Valve can afford a niche, pricey hardware launch; Sony and Microsoft can’t | Opinion

The great hardware pricing crisis may feel like it’s been going on for ages, but in truth, its full effects have only been felt in certain specific consumer sectors so far. If you’re directly shopping for PC components like RAM or SSDs, you know just how bad things have become; people in the market for things like SD cards or USB sticks may also have seen some jaw-dropping prices lately.

If you’re buying something pre-assembled from a major manufacturer, though, the impact – while real – probably hasn’t felt all that bad yet. Price hikes have happened, with newer models especially being priced well above their predecessors, but it’s not quite the full-blown pricing apocalypse we were warned about.

Not yet, anyway. Before anyone dismisses fears about soaring hardware prices as overblown, it’s worth bearing in mind that there are a few layers of cushioning in play here.

Major manufacturers generally have supply contracts that protect them from sudden massive price spikes, but they don’t get grandfathered into the old pricing for very long – such contracts are a protection against short-term market instability, not a guarantee of long-term pricing. In turn, those large companies also prefer to smooth out the pricing impact on their consumers, accepting a temporary hit to their margins to avoid the massive sudden price shocks that would result from passing through new component costs all at once.

It’s very apparent that we’re coming to the end of whatever grace period those contracts and policies might have offered. This week, Microsoft became the latest major manufacturer to hike prices, adding $100 to the 512GB Xbox Series S and $150 to the 1TB version.

Days earlier, we saw Apple raising starting prices across its entire line-up of Macs and iPads by at least $100 (and over $1,000 for some high-end models). The iPhone held its pricing, but it’s likely that new models arriving in the autumn will carry eye-watering price tags. For all that Apple is noted for extravagant pricing policies in many cases, it was actually one of the last major hold-outs in this move; most PC manufacturers have already passed through huge price hikes, though some – like Microsoft – are still warning grimly of worse to come.

That’s the context in which we have to consider Valve’s $1,000+ pricing for the Steam Machine. Coming hot on the heels of 40%+ price rises for the Steam Deck, and fully exposed to all of the same market pressures – not least of which being that Valve isn’t a major enough hardware manufacturer to command any pricing power with component suppliers – the price tag wasn’t a surprise. It was still a disappointment, of course, not least for Valve themselves I suspect, but this is the market reality right now.

For some consumers, in some niches, the Steam Machine may still look like a pretty good deal, at least once they get over the initial sharp intake of breath at the number of digits in the price. If you’re someone with an elderly gaming PC on its last legs who has been priced out of upgrades, for example, Valve’s offering is one of the more cost-effective ways to be able to play new releases. The high price points will certainly limit the addressable market for the device, but it will probably carve out a decent niche for itself among consumers who are directly comparing it to gaming PC pricing, rather than to consoles or other consumer devices.

For Valve, a decent niche may be just fine. For other major companies in the industry, not so much. It’s often observed that the Switch 2 outstripped the lifetime sales of the Steam Deck in under a month. That illustrates the vastly different scales which Nintendo and Valve operate at in the hardware market, but it also serves as a reminder that the commercial performance of the Steam Deck, which was perfectly fine for Valve, would have been an absolute catastrophe for Nintendo. The Steam Deck could thrive in a niche; if the Switch 2 had only found a niche of that scale, it would have been a disaster worse than the failure of the Wii U.

The same logic applies to two other industry giants who are lining up massive, consequential hardware launches in the next couple of years – launches which are likely to come while component pricing is still sky-high. Neither Sony nor Microsoft can afford for their next consoles to be a “niche success”; a level of commercial success that would make for a decent new string to Valve’s extensive bow would be the stuff of nightmares for a PlayStation or Xbox launch.

Yet both of those companies are facing down the barrel of exactly the same supply chain and pricing issues that forced Valve to hike prices over that psychologically massive $1,000 mark. Both of them do have a lot more muscle to throw around in terms of pricing power, which will help, and they’re also better situated to subsidise hardware pricing somewhat (unlike Valve, which would effectively be subsidising every Linux nerd’s next home media server – including mine – if they had sold the Steam Machine at a loss). Nonetheless, both companies have still had to raise prices on current-gen hardware – and there’s little reason to assume that Microsoft’s move this week won’t be followed by similar from Sony before the year is out.

Moreover, for their next-gen offerings they’re trying to build vastly more ambitious hardware than the Steam Machine, whose raw performance seems to be situated somewhere around the same level as a PS5. At the kind of performance bracket we’d normally expect from a PlayStation 6 or Microsoft’s Project Helix, we have to start contemplating not only $1,000 price tags, but even higher; $1,000 may actually be the best-case scenario for an entry-level console in the next generation.

The discussions behind closed doors at both companies are undoubtedly intense. The question of how much cost the console market can sustain before your device simply isn’t a mass-market proposition any more is an extremely tough one. We’ve seen that a lot of consumers are remarkably tolerant of high prices for some consumer devices like smartphones, but translating that directly into the console market doesn’t make a lot of sense. The risk of launching a console that’s simply priced out of its target market is very real – and it would be a brutally costly mistake to rectify, with heavy hardware subsidies being basically the only lever the platform holders could pull to try to claw back their audience.

“$1,000 may actually be the best-case scenario for an entry-level console in the next generation”

Given that situation, it’s unsurprising that we’re starting to see hints of strategies aimed at mitigating those risks – at least in part. Microsoft’s messaging around Project Helix remains minimal, but in the past weeks it’s hinted that it’s reconsidering a lot of fundamentals around the console in response to the hardware pricing crisis. What that reconsideration looks like is up in the air. We know that in the relatively recent past, Project Helix was pitched as a high-end, premium device that would combine Xbox console and gaming PC into a single system – an ambition that now looks incredibly hard to fulfil at a mass-market price point. A repeat of the reasonably successful Series S/Series X specification split might be one option to soften the pricing blow without entirely abandoning that original vision. Leaning more heavily on streaming (perhaps resurrecting the notion of an Xbox streaming-only device as an entry-level console) or adapting the Game Pass model to include payment plans for hardware could also be possible.

We know even less about Sony’s plans for PS6 at this juncture, but I suspect that the company’s recent return to a relentless focus on big, high-profile PlayStation exclusives is not disconnected from its worries about the direction of hardware pricing. Refocusing on the kind of big single-player exclusives that made the PS4 into such a powerhouse is good business under any circumstances, but if the next-gen console is going to have to justify a $1,000+ price tag, the first-party software line-up will have to shoulder an immense amount of the responsibility for selling hardware. Consumers faced with a doubling of console prices over the course of a single generation will be far, far less forgiving of a sparse release schedule than they were last time around.

Steam Machine isn’t exactly a canary in the coal mine for these consoles – it’s a very different beast from the outset, especially given the nature of Valve’s position within PC gaming more broadly. For a system with relatively low-powered hardware to hit this price point, however, is a stark warning about the direction pricing is going, and just how bad things are going to get on that front – in ways that Valve may be able to tolerate, but risk catastrophe for Sony or Microsoft. Both companies are no doubt scrambling to find ways to lessen the impact; but with component prices expected to rise even further by the end of this year, their room for manoeuvre is uncomfortably narrow.