Economists and Tech Companies

More and more a lot of Marketing decisions are being made or driven by Economists in technology companies like Microsoft. And boy, do they think differently. For instance this latest Microsoft promotion caught my eye.

Microsoft Announces New Back-to-School Offer for Students

Microsoft Corp. today announced a new offer for students who purchase a new Windows 7-based PC. Starting May 22, students buying a new Windows 7-based PC priced at $699 (U.S.) or more will also get a free Xbox 360 4GB console.

For a moment, I thought that’s a bold move giving away an XBOX 360, $200 value product along with a $700 or more Windows 7 PC. But some searches and half an hour later, I could do nothing but smile at the brilliance of the Economists or business economics savvy Microsoft Managers. Here’s why. Consider the below data:

#1, As of Q3, 2011 (which is March 2011 for Microsoft), Microsoft has sold 53.6 Million XBOX 360 consoles. Microsoft also sold 10 Million Kinects so far and this number is increasing at a rate of 2+ million per quarter. (source)

#2 As of Jan 11, Microsoft has 30 million XBOX Live members and more than 50% of XBOX Live members are XBOX Live Gold members (subscription for $50). (source)

#3 The attach rate for XBOX 360 is the highest for all game console makers at 8.8. From Wikipedia.

The attach rate of a product represents how many complementary goods are sold for each primary product. For example, the average number of DVD-Video discs (complementary product) purchased for each DVD player (primary product) sold, or the number of console-specific video games purchased for each console sold. 

The higher attach rate makes a product more valuable to content producers and the reason for better games on XBOX as compared to other consoles right now. The better the games, the more people will flock to XBOX, better the network effects, better the ecosystem, better feedback loop, better product, more users and the same vicious circle.

So what does Microsoft gain for 100 users, who lets assume take part in this promotion.

A – Took a $200 loss on giving XBOX for free. – Total - $20,000

B – Gained XBOX 360 user who has one out of five chances to buy a Kinect considering there are 10 million Kinects for 53 million XBOX 360’s. Kinect costs $150 so assuming 20 people buy Kinect, that’s $3000

C – Attach rate of 8.8 means people bought 8.8 games per console. Taking $30 average cost for an XBOX game, that’s $26,400 (8.8 x $30 x 100 users)

D – Then add XBOX Live Gold membership which considering above date you can assume half of people will take, That’s $2,500 ($50 x 50 subscribers)

As a simple math, the net value for Microsoft is B+C+D-A which in our case comes to (30,000+26,400+2,500) – 20,000 = Revenue of $38,900. While this may seem simple and straightforward, please see publishers are the main beneficiary of games sales and there are other costs like the marketing around this promotion (BTW,Check out this wonderful ad of a Halo Spartan blowing up a mini-fridge). Then there are indirect advantages also of young students learning using Windows PC while in schools and hopefully using Microsoft software and some becoming proponents of Microsoft software when they grow up and join large enterprises (playfield of Microsoft Office and Windows).