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What makes a platform? Games or users? Console makers place their bets.
by Nicholas Lovell on 06/11/13 06:33:00 am   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.


I’m still catching up on all the news and analysis from the E3 reveals of the new consoles yesterday, but this is my current thinking.

Both console manufacturers need to get a large installed base. Although both Sony and Microsoft are committed to this generation of consoles, they still need lots of consoles in people’s living rooms to make money. The consoles are unlikely to make money at launch: most of the revenue will come from the royalty paid by publishers on each game they sell and on the share of revenue from digital downloads and online services on the platforms.

Each of those models need users. Lots of users. This is not a winner-takes-all market, but it is one that is, in financial terms, highly operationally geared. To explain that, imagine it costs you $1 billion a year to run a console business. That includes the marketing, the infrastructure, the retail teams, everything. Let us simplify and imagine that it costs $1 billion whether you have an installed base of zero or an installed base of 100 million units. In practice, that isn’t true. The more consoles you have to sell and support, the more it will cost you. But those customers are paying you money. What are really looking for here is the fixed cost base of running a console business, not the variable cost that depends on how many customers you have.

The chart below shows the fixed cost of running a console business as a straight line. On the left, where the revenue line is below the fixed cost, the console manufacturer is making a loss. Over on the right, where it is above the fixed cost, they are making a profit. Now here is the kicker: pretty well all console manufacturers are heavily in “loss-making” territory at launch. Even Nintendo, which famously made sure that it made a profit on every Wii sold even at launch, had substantial fixed overheads of running a console platform.


For any manufacturer, getting to the point where annual revenue exceeds annual fixed costs is a big moment. (More accurately, the CFO cares about when annual gross margin – after the costs of supplying the physical consoles or bandwidth for online services – exceeds fixed costs). The business is then profitable on a cashflow basis. They may still be unprofitable when you consider the pre-launch expenditure and the losses incurred up until this point, but the business is no longer haemorrhaging cash.

Microsoft and Sony know this. They are in a race to get to that moment as fast as possible. They face shareholder pressure for good financial results. The last two console cycles have not clearly made money for the manufacturers. Time is no longer on their side.

So Microsoft and Sony have to work to grow that installed base high and the revenue per user as fast as possible. And it seems to me that they are pursuing two different strategies.

  • Microsoft is betting that publishers are the key. Policies like restricted used sales and once-a-day validation are designed to attract game publishers who have spent years bitching about second-hand sales. Microsoft has taken out its cheque book to secure relationships with other content providers too, like the NFL and Stephen Spielberg. This strategy identifies content as the key battleground and is predicated on the assumption that if they have the best content, by offering the most friendly platform to content providers, gamers will flock to the Xbox One in droves.
  • Sony is betting that gamers are key. It has no used game restrictions. It is unashamedly about the games, not an all-in-one media centre (although it does have many media centre features). It has co-opted the retailers by throwing a lifeline to the highly profitable used game market. Sony’s strategy says that if we can get the installed base, the publishers will flock to where the consumers, and hence the money is, irrespective of whether they prefer the limited trade-in, DRM-friendly Xbox One.

Content is vital to both platforms. So are users. But to summarise the difference between the strategies, Microsoft is focused on “If we have the content, the users will follow”; Sony is focused on “If we have the users, the content will follow.”

So is content king, or is it distribution? Most investors would plump for distribution over content every time. If I had to pick sides now, I would go for the platform that is focusing on giving the users what they want, not the content suppliers. Over the next decade, we will see whether I am right.

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Erin MacGillegowie
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I'm not entirely certain that Microsoft has the content this article implies they do, at least not from a games perspective. Very little of what they showed at their conference was an exclusive to the point that they lead off with a multiplatform release. They also lack a lot of content in the indie space since their entire indie developer showcase was "new version of Minecraft." In that regard, Sony (and even Nintendo) are absolutely leaving them in the dust.

There was also a huge disparity in the number of games shown at their conference. Microsoft had somewhere in the 20s, where apparently Sony had upwards of 40, with a good portion of the titles being demoed on stage. I'd say that Sony has made a big push for gamers AND publishers, with publishers throwing a lot of weight behind Sony, given the massive showing they had on stage.

edit: Let's not even mention the $100 price difference that will make a difference to a lot of consumers.

Nicholas Lovell
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I think that is a fair point. But MS is going after the big "providers". i.e. appealing to publishers with DRM/tackling used games sales and other content providers with a cheque book. Sony is more focused on getting users.

I think you could argue that Sony is going after both audiences, whereas MS has focused on corporate needs not consumer ones. It's an interesting decision.

Erin MacGillegowie
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Again though, I don't think that the publishers really actually care so much, or they actually recognise that taking part in such a system would alienate their audience far more than actually make them any money. All the publishers likely knew about Sony and Microsoft's policies well before we did and they hedged their bets accordingly, making a -massive- showing at Sony's presser.

Joaquim Guerreiro
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One can be cynical and say the Big Publishers are behind Sony now at E3 but as soon as the lights go out they will crawl into Microsoft's cart, where the good profit is. I'd avoid to be seen near that PR disaster myself.

Sam Knudson
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There is way to much misinformation going around that is giving sony a lead that really is only because of their intense marking machine. Xbox showed far more exclusive games will the vast majority of sonys conference was dedicated to games that are coming out on both consoles and PC. All of those "Exclusive Indie Games" are actually not they will all be coming to steam at the same time as the PS4 launch. While Xbox does have its own exclusive indie game. If you rewatch the confrences and take notes Xbox actually had a far more powerful showing here is what i got

Xbox One:
MGS 5-Not Exclusive
WoT-Xbox 360 game (port of PC game)
Killer Instinct- Exclusive
Sunset Overdive- Exclusive
Forza 5-Exclusive
Minecraft-Exclusive (dont really count this one)
Quantum Break-Exclusive
project spark-Exclusive
Dead Rising 3-exclusive
TITANFALL- exclusive
Crimson Dragon-Exclusive
BF4-not Exclusive
halo 5-exclusive
Black tusk studios- Exclusive (no title or anything from them yet dont count it)

the order-exclusive
Infamous-exclusive (Will not be released on launch)
Drive club-Exclusive
Transistor-non exclusive
Indie games-non-exclusives
FFXV-Not exclusive
KHIII- Not exclusive
ACIV-Not Exclusive
Watch Dogs- Not Exclusive
Sports-not exclusive
Elder Scrolls Online-not exclusive
Mad Max- Not Exclusive
Destiny-Not Exclusive

Sam Knudson
profile image Here's a nice little diagram that got a couple of things wrong but pretty much the gist of day one. How can anyone say that Xbox isnt going after gamers with a much more impressive exclusive list AND the ability to trade games over XBL not needing the physical copy (Something sony will not be able to do). While the entire sony press conference was games that will be released on both and low blows to Microsoft that in the end will screw them in the end. The way of the future is digital distribution and If they want to be able to allow resell of digital games they need some sort of always on or DRM. Which they will not do. They made themselves a worse resale machine while toting it as better one.

Andy Cahalan
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@Sam Knudson... Who's to say Sony CAN'T do it? And I presume that Microsoft's instant play while the game is installing from disc won't apply when downloading without the disc. Sony can instantly win by offering instant access during install via Gaikai. Admittedly, not ideal as it is streaming but in terms of "hit download, play instantly" Sony have a decent advantage right now.

John Flush
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@Sam - "How can anyone say that Xbox isnt going after gamers with a much more impressive exclusive list"

History. The X360 has had an impressive exclusives list, for 6 months until the contracts expire. Then every 3rd party game became a multi-plat. Not only that once they go to the PS3 they also come more complete. I think most would rather wait until the game is actually 'done', and the MS exclusivity wears off, than deal with the Xbox one.

Really, everything that is exclusive to Xbox, that isn't done by MS studios themselves, I'm not even counting as exclusive. I got bit this gen (X360/PS3), I'm not going to do it again. Sony ends up with more exclusives long term.

Jakub Majewski
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Yes, the Xbox does have a more impressive list of exclusives. In truth, I would be surprised if they didn't. Think about it - for Xbox One, exclusives are going to be make-or-break. How will players justify buying a console that not only costs more, but also may restrict their ability to get money back by selling their games (mind you - this is likely to be an unjustified fear; publishers will be looking to make money off the second-hand sales, not to disable them)? Well, the only way to justify it is if the Xbox One gets you the possibility to buy games that are not available anywhere else. Sony, on the other hand, can afford to be a little more relaxed about exclusives. Sure, an exclusive is always a good thing for a console - but even if the game is not exclusive, even if it shows up on both consoles, the PS4 version will still have the advantage of being available on a cheaper console and of having less restrictions. Microsoft will be fighting all the time to persuade publishers to at least publish a couple of weeks earlier on the Xbox One, in order to preserve their advantage - that's going to be tough on them. They'll either be threatening publishers all the time, or having to offer them extra benefits to cajole them into delaying their PS4 launch.

Bob Allen
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The Gamecube and Xbox launched the same holiday. The Gamecube was $200 and the Xbox was $300 (50% more). And at the time, Microsoft had no gamer cred while Nintendo was the most profitable game company at the time. The Xbox sold more consoles than the Gamecube and WAY more software units. Software matters more to consumers.

The Xbox One is only %25 more expensive than the barebones SKU of the PS4 (missing the camera). Add the camera and the Xbox One is only %10 more expensive. And don't think Sony is above pulling what they did with the PSP. They may not even make many barebones PS4s and instead only sell bundles that include the camera and maybe a (what they value) $50 hdmi cable.

Another point, both Sony and Microsoft talked extensively around the time of the PS3 launch of making the next generation (the PS4 and Xbox One) not use any optical medium. All the Xbox One titles will be available as digital downloads. Is the lack of physical discs hurting games on the iPad? Android? PSN? XBLA? Stream? Think of the XBox One as the Steam Box that has fewer restrictions than Steam (you can actually take your games to a friend's house and share them), plays Halo and Forza, and also has the option to install off a disc rather than eat up 50GB of your monthly bandwidth cap.

Heck, if Microsoft wants to make a cheaper Xbox One, they should just leave off the blu-ray drive since everything will be available digitally day-and-date. For bonus points, they could allow you to copy the install image to a USB flash drive from a Redbox or Blockbuster kiosk since that would be faster and more convenient for installs than a blu-ray disc.

Jakub Majewski
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Bob, I very much believe that is their plan. Right now, the Bluray is in there, because an online-only console hasn't been tried, and would be too much of a risk - not to mention that a lot of people do want to watch their Bluray movies on something. But in a couple of years, after people get used to buying games online for the Xbox One, I would assume they will release a Bluray-less barebones version.

Fahad Zafar
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I agree with the core premise of the article. Nicholas, i know you are being diplomatic, but clearly MS made the wrong decision (not an "interesting decision"). Yes, time will tell, but segregating their customer base, not going for the full market (like you mention in your article) and pleasing only the corporate overlords is a very bad decision.

Chris Oates
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(apologize if this posts twice. Gamasutra appears to have lost my original after I logged in)
One thing being overlooked is that MS's policy allows for some advantages currently enjoyed by services like Steam and mobile games. Namely that once the game is activated on the Xbox Live account, that game can then be downloaded and installed without a disk to any console that the user is logged in to (leaving aside the Family pass option for now) -- whether this is enough to offset the loss of easy reselling is open for discussion, but it is not unilaterally more restrictive than the traditional console model.

daniel birchal
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It is more restrictive since you must be logged in your account!
With the disc model you simply don't need to download! Just bring the disc!

Kujel s
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With a media box or a console I want the content that interests me, sony doesn't and never did have this, MS has a lot and so does Nintendo. I've already got a Wii U and at some point I'll get a x1 but not before Halo 5.

John Maurer
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You must own a Vita too

Alternate Procellous
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Someone in Microsoft's marketing department has made a mistake. The early lead goes to Sony this time.

Number one rule of business: you have none without customers. Early adopters in this market are hardcore gamers. Whose value proposition appeals most to this segment?

Gamer-friendly policies from Sony on the PS4 and a lower price point for a roughly equivalent product (as far as gamers are concerned) clearly indicate that someone at Sony was paying attention during the last product cycle.

The message from Microsoft so far suggests they don't care about gamers. They might deliberately be playing the long game here, hoping the strength of the Xbox brand and their "it does everything" approach will have a broader appeal, but there have been some significant missteps so far. Note that the "it does everything" approach is the one Sony eventually took last generation.

Finally, just ask yourself, "is the ability to switch TV channels with my voice worth an extra $100?" I have a remote that does just fine (I'm reminded of the better mousetrap fallacy). One could argue that the Kinect does a little more than that, but my experience with the 1st generation Kinect was not very compelling. I didn't think the demonstrations during Microsoft's big reveal were convincing either.

John Flush
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To take this a step further... they say Kinect makes things easier to navigate. I have seen this with Forza 4- I'm upgrading and want to go back to the career, "Xbox - Play Career". Every time I do this I wonder why pushing 'X' doesn't bring up the same menu and let me select it, no voice needed. Kinect is stapled into stuff to appear more 'friendly' - really I just get sick of repeating myself of telling the room to shut up so the Xbox can hear me.

Axel Cholewa
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Recently I read the following: "Invention is the mother of need". Translated to the topic discussed here, content creates users. And I think this is true.

Personally I hope that Sony's strategy will pay off, but I'm afraid MS is on the right track.

Supply creates demand. Ever walked into a fashion store with a picture of a T-shirt or a pair of pants in mind? What did you walk out with?

daniel birchal
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MS didn't learn from Sony mistakes on current generation. At the end of the PS2 generation, Sony was leading by far and had excusivity contracts with most major devellopers(at least timed exclusives).
As the X360 install base grows, Sony lost this contracts. (like GTA 4 beeing released simultaneoslly on both 360 and PS3).
Publishers can't ignore a large install base and seems obvious to me that PS4's will grow much faster than the XBONEs by the simple fact that early adopters are core gamers and they do mind of how companys treat them. They're also the mind makers. Everyone that doesn't know much about technology knows someone that does know, and usually this guy is a core gamer. As PS4 is much more apealing to him he'll recomend that the other person buy a PS4!
I can tell this by myself. I conviced LOTS of people that the 360 was the best way to go, but I'm with Sony this time arround!
In my point of view, MS is in trouble. Their arrogance will cost big time!

Fahad Zafar
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okay what business school have you been going to ? "supple creates demand" ???????
please ask for your money back.

No, a quality product/service attracts demand (ps4/xbox one provide the same only about 10% different content).
demand creates supply.

Alexandre Laine
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The content will surely attract users, but you also have to see where and how this content will be available. Reading this article and the comments, I have the impression that the model is going to repeat itself again: USA = Microsoft / Europe = Sony.

When I look at the XBox's "media center" features, as an European, I just see American oriented marketing. I know we won't get a fraction of what is advertised to us, and that what I really care about are the games that'll be available on the system. When you look at the "always-online" feature of the XBox, you think about the guys who have sloppy internet connexions, weither it's the bandwith which is too slow, or the stability of the connexion. I also think of when I go on a vacation and I take my console, sometimes there is no internet there, so what will happen then?

When I look at the products Sony has to offer, and by product I mean games, I see some nice exclusives, some others which are available on all platforms and a console that I can use as I want, and games I can resell to buy more games, or trade with a friend to experience more games at a lower cost. I don't really care about the netflix and stuff, because it's not something very developped here, in Europe.

Talking about bandwith and connexion stability, I recall people complaining that in the US there are a lot of people with crappy connexion. And I also remember the complains on games like Diablo3 requiring to be online at all times, and the frustration I felt everytime my connexion went down, or that I got a power cut. It didn't prevent Diablo's great success, but as a player it keeps on annoying me a lot! and I'm not the only one :)

In the end for me it's not only the content that will define who's gonna win this generation, it's how the user access this content, and what he/she can do with it. And for now I think Sony delivers pretty good on this. If you look at the Wii U, featuring Zelda, Mario and such, it still sells quite badly and this content is not enough to build a fast big user base. So Halo and a few other exclusives are not something I'll take into consideration to choose the platform I'll spend my money on... or maybe in 2 or 3 years when the prices drops and the games are available as second-h... oh wait, no! :D I'm screwed!

Maria Jayne
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As a PC gamer, who hasn't put hands on a console in over 15 years, everything Sony are doing makes their console look more attractive to me. It feels to me that Microsoft have not only lost focus on what is important to consumers, they've actively marketed their competitors systems as better for gamers.

For Microsoft to succeed, they have to draw in an audience whose main interest in a "console" isn't playing video games. Because judging by the response at E3, they are already losing that audience, before it's even on sale.

Andy Cahalan
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I've been backing Microsoft since the first Xbox, but I can't help but feel left out in the cold. $161 extra in EU for less supported services. As long as Europe is blatantly subsidising cheaper Xboxes for America i'm out. I know that consoles will always be cheaper in the US but Microsoft have gone full piss-taking. I don't even have a TV connection (rots the brain) so it's even less relevant to me.

I was a top tier spender, too. I spend more money on new gaming product than anyone I know. It's not about the money, it's about respect. Even though Sony are pulling the same $/€ crap their console is still less of a rip off, and they seem to care about gamers this time around. It seems to me that Microsoft would be just happy owning North America. Let them, because no amount of Halo or Quantum Break or Titanfall will bring us back.

I'm too old to be angry about this. It's just shocking. Truly shocking. Sony just had to keep going as they were to win - and that in itself makes a statement about Microsoft.

Vinicius Couto
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I think this generation we'll see whether DRM does indeed hurt the industry or not. Who's right, gamers or publishers?

Bokshik Kim
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I think the publishers are the key.

If they decide to publish games exclusively on XboxOne because of the policy, the games couldn't help but choose XboxOne because PS4 would have games only from their first parties. If they don't, there isn't any reason for customers to buy XboxOne. It has lower spec and is $100 more expensive.

But I don't think publishers will boycott PS4. at least, not until XboxOne overwhelmed the market. and without it, it won't happen.

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Jorge Molinari
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Loved the article and the discussion that followed it. I owned a PS one, and switched to XBOX. In current gen I only had an XBOX 360. For next gen, I feel I’ve just lost interest in games. I would have preferred better physics than better graphics. The only thing that made me smile when thinking next gen is playing a 64-player battle in BF4 from my living room. As to which console will I get? I’m torn. I hate paying an extra $100 for a stupid kinect (I have the first one) and some non-gaming features 60% of which I’ll probably never use. But I HATE the dual shock and LOVE the Xbox controller. Who knows, maybe I’ve lost interest to the point that I’ll be able to sit next gen out for a few more years until I slowly finish my backlog of games and the dust settles. At this point the only next gen game I’m looking forward to is BF4 and I’m not going to get suckered again until I see how their destruction engine works after the console game is released.

Sony was the smarter company: By appealing to the gamers, they set themselves up to compete with MS and Nintendo. By contrast MS set themselves up to compete with whatever the heck Apple has been cooking for the living room; in addition to Sony. When the hardcore gamers flock to Sony come November, MS will have to pluck sales from a demographic of “casual gamers with deep pockets”. And this demographic is Apple territory. Any new product Apple releases for the living room will spell the end of Xbox.

Jorge Luis Herrera Omonte
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Sony will win the hardcore gamers, Nintendo the rest and MS well... i don't know where they're going or focusing. Sony doesn't need exclusives to win because the gamers support them, XBOX 360 was succesful because they targeted this share of market (hardcore), they released the kinect to get the casuals from Wii investing an insane amount of money in marketing and it gave them a boost in sales for a couple of years, at the cost of angering their fan base, now they announce all this anti-consumer policies losing all of them entirely. Publishers will go where they can get more sales off, i don't think they would release any real exclusives for any console unless they get under heavy pressure. As for me I'm from South America and I'm saving to buy a Wii U Deluxe (selling for 600$US around here) it has more value for my money, awesome real exclusives, innovative gameplay and good games from 3rd party publishers coming without having to pay additional fees later. In the end lending games or buying used is the core of the bussiness, and the reason why anyone who isn't rich would buy a console here, in USA, Europe, Japan and anywhere.

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Ricardo Hernandez
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I have to say I do not agree with some of the article's observations or conclusions per se on what Sony is doing - or at least the reasoning in the article. I do not see how exactly Sony "going after users first" means "less content" or "content will come" as if Sony was starting from a content-lacking point of view.

From everything I saw at the E3 if anything, Sony has great content. A lot of cross platforms and Sony has more than their share of exclusives and the associated studios to back that up.

Ian Welsh
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The question is if they have a "must have" game or games which are exclusive. If they do, those will sell the consoles, even at $100 more.

Jon Boon
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As long as there are stupid people, the XBox One will sell, and unfortunately, there are far too many stupid people in this world...

Titi Naburu
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"Content is vital to both platforms. So are users. But to summarise the difference between the strategies, Microsoft is focused on “If we have the content, the users will follow”; Sony is focused on “If we have the users, the content will follow.” So is content king, or is it distribution?"

Great analysis, and tough question.

Brock Davis
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I like that Sony is supporting Indie developers also because that appeals to the casual gamer also. Cheap games and fun. I think that Sony learned from the launch of the PS3 and doesn't want to make that mistake again. Microsoft's Xbox 1 is basically what the PS3 was in this generation, a media hub, PS4 can do all that and has no restrictions at all. Plus Sony owns something like 15 or 20 game studios their selves so they can pump out exclusives like no other. Plus do you see PlayStation exclusives being on the PC also? I don't think so!