I would argue the cost of the RRoD was a heck of a lot more than $1B because of all the lost sales. People didn't want to invest in hardware that was going to break 5 times over.
The direct damage from this won't be $1B (still tens of millions at least). But what about the impact of the lost sales and customers from the loss in credibility and trust? That is what could be huge.
It was relatively "easy" for Microsoft to replace broken hardware. How easy and how much is it going to cost Sony to replace broken trust?
I would argue the cost of the RRoD was a heck of a lot more than $1B because of all the lost sales. People didn't want to invest in hardware that was going to break 5 times over.
Agreed. Microsoft only wrote down the $1B as an expected total cost of fixing broken Xboxes. Who knows how much money they lost?
I've been seeing the notion of accounting for the loss of sales due to "reputation" come up on HN recently and I wish to dispute it.
First, most of the time when we're talking about business and we talk about costs we're clearly talking about accounting costs. This applies to startups, too. When you're talking about accounting costs, you don't get to include economic costs (e.g., opportunity cost.)
Second, isn't trying to include these extra "costs" due to lost sales the same thing that the music industry is doing? That is, claiming that they lost trillions of dollars due to file sharing from, you got it, "lost sales." [1]
I don't think there's any real way to measure these costs, so let's stop trying.
"Goodwill" is the difference between the book value of a company (value of tangible assets) and what it can be sold for. A manufacturer with tooling, machines and inventory might not have much, but a software company's book value is near zero.
People are asked to put value on intangibles all the time. You might want to write them all down to zero, but the rest of us value Wordsworth more than the dead trees his words are printed on.
No. Goodwill is the difference between the price paid to acquire a company and the book value of the acquired company. To put goodwill on the books, you must buy a company.
Opportunity costs are measurable. It all depends on your assumptions whether the measurements are reasonable or not.
Ex. If I make $2000 a week as a contractor on a steady contract, I know that the opportunity cost of taking a week of unpaid vacation time is $2000. That's a reasonable, measurable assumption.
However, I could also say that the opportunity cost of that week of vacation will be $12000, because there might be a one-week rush project that will come in that I can bill for $10000 in addition to my normal steady contract. Assuming there's not a pattern of that happening in the past, it's not a reasonable assumption and thus measurable in that way.
I'd say this second scenario is akin to the record companies assuming that every instance of piracy is also an instance of lost sales.
You're estimating an opportunity cost here, not measuring it.
Goodwill can be measured in the sense that goodwill = purchase price - book value. No assumptions are involved in its calculations--goodwill is calculated based on two fixed values.
Opportunity costs are not as concrete. In your example above you state your opportunity cost is $2000...but what if that rush project comes through? What if your steady contract scales back for that week? There are assumptions involved; ideally your opportunity cost would be the expected value of all probable incomes during that week. Identifying those probabilities a priori is impossible.
My point is: opportunity costs are based on assumptions. They cannot be measured--only estimated.
I definitely agree, and any "lost sales" are clearly evident in future revenue data. Opportunity costs are factors in economic decisions, but writing them down would be laughable.
My point was that Microsoft probably had some revenue trajectory with slope X before the write-down, and experienced a new revenue trajectory with slope Y < X after the write-down. I'm curious about the area between the two lines.
The direct damage from this won't be $1B (still tens of millions at least). But what about the impact of the lost sales and customers from the loss in credibility and trust? That is what could be huge.
It was relatively "easy" for Microsoft to replace broken hardware. How easy and how much is it going to cost Sony to replace broken trust?