Royalty Revenue Doesn't Calm Console Wars. It Arms Them.

Based on the research ofRamnath K. Chellappa and Rajiv Mukherjee, "Ecosystem Competition: Platforms, Subsidiary Markets and Multihoming in the Videogames Industry," Information Systems Research, 2026

In the standard telling of platform economics, letting a platform earn royalties on downstream game sales should relax the fight for gamers: with a revenue stream secured after the sale, why bid hardware prices down further? Ramnath Chellappa and Rajiv Mukherjee's ecosystem model of consoles, publishers, and gamers, forthcoming in Information Systems Research, finds the opposite. When a console expects to earn royalties on the games a gamer will buy after picking a platform, it has a stronger incentive to cut the price of the box today, because every additional gamer it wins now becomes a stream of future licensing revenue. The competition does not move to the console price; it starts there. The bill for that generosity is then passed upstream, not downstream: publishers pay for it through higher licensing fees.

The Box Was Never the Product

Console makers have subsidized hardware since long before anyone modeled it formally. When Sony launched the PlayStation 3 in November 2006 at $499 and $599, the semiconductor research firm iSuppli's teardown estimated Sony was losing $306.85 on every 20GB unit and $241.35 on every 60GB unit it sold, largely on the cost of the new Blu-ray drive and Cell processor. Sony absorbed roughly $2.1 billion in PS3-related losses in fiscal 2007 alone and another $1.1 billion the following year. That was never a pricing mistake. It was a bet that the installed base would generate enough downstream software revenue, including per-title publisher fees, to make the up-front loss worthwhile.

The same arithmetic is running today, only now the losses are being reported in real time. Xbox chief Phil Spencer confirmed in 2022 that Microsoft was losing somewhere between $100 and $200 on every Xbox Series X or Series S sold. By mid-2026, reporting on Microsoft's console economics put the loss at roughly $150 per unit even after a price increase, driven largely by a spike in memory prices that has pushed component costs well above what Microsoft priced into the original Series X|S bill of materials. Microsoft's own executives have been explicit that the model only closes if the box drives enough downstream spending, on games, subscriptions, and services, to make up the gap. That is the royalty-expectation channel in the paper made literal: the platform loses money on the gamer at checkout because it expects to make it back on every game that gamer buys afterward.

The Fee Publishers Never Voted On

If the console is financing its hardware loss with future game revenue, someone has to fund that revenue, and it is not the console. Nintendo wrote the template for this in the 1980s. After the North American video game crash of 1983-84, Nintendo built a third-party licensing program that gave it near-total control of the value chain: it charged licensees a 20 percent royalty, manufactured every cartridge itself at a fee of about $14 per unit against a subcontracted production cost of roughly $7, and required publishers to prepay for a minimum print run, commonly cited at 10,000 units for the Japanese market and far more for the US, while capping most licensees to five titles a year. Nintendo controlled well over 90 percent of the console market at the time, and third parties had no real alternative distribution channel to reach the installed base it had built. The platform did not need to subsidize hardware aggressively in that era because its manufacturing monopoly let it extract the surplus directly. What has changed since is not the logic, only where the extraction happens.

Modern digital storefronts run on a standardized 30 percent commission on game sales across PlayStation, Xbox, and the Nintendo eShop, the same split Valve popularized on Steam. Microsoft is the one platform that has publicly cut that number, but selectively: in 2021 it dropped its own PC storefront (the Microsoft Store) commission from 30 percent to 12 percent, a direct response to competitive pressure from Steam and Epic Games Store. Internal Microsoft documents that surfaced during the Epic v. Apple litigation showed the company had also modeled a matching cut to the 30 percent Xbox console commission, but that console-side cut was never implemented. Microsoft was willing to concede margin exactly where multihoming to a rival storefront was cheap and easy for a publisher, on open PC, and held the line exactly where the console's exclusive control over its own hardware gave it leverage. That is the mechanism from the paper operating in plain sight: the platform's fee is not a fixed cost of doing business, it is a lever set by how much competitive pressure the platform is under to win the gamer, and it moves in the opposite direction from hardware price.

Multihoming Deepens the Subsidy, Then Stops Paying

Publishers who release the same title on every console should, in the conventional multihoming story, be good for every platform equally: more supply, more reasons for gamers to buy any given box. The paper's model complicates that. As more publishers multihome, the model shows platforms subsidize gamers even more deeply, because a multihomed catalog removes exclusivity as a reason to pick one console over another, so price becomes the main lever left to win the gamer, and licensing fees on publishers rise further to fund it. Grand Theft Auto V is close to the platform's dream case here: Rockstar shipped the same title on PlayStation 3 and Xbox 360 in 2013, then on PlayStation 4 and Xbox One in 2014, then again on PlayStation 5 and Xbox Series X|S in 2022, and every console maker collected its cut on every version. Call of Duty tells the same story at even larger scale, and it became a live regulatory question when Microsoft acquired Activision Blizzard: to close the roughly $69 billion deal, Microsoft signed a binding ten-year agreement in July 2023 guaranteeing Call of Duty would keep shipping on PlayStation, precisely because both companies understood that a fully multihomed franchise generates value for every platform that carries it.

But the paper's sharper claim is that this benefit does not scale forever. Past a certain threshold, additional multihoming stops benefiting the platform, because the deeper subsidies and higher fees needed to keep competing on price for an increasingly commoditized, everywhere-available catalog start eating into the platform's own margin faster than the extra publisher licensing revenue can offset. More multihoming is not simply better, and platforms that keep pushing for it past that point are working against their own economics.

Why Platforms Buy Studios Instead of Multihoming Forever

Once a platform is past that threshold, squeezing more licensing revenue out of an already-multihomed catalog is a losing trade, and the more efficient move is to stop multihoming the title altogether. That is the strategic logic behind the console industry's recent wave of exclusivity plays and studio acquisitions. Sony paid Square Enix to keep Final Fantasy XVI as a PlayStation 5 exclusive rather than a day-one multihomed release, with the wider console release delayed and, in the case of the PC and Xbox versions, permanently blocked from Xbox entirely. Sony was reportedly circling Bethesda's Starfield next, having already secured timed exclusives for Deathloop and Ghostwire: Tokyo; Microsoft's answer was to buy the studio outright, acquiring ZeniMax Media and turning Starfield into a full Xbox exclusive rather than negotiating over a shrinking multihoming fee. Buying the publisher is the paper's threshold effect taken to its logical conclusion: when the marginal dollar of licensing revenue from further multihoming stops being worth the subsidy required to win the gamer, owning the exclusive content outright becomes cheaper than continuing to bid for it.

The price cut on the console was never a gift to gamers. It was a loan against a publisher's future licensing fee.

The Chellappa-Mukherjee model is a reminder that platform ecosystems do not decompose neatly into "the gamer side" and "the publisher side." A dollar of expected royalty revenue reshapes the console's incentive on the hardware side long before a single game ships, and a publisher's decision to multihome reshapes the subsidy gamers receive long before that publisher ever negotiates a fee. Anyone modeling platform competition as a simple two-sided balancing act, or advising a platform that revenue sharing will cool down a price war, is working from the wrong picture of the ecosystem.