Sony’s Caught In The Middle...
I think Sony’s strategic positioning of the Playstation 3 is flawed. They are trying to accomplish two significant goals with this product, but may not be able to do either in a way that is sustainable for the company.
Sony’s first goal for the Playstation 3 is to maintain their position as the dominate gaming platform when the market transitions over to the next generation consoles. Sony has 51% of the console market today, and while most of their other divisions have struggled with losses, the game division has maintained profitability. Sony’s overall success as a business today is intimately linked to the success of their gaming division. They cannot afford to cede ground to either the XBox 360 or Nintendo’s Wii (Formerly called ‘Revolution’). .
Sony’s second goal for the Playstation 3 is to establish BluRay as the winning HD media format. They have made a BluRay drive standard on the console, and have built in a set of “media center” capabilities to broaden the system’s appeal beyond the traditional gamer marketplace. By selling it at an attractive price-point compared to other HD media players, they believe they can achieve a critical mass of units in the market before the competing HD-DVD format gains a meaningful foothold.
Sony faces a big challenge in making this ambitious strategy work...
The Playstation 3 - like most other game consoles introduced into the market - will initially sell for below cost. This loss is typically made up through game licensing. Having a high ‘attach rate’ - the number of games sold per console - is essential. If the initial console price is set too low, the manufacturer will need to eat potentially years of loses until the attach rate catches up and manufacturing cost drop to the point they can see a profit. If its set too high, the console struggle in the marketplace.
What makes this uniquely difficult for Sony is that the features required to make the Playstation 3 a BluRay media player are driving the cost of the console up significantly. Sony has announced two versions of the console costing $499 and $599 (US) - the most expensive console prices ever. But despite the record high price of the Playstation 3 console, Sony will likely be taking a significant loss on each unit. Possibly more of a loss then their lower priced competitors.
While the PS3 is $200 more then Microsoft’s XBox 360 (the system they compete against most directly), it is still about $400 less then any other BluRay player on the market. They seem willing to do this to promote the success of BluRay in the marketplace.
But they are walking a very fine line here...
The significantly higher price of the console could slow adoption in the gamer community, or leave gamers with less money available to purchase the games necessary to offset the loss per unit. And outside the gamer community, the significantly lower price of the console when compared to other BluRay players could make it very popular, again resulting in sales with low or no attach rate. Neither would be good for Sony’s bottom line.
Even flawlessly executed, the PS3 launch will likely require significant upfront losses for Sony. Given the already shaky financial footing Sony finds itself in today, it is possible that they are literally betting the company on this being a success. They have little margin of error.
And ultimately, this isn’t all in Sony’s hands. Peter Moore, a vice president at Microsoft, was recently interviewed about the coming releases of the Playstation 3 and Nintendo’s Wii console. His comments are telling:
"Tell me why you would buy a $600 PS3? People are going to buy two (machines.) They're going to buy an Xbox and they're going to buy a Wii ... for the price of one PS3."
Of all the scenarios that could happen in the marketplace, this must be the one that keeps Sony up at night.
Sony is caught between two different markets and two aggressive competitors. They are stuck square in the middle, and I don’t envy them at all.
Saturday, May 13, 2006
