Business Week: Will Sony's Pricey PS3 Pay Off?

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vortexpud

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http://www.businessweek.com/globalb...759.htm?chan=innovation_game+room_top+stories

Ever since Sony announced the $600 price tag for its next-generation video-game console in May, Stringer and his team have been busy deflecting criticism from analysts and hard-core gamers that the PS3, despite glitzy features such as a Blu-ray disc, is just too darn expensive. Potential buyers, say the critics, won't be impressed enough to haul one to the checkout counter.

That might not be such a big deal if Sir Howard & Co. didn't have such grand ambitions for the PS3. But Sony (SNE) has tied nearly every piece of its expansive operations—movies, music, chips, and high-definition television—to the console's success. The company plans to use the console as a Trojan horse to dominate the living room and, by extension, much of the entertainment industry.

The machine will have an Internet connection to let users send instant messages, talk to other PS3 gamers, and surf the Web on a built-in browser. And its hard disk and slots for plug-in memory cards will make it a cinch to sift through and play downloaded music or movie files—and allow Sony to funnel buyers toward its vast library of games, films, and music.

GOT GAMES? One troubling sign already indicates that the PS3 might not be quite the hit Sony expects. Game makers are steering development resources away from Sony and toward games for machines from Microsoft (MSFT) and Nintendo, says Hirokazu Hamamura, president of Enterbrain, a game-industry researcher in Tokyo. At its autumn games preview on July 13, for instance, traditional Sony ally Electronic Arts (ERTS) spent far more time showing off innovative Nintendo games than it did titles for the PS3. EA announced six Nintendo Wii launch titles and showed long working demos for two of those. But it offered only a short clip of a car-racing game for PS3. EA says it's still testing the potential of the PS3. "Many developers think the console's initial high price will lead to slow sales and are holding off on creating games for Sony," Hamamura says.

As the PS3's worldwide launch in November approaches, some are even predicting that Sony will lose its title as the undisputed king of console makers. Sony's 70% market share could fall by anywhere from 20 to 50 points, figures market research firm DFC Intelligence. Such a decline would be a strong boost to the only other serious players in the business, Microsoft (with 16% market share) and Nintendo (13%). "There is going to be a shakeup in the video-game industry," says David Cole, DFC's president.

No one would be more shaken up than Sony. Its first two PlayStations have each sold more than 100 million units, making them the hottest-selling consoles in history. And their success has helped Sony's games unit grow into a business that should book $9.5 billion in sales this year—almost 14% of Sony's total. Far more important, the unit has generated as much as two-thirds of Sony's operating profits in recent years, though last year that contribution fell to less than 1% of the total, or $75 million, as development costs for the PS3 started to add up.

DO THE MATH. Despite Sony's aspirations of pitching the PS3 as a home entertainment hub, games will almost certainly be the biggest draw initially. Although Sony also plans to offer a stripped-down version for $500, it may still be forced to slash prices to stay competitive. The PS3's top rival, Microsoft's Xbox 360, costs $200 less than Sony's machine and has been in stores since November. When Nintendo's Wii is released this fall, it could cost $250 or less, the company says. Hiroshi Takada, analyst for JPMorgan (JPM), predicts the PS3 will cost $500 by September, 2007, then $450 the following year. "It's likely Sony will have to discount more…and faster" than planned, says Takada.

Anyway you look at it, that hurts. Even off the starting block, Sony will be spending more than $750 to manufacture each machine, more than the initial retail price. It's not unusual for console makers to swallow losses in the early years of a new machine's life, making up some of the difference through licensing fees from game developers, and relying on efficiency gains later to turn those losses into profits. Yet Sony could go as much as $2 billion into the red in the PS3's first year, says Goldman Sachs (GS) analyst Yuji Fujimori. With sales of packaged games declining, Sony execs say they're looking to other sources such as fee-based online gaming and downloads, as well as ads for games Sony creates in-house. "Game advertising is likely to be an important part of our strategy," says Izumi Kawanishi, senior vice-president of Sony's Games division.

Sony executives won't comment on the PS3's cost, other than to say they will try to make the machines at a profit as soon as possible. But they note that no one has ever built such a complex console and that the PS3 will feature new technologies such as the high-definition Blu-ray disc and ultrafast Cell chip.

And Stringer says he's happy to take his chances. "The price of the PS3 is high, but you're paying for potential," he told Tokyo journalists in late June. It's the risk of being "revolutionary rather than just evolutionary on the cheap."
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Boy, the bad press (and arrogance from the execs) just doesn't stop for Sony, does it? When an investor's magazine picks up on it, you've got to have SOME concern. The parts I found most concerning are bolded... and if I wanted to "do the math", I think Nintendo has the most to gain this generation. Unless Microsoft can sell like hotcakes in Japan, it's easy to hypothesize that Nintendo will jump from a barely-third position to a close-first.

And this one discusses the lasting impact of a failed console:
http://www.businessweek.com/innovat...720.htm?chan=innovation_game+room_top+stories
 
I'm not sure how good the ps3 will do, however I'm not going to purchase one unless it proves itself with good games and if blueray turns out to be something worth having, I'm much more inclined to purchase a 360+Wii then the ps3, but that might change who knows?
 
With Sony pitching Blu-Ray on the PS3, I think Sony's software guys need to make sure that blu-ray playback is optimized for good image quality and performance. Nearly every review i've read of the only BR player on the market(Samsung) has bashed it for being extremely buggy and having really poor image quality. I believe FiringSquad did a minireview not too long ago where they said that even Toshiba's HD-DVD had better image playback. I believe that sony's biggest chance here is to make sure that this console works, and works as advertised instead of needing revision after revision, and patch after patch to get things working. I still stand by my amatuer prediction that the #1 and 2 spot will be very close between M and N, with Sony trailing closely behind in #3.
 
Wow, First the internet websites, then Business Week, whats next? News Week? Time Magazine? Sony's crap (for the lack of a better word) WILL get out to the general population in time. Having zero positive momentum / genuine excitement is bbaaaaaad.
 
Time Magazine and other such compilations are already siding with the Wii. IMO, the second article is far more interesting than the one posted.
 
Only time will tell what happens but I think the PS3 is going to be priced alittle high for a "gaming" system. But as we all know its not just a "gaming" system in Sony's eyes it does so much more. Its a matter of making that extra stuff worth-wild.
 
The idea that it's a steal as a blue ray player is bogus as well. A PS2 played DVDs, but did it play them well? Playback sucked on a PS2 because it was not a DVD player, it was a DVD-rom w/ a software decoder. Same is true on the PS3. If you absolutely must have next gen dvd but you're content with sub-par playback, then get it.... or save yourself some $$$ and just get a BD-rom for your pc.
 
For some reason or another, Sony seems to think that their consumers' purchasing power has risen as fast as the Playstation franchise. Unfortunately, this isn't true; this is a leisure market and people are growing increasingly skeptical of the pricing. Microsoft caught a lot of flak for $399; $599 isn't going to look any better to those of us in college who actually have to pay for our toys.

The noose is tightening around a lot of families with ever-increasing gas/grocery prices. Some might say "Oh, the fans will find a way" but any economic advisor worth his salt will tell you otherwise; videogames don't fit into most peoples' main priorities (Especially not the priorities of casual gamers, which is where Sony's bread-and-butter is).

What perplexes me the most is that Sony realizes that they're selling a non-essential product yet still insists that it's something we all need. We all remember one of Kutaragi's zingers that resembled something like "People will work overtime to get it".

Not only is their price absurd, but their basing the entire system around technologies that haven't really been market tested. That's essentially like Toyota producing an entire generation of cars around a wonder-engine (Cell) and quasi-revolutionary drivetrain (Blu-Ray) that may or may not pay off in reality. It's business at its worst and I can't even begin to fathom why Sony's shareholders are sitting by and watching it happen. This is Sony here; they managed to fuck up the optical media devices in both generations of their hardware and those were proven technologies. Now we're supposed to trust them with a technology that hasn't been tested? What kind of logic is that?

I hope they fail. Nintendo and Microsoft have done a lot more for the industry than Sony did with their PS2. Sony did great things with the Playstation but they took ten steps back with the PS2; Nintendo's hardware innovations and Microsoft's online infrastructure have changed the direction that the industry is headed in; Sony is standing on the sidelines trying to mimic the actions of the real stars.
 
K600 said:
This is Sony here; they managed to fuck up the optical media devices in both generations of their hardware and those were proven technologies. Now we're supposed to trust them with a technology that hasn't been tested? What kind of logic is that?.
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My thoughts exactly. Not that I'm a huge fan of either Microsoft or Nintendo, but I agree that they at least seem to be trying. Few remember, or are at least old enough to remember, Nintendo back in the old days. They were to the game industry what Microsoft is to the OS industry. They made developers sign agreements to not develop for other systems inorder to get their products liscensed as well as numberous other preditory tactics.
 
K600 said:
For some reason or another, Sony seems to think that their consumers' purchasing power has risen as fast as the Playstation franchise. Unfortunately, this isn't true; this is a leisure market and people are growing increasingly skeptical of the pricing. Microsoft caught a lot of flak for $399; $599 isn't going to look any better to those of us in college who actually have to pay for our toys.

The noose is tightening around a lot of families with ever-increasing gas/grocery prices. Some might say "Oh, the fans will find a way" but any economic advisor worth his salt will tell you otherwise; videogames don't fit into most peoples' main priorities (Especially not the priorities of casual gamers, which is where Sony's bread-and-butter is).

What perplexes me the most is that Sony realizes that they're selling a non-essential product yet still insists that it's something we all need. We all remember one of Kutaragi's zingers that resembled something like "People will work overtime to get it".

Not only is their price absurd, but their basing the entire system around technologies that haven't really been market tested. That's essentially like Toyota producing an entire generation of cars around a wonder-engine (Cell) and quasi-revolutionary drivetrain (Blu-Ray) that may or may not pay off in reality. It's business at its worst and I can't even begin to fathom why Sony's shareholders are sitting by and watching it happen. This is Sony here; they managed to fuck up the optical media devices in both generations of their hardware and those were proven technologies. Now we're supposed to trust them with a technology that hasn't been tested? What kind of logic is that?

I hope they fail. Nintendo and Microsoft have done a lot more for the industry than Sony did with their PS2. Sony did great things with the Playstation but they took ten steps back with the PS2; Nintendo's hardware innovations and Microsoft's online infrastructure have changed the direction that the industry is headed in; Sony is standing on the sidelines trying to mimic the actions of the real stars.
Click to expand...

I agree 100% with everything you just said!
 
K600 said:
For some reason or another, Sony seems to think that their consumers' purchasing power has risen as fast as the Playstation franchise. Unfortunately, this isn't true;
Click to expand...

QFT

working 40 hours a week making $11 per hour, add up to about $700 for two weeks of work full time. How many kids are willing to put two weeks pay into a video game console? (IF they work full time in the first place? $600 is TOO HIGH.

I understand thier strategy and its a BIG gamble on Sonys part, but to get thier shit in the living room in the first place I think they need to take a bigger initial hit, i dont know if its going to sell that well at a $600 price point - without games,controllers, memory cards added on.
 
to add a little more...

Sony is touting all this muscle and great things that the PS3 can do, but without the software to back it up it will just be a glorified plastic box to look at. I mean the Dreamcast is a shining example of this. Fisrt 128bit system to market. IMO it had alot going for it and could have been good if the support was there, which it wasnt. I know there were great games for it, I owned one, but support for it went away and so did the console. Take the up and comming Wii. It is far and away the least powerfull of the 3 so called next gen systems yet it will still kick some serious ass and sell a ton. If you sell something that can do X but there is nothing being developed to take advantage of X whats the point in having it. Only time will tell what will happen with the PS3. Do I want it to be a success, yes, becasue in the long run more competition in the industry leads to better things for the people that really matter, you and me.
 
K600 said:
For some reason or another, Sony seems to think that their consumers' purchasing power has risen as fast as the Playstation franchise. Unfortunately, this isn't true; this is a leisure market and people are growing increasingly skeptical of the pricing. Microsoft caught a lot of flak for $399; $599 isn't going to look any better to those of us in college who actually have to pay for our toys.

The noose is tightening around a lot of families with ever-increasing gas/grocery prices. Some might say "Oh, the fans will find a way" but any economic advisor worth his salt will tell you otherwise; videogames don't fit into most peoples' main priorities (Especially not the priorities of casual gamers, which is where Sony's bread-and-butter is).

What perplexes me the most is that Sony realizes that they're selling a non-essential product yet still insists that it's something we all need. We all remember one of Kutaragi's zingers that resembled something like "People will work overtime to get it".

Not only is their price absurd, but their basing the entire system around technologies that haven't really been market tested. That's essentially like Toyota producing an entire generation of cars around a wonder-engine (Cell) and quasi-revolutionary drivetrain (Blu-Ray) that may or may not pay off in reality. It's business at its worst and I can't even begin to fathom why Sony's shareholders are sitting by and watching it happen. This is Sony here; they managed to fuck up the optical media devices in both generations of their hardware and those were proven technologies. Now we're supposed to trust them with a technology that hasn't been tested? What kind of logic is that?

I hope they fail. Nintendo and Microsoft have done a lot more for the industry than Sony did with their PS2. Sony did great things with the Playstation but they took ten steps back with the PS2; Nintendo's hardware innovations and Microsoft's online infrastructure have changed the direction that the industry is headed in; Sony is standing on the sidelines trying to mimic the actions of the real stars.
Click to expand...
Well written post.
 
The other thing to look at, is the fact the Sony may be right. Maybe price won't matter. If Alienware can ship out rediculasly priced PCs and Dell can sell their over priced XPS systems, why can't Sony sell a $500 - $600 console?

I'm sure it won't have the sales numbers of the PS2, but they don't need it to. The format war is much much bigger than the console war ever could be. If they ship out 2 million PS3 units before christmas, they can claim that there are 2 million more BluRay players out there than HD-DVD players. This will buy them the support of movie studios, which is what they are truely after. Why waste time and monie supporting HD-DVD when BluRay has 10x the potential audience?
 
StorageJoe said:
If they ship out 2 million PS3 units before christmas, they can claim that there are 2 million more BluRay players out there than HD-DVD players. This will buy them the support of movie studios, which is what they are truely after. Why waste time and monie supporting HD-DVD when BluRay has 10x the potential audience?
Click to expand...

I think HD-DVD sales numbers are already pretty high, but ignoring that.... I've often wondered how much of a difference something like the PS3 would have on overall sales numbers of a tech. Take the PS2 for instance. 100 million units shipped, but what's that compared to DVD players sold? I don't know, it might be a considerable percentage, and maybe it makes a difference at the start, but when the players come down in price (and they will, or they'll fail) then I doubt PS3 uptake will have much of an effect.
 
StorageJoe said:
The other thing to look at, is the fact the Sony may be right. Maybe price won't matter. If Alienware can ship out rediculasly priced PCs and Dell can sell their over priced XPS systems, why can't Sony sell a $500 - $600 console?
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Presumably because they don't want the single-digit marketshare enjoyed by Alienware and Dell XPS systems (as well as Apple, for that matter).

If they take 80% of the market, then the price won't matter, but that seems unlikely at the moment.

Have you noticed that the system with the largest marketshare always has the most games?
Equivalently, the system with the most games always has the largest marketshare.

Library size and marketshare reinforce each other:
Get enough marketshare and the titles will follow. Get enough titles, and marketshare will follow.

IIRC, the SNES and Genesis had similar sized marketshare, but that hasn't happened since (102m PSX vs 35m N64 vs 10m Saturns vs 6m 3DO vs dozens of Jaguars)
 
Molingrad said:
QFT

working 40 hours a week making $11 per hour, add up to about $700 for two weeks of work full time. How many kids are willing to put two weeks pay into a video game console? (IF they work full time in the first place? $600 is TOO HIGH.

I understand thier strategy and its a BIG gamble on Sonys part, but to get thier shit in the living room in the first place I think they need to take a bigger initial hit, i dont know if its going to sell that well at a $600 price point - without games,controllers, memory cards added on.
Click to expand...

Factor in $70-$80 for a game and fees to go online, and you are looking at start-up costs that would kill more than an entire paycheck.

other things that are keeping me from even considering a PS3 is the rumors of them shipping with only 7 of the 8 cores working. i'm NOT going to pay $600 for a product that comes defective right off the lot. so what if it "works". Sony is touting that CELL processor as this AMAZING processor, and if i have a chance at not getting the complete package, then screw it.

i'm also not going to spend $600 on a console, waiting for games to come out. knowing Sony's "amazing" reliability (sarcasm), i would be suprised of the damn thing died before quality playing time would be put into it.
 
They've always planned on shipping the PS3 with 7 functional SPE's... from day 1. The fact that it's making you seethe with hatred means nothing because they announced that they would have 8 cores (1 PPE + 7 SPE's). The fact that the Cell has 8 SPEs means nothing, because they've always planned for 7. Don't worry, though, the SPE's are almost useless in many gaming applications.

Conversly, you can hate for online fees and expensive games, but then you'd be hating the XBox 360 too. FYI, $70-80 games haven't been announced, and you can most definately expect them to match Microsoft's standard pricing ($60) at least in range - but still nothing is known in solid rock fact. You're also hating on shoddy hardware, but I remind you of the 360's launch and subsequent (if similarly small) failure rates. Hell, I don't trust Sony hardware much, either, but until the console is released the point is moot. I do, however, agree (with K600) that their arrogance is misplaced and the fact that too many regular families aren't buying up >$300 consoles very much, and that the casual gamer is where the cheese is. Which is interesting, because this is where the Wii is marketed. The weaker hardware means jack all, otherwise the PS2 would have been creamed with the XBox, or at least the Cube. Instead, Microsoft and Nintendo fought over a 30% console marketshare fairly evenly (within a million systems now, I think), whereas Sony took their crown. As DFC Intelligence has pointed out, there is going to be a massive shift in the gaming industry, and we've seen these trends in the past year or so. Just visit the old-folks-homes in Japan to find out which handheld is smoking hot right now. Why isn't the handheld with superior hardware in their hands?
 
That's a very good point. I believe that they are not differentiating the fan-boy and hardcore enthusiast people, from the casual gamers. Within any market, the hardcore crowd generally only makes up about 2% of the total population(roughly speaking). This means that after the hardcore crowd is done buying their systems, they better start dropping to price rapidly.

K600 said:
For some reason or another, Sony seems to think that their consumers' purchasing power has risen as fast as the Playstation franchise. Unfortunately, this isn't true; this is a leisure market and people are growing increasingly skeptical of the pricing. Microsoft caught a lot of flak for $399; $599 isn't going to look any better to those of us in college who actually have to pay for our toys.

The noose is tightening around a lot of families with ever-increasing gas/grocery prices. Some might say "Oh, the fans will find a way" but any economic advisor worth his salt will tell you otherwise; videogames don't fit into most peoples' main priorities (Especially not the priorities of casual gamers, which is where Sony's bread-and-butter is).

What perplexes me the most is that Sony realizes that they're selling a non-essential product yet still insists that it's something we all need. We all remember one of Kutaragi's zingers that resembled something like "People will work overtime to get it".

Not only is their price absurd, but their basing the entire system around technologies that haven't really been market tested. That's essentially like Toyota producing an entire generation of cars around a wonder-engine (Cell) and quasi-revolutionary drivetrain (Blu-Ray) that may or may not pay off in reality. It's business at its worst and I can't even begin to fathom why Sony's shareholders are sitting by and watching it happen. This is Sony here; they managed to fuck up the optical media devices in both generations of their hardware and those were proven technologies. Now we're supposed to trust them with a technology that hasn't been tested? What kind of logic is that?

I hope they fail. Nintendo and Microsoft have done a lot more for the industry than Sony did with their PS2. Sony did great things with the Playstation but they took ten steps back with the PS2; Nintendo's hardware innovations and Microsoft's online infrastructure have changed the direction that the industry is headed in; Sony is standing on the sidelines trying to mimic the actions of the real stars.
Click to expand...
 
Even if the 360 and Wii doubled the sales of the Xbox and Gamecube, and the PS3 only sold 50-60% of what the PS2 did, it would still win.
 
Lord Nassirbannipal said:
Even if the 360 and Wii doubled the sales of the Xbox and Gamecube, and the PS3 only sold 50-60% of what the PS2 did, it would still win.
Click to expand...

True, but any way that you could look at that scenario, it would be a HUGE gain for Nintendo and Microsoft, but like a JIANT enemy crab for Sony.

I'd also put my money on the Wii selling close to 3 times more systems than the GC ever did. Nintendo just seems to be clutchy this time around.
 
There are still a ton of morons out there that still are buying or will buy Sony products, even though they are overpriced out the ying yang.
 
vortexpud said:
Boy, the bad press (and arrogance from the execs) just doesn't stop for Sony, does it? When an investor's magazine picks up on it, you've got to have SOME concern. The parts I found most concerning are bolded... and if I wanted to "do the math", I think Nintendo has the most to gain this generation. Unless Microsoft can sell like hotcakes in Japan, it's easy to hypothesize that Nintendo will jump from a barely-third position to a close-first.
Click to expand...
Er? Why is everyone always emphasizing the Japanese market? Going by console sales numbers, the Japanese market is SMALLER than both the European and the US markets:

Millions of Units sold:
Japan: 23.27, USA: 41.82, Europe: 38.60
Source: Wikipedia

According to these numbers, Japan only holds the key to less than 25% of the gaming market. Winning over a majority of the US and European markets means that you've won the console wars. No matter how well the PS3 does in Japan, if it flounders in the US and Europe, its dead. The 360 could sell 0 consoles in Japan, and still win be the winner of this generation.
 
It's really nice to see intelligent, well thought-out posts on this subject for once. Or maybe I've just been gone too long and it's the norm now. Anywho, I truly believe that the price is going to be a major stopping point for the casual gamer. Hell, I'm halfway to hardcore, and I'm not even thinking about buying one at that price. Video cards on the PC have sent me into the same mindset.

The simple fact is that $500 is the entry point, $600 is the all-features version, and after controllers and a game(s), we're looking at close to 900 bucks here when you factor in tax on the whole lot. The 360, which I don't play near enough as-is, is the most expensive video game console I will ever purchase. If the PS3 debuted at that price range, I would have it on opening day. Simply put, all the extras and hyped potential of the product are not enough to sway me into the definite buyer category.

I've grown up with gaming, but I've also grown up. And with that I've grown into a wife, a mortgage, property tax, home repairs, health insurance etc... etc..

The price is simply too high, and represents too large of a single chunk of my leisure expenses to even warrant consideration. I'm sure I'll own one, but not for a couple years from now apparently.
 
OutOfGum said:
Er? Why is everyone always emphasizing the Japanese market? Going by console sales numbers, the Japanese market is SMALLER than both the European and the US markets:

Millions of Units sold:
Japan: 23.27, USA: 41.82, Europe: 38.60
Source: Wikipedia

According to these numbers, Japan only holds the key to less than 25% of the gaming market. Winning over a majority of the US and European markets means that you've won the console wars. No matter how well the PS3 does in Japan, if it flounders in the US and Europe, its dead. The 360 could sell 0 consoles in Japan, and still win be the winner of this generation.
Click to expand...

BTW... where are a great deal of the good developers situated? Before I even get into it, you have to look at the developers. If they can't sell their product in the homeland on a console base (i.e...oh... the XBox line for instance) they are a lot less likely to work on a title for the platform, especially if it's not a western-style game (see: shooter).
 
Lord Nassirbannipal said:
Even if the 360 and Wii doubled the sales of the Xbox and Gamecube, and the PS3 only sold 50-60% of what the PS2 did, it would still win.
Click to expand...
That's a pretty unlikely outcome. Look at the history of console sales and the only close first/second place pair was the SNES (49M) and Genesis (35M). In every other case: NES/Master System, PSX/N64/Saturn, PS2/Xbox/NGC/Dreamcast, the best-selling system had 3-4x the marketshare of the second place system.

*edit* forgot DreamCast
 
Lord Nassirbannipal said:
Even if the 360 and Wii doubled the sales of the Xbox and Gamecube, and the PS3 only sold 50-60% of what the PS2 did, it would still win.
Click to expand...

You seem to be missing the point and your definition of "win" must vary from mine. Taking huge hits in your profits doesn't equal a "win" in my book.

Whether or not Sony is #1 in hardware sales isn't really relevant. They're going to be taking losses even at the ridiculously high $599 pricepoint; with less marketshare, they're going to be selling less of the software that is going to pull them out of that hole. Not only that, but they're losing franchises that were once guaranteed to sell millions for them.

Sony's gaming division is the sacrificial lamb this time around; they're putting their balls on the block at the hopes of surviving by blind luck and getting huge market penetration for their Blu-Ray technology. This market penetration would allow them to release/re-release new/old movies on the format to get people to convert like they did with the transition from VHS to DVD.
 
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