Sony's Hit Machine

[PeterGibbons]

Sony's Hit Machine
Forbes.com, 01.19.06

Sony's future as a hardware company and legacy as a media company are both riding on PlayStation 3--its long awaited next-generation game console. But the less Sony says about the device, the louder skeptical voices grow.

Sony (nyse: SNE - news - people ) hasn't said much about the PS3 since May 2005, when it spilled details about the console's new processor and high-definition graphics. It's been mum since then. And when no new details were presented at the Consumer Electronics Show this month--either during Sony Chief Executive Howard Stringer's keynote or under the roof of the company's megabooth, where it showed off a demo of the machine but wouldn't provide any other details--the buzz only got stronger.

Now industry observers are wondering when the machine will finally debut and what the price tag will be--both for consumers and for Sony itself.

The outcome will be big for Sony: The size of the videogame industry is nearing $30 billion, and Microsoft (nasdaq: MSFT - news - people ) and Nintendo (other-otc: NTDOY.PK - news - people ) are simultaneously trying to position their own consoles as digital hubs in living rooms across the world. On top of that, the game machine is key to Sony's high-stakes bet on Blu-Ray, the next-generation, high definition DVD format.

First there's the issue of the launch date. Sony's last word on this remains spring 2006, but almost nobody believes it--at least not for the North American launch---because of a history of delays for previous products. Thanksgiving looks to be a better bet, at least to Evan Wilson, an analyst with Pacific Crest Securities.

If the PS3 does launch in November, Sony will have given Microsoft a full year's worth of potential sales of its next generation console, the Xbox 360. "Microsoft's lead time in building share for this console generation is real," says NPD Group's Anita Frazier. "The longer that lead time is, the greater the initial risk for Sony."

Then there's the worry that there won't be enough PS3s to go around when the machine finally does launch. Gamers had these fears realized the last time around, when only 600,000 of them got their hands on an Xbox 360 during the last two months of 2005. "But that was the most restricted launch supply of any major console platform," says Frazier.

Other analysts have estimated that Sony could launch about a million PS3s before 2006 is over--but that's the same number of units as were shipped by Sony during the launch of the PS2, and if a million units wasn't nearly enough in November 2000, it won't be enough in 2006 either.

Finally, the high-end console looks as though it could break the proverbial piggy-bank--not just for the consumer, but for Sony, too.

The company made sure to warn consumers in May 2005 that the new machine would be expensive. It didn't say how expensive, but with advanced components like a new "Cell processor" and a high-definition Blu-Ray disc drive, the PS3 will likely cost consumers more than the Xbox 360, which retails for $400.

Even at a pricey $500, Sony will be taking a loss on each machine, just as it did with each earlier PlayStation model. The company will hope to make money selling software for the console down the line--the same strategy Microsoft and Nintendo have taken. But Sony's use of the Blu-Ray disc drive means even more is at stake for the company--Sony and Microsoft aren't including a high-definition player in their consoles. The PS3 will cost Sony more to make, but the payoff in the future could be worth it.

Even the cheapest new Blu-Ray DVD players will retail for about $1,000. David Carey, president of electronics component specialist firm Portelligent, says the Blu-Ray drive could add about $100 to the cost of owning a PS3.

Other components will drive up the cost of the PS3, Carey says. Based on his estimate that Microsoft loses about $100 for every Xbox 360 sold, he projects that Sony could see a $200 deficit per set-top box. That means consumers will pay $200 less than the cost of goods.

"This is more about egos and market share than it is about profits," says Carey. "This is a chest-pounding thing for Bill Gates and Howard Stringer. However, it's great for consumers to get this underwritten hardware."

Microsoft could already be recouping its lesser losses with surprisingly good sales of games during the holiday season. According to Wedbush Morgan Securities, Microsoft sold 4.3 games for every Xbox 360--this in a season when overall game unit sales were down more than 10%. If each game is priced at $50, Microsoft might earn about $25 in profits per game, suggests Carey. If the average Xbox 360 owner buys four games, Microsoft would have recouped the estimated $100 loss.

If the company actually sells the approximately 5 million units it boasts, it will ship by June, Microsoft will be on its way to making some serious money off the console and its games.

Sony, with loss-leading machines that could cost the company $200 each, might need to sell eight games per machine to make up the difference--a big challenge. "Compelling content is what drives the long-term success of these systems," says NPD's Frazier.

For the first time Wednesday, Sony announced six game titles that it said will launch with the PS3 in Japan. That's good news. In fact, it's the only news we've heard from Sony regarding the PS3 in a long time.
_________________
Peter Gibbons
SunnyGardens.com

[iFinancialAdviser]

[PeterGibbons]

[iFinancialAdviser]

We are half way through 06Q1, and we aren't hearing about Sony PS3. Maybe it'll be some time before we see Sony PS3 relapsed.
_________________
Online Finance Education :: College Degrees

[PeterGibbons]

I would not be surprised if Sony got lapped by Microsoft's next Xbox version before they come out with PS3.
_________________
Peter Gibbons
SunnyGardens.com

[iFinancialAdviser]

[PeterGibbons]

It seems like when Microsoft appears to be some kind of beurecratic mess, they really are not. They are still competing very well in the marketplace.
_________________
Peter Gibbons
SunnyGardens.com

[iFinancialAdviser]

[PeterGibbons]

I heard about that. If it has been determined black berry infringed, then it would certainly open the door wider for other competition.
_________________
Peter Gibbons
SunnyGardens.com

[iFinancialAdviser]

Making the market more competitive is a good thing, but I wish things were handled differently.
_________________
Online Finance Education :: College Degrees

[PeterGibbons]

Yes, as far as I know, the blackberry product is good, so it would be a shame to lose a good product.
_________________
Peter Gibbons
SunnyGardens.com