should they behave in this market? One option is to fight for market dominance: cut prices, spend on R&D, innovate and market hard. This might give you more sales, but also might be less profitable than the alternative: milk your market and don’t upset the boat.

This same market dynamic has played out in the past with Coca-Cola vs Pepsi. It has turned out that the best thing for the bottom line, when the other half of the duopoly is happy to play along, is to focus on being profitable where you are. So Microsoft and Sony focus on being profitable – introducing subscription models to get more out of their customers over time – without upsetting the boat and accidentally veering into competition territory. It isn’t surprising that most gaming articles, when comparing the two new consoles – end up saying that neither is better on its own, but the games available will change how attractive each console is.

Competitive collaboration isn’t illegal, but it also isn’t always what is best for consumers. In this case, unnecessary spending on marketing, advertising, and unnecessary innovation (that doesn’t add to the consumer experience) is a waste for the shareholders. Sometimes competitive collaboration, not trying to grow the market-share by stealing from the other party, is what is best.