Low cost is king

Analysts have recently revised downwards sales estimates for Blu-ray disc technology, a move largely related to the fact that Blu-ray hardware is comparatively rather expensive. Blu-ray always had an uphill battle, in my opinion, irrespective of the down market. The visual clarity, for most, will be non-existent barring TV sets that are on the large side (and viewed from shorter distances than is possible in most living rooms). Given the power of upscaling DVD players combined with the bargain basement prices at which one can find most DVDs, I couldn't see how a Blu-ray video disc universe would develop very quickly (long term, maybe, though in the long term, video downloads will be a lot more common). I can't help but wonder whether the industry wishes it hadn't put itself on the slow track this past January - or rather, regrets that it was put on that track by the decision by Time Warner to back away from support for HD DVD and favor Blu-ray exclusively.

But my point, however, is not to pick over the carcass of a horse whose bones have long since been picked clean. The technology market is clearly in for a period of slow growth, and some are better positioned to weather the shift than others.

Microsoft has been running a series of ads on Comedy Central promoting the new, lower price of the XBOX 360 (and on that note, it's funny how you can sense the majority demographic of various TV channels by taking note of the sort of ads they tend to favor; Comedy Central is clearly watched by more males than anyone else given its preponderonce of gaming advertisements). The Arcade version doesn't come with an integrated hard drive (though via promotions, they aim to give Arcade users a 20GB refurbished drive for about $20), but at $199, it now undercuts even the Wii in terms of price.

This has helped push XBOX sales dramatically upward, and for the first time in - well, EVER - caused it to beat out Sony's PS3 in Japan, Sony's home turf (which is a considerable improvement, as for a very long time, XBOX sales in Japan were far behind both Nintendo and PS3).

XBOX had a year's head start on the other game consoles, and like the Wii, opted not to take a chance on high definition disc formats (though unlike Wii, XBOX supports HD video). That has helped them to achieve a price point that Sony, it would seem, is unable to match in the upcoming Christmas buying season (what there will be of one). That could lead to shifts in market share. XBOX might not catch up to the Wii, but it is almost certain to pull further ahead of the PS3.

Given the cost consciousness of consumers, however, other features of the XBOX market may work in its favor. XBOX has large numbers of low-cost games (many of them developed using Microsoft's XNA tools, a framework that enables regular "Joe the Computer Geeks" to build custom games) available for purchase through the XBOX Live network. Granted, you will want to have some form of hard drive to store them, but the games I've seen ARE quite addictive, and are far less than the $60 typical of a new release title. This adds to the value of a console that is already lower cost than others on the market.

Though XBOX may be helped, comparatively speaking, by newly cost-conscious consumers (though only comparatively - everyone prefers consumers who are fat, happy, and buying lots of product), one area that could suffer in the downturn is online advertisements. Google management may be maintaining a brave face, but it's hard to argue with Henry Boldget's analysis of trends in the online advertising business. If your business model is based on ads, times will be VERY tough over the next two years. That's bad news for Google, though much worse for second-tier ad networks such as Yahoo (never mind MSN, a division whose continued existence says more about internal politics at Microsoft than anything else). Getting bought for $43 billion (or something like that) by a company less dependent on ad sales probably doesn't seem like such a bad idea right about now.

Of separate note: Given consumers new-found cost sensitivity, a lot of analysts expected Apple to announce last week lower cost Mac laptops. They didn't, and to my mind, that makes complete sense. Apple has not spent years cultivating its luxury status, putting stores in the most fashionable locations around the world and spending huge sums on ad campaigns that are as universally recognized as they are iconic, only to suddenly race to compete on price at the first hint of an economic downturn. Does BMW lower its prices to compete with Honda during recessions? Does Gucci sell its wares in Target?

Apple products are luxury goods, and will remain so even in these tighter markets. I think their decision to maintain the price point shows that Apple management really understands the nature of the product category they have created. I don't expect Apple sales to break any records in the coming year, but then again, I don't expect many IT product categories to do much better.