PS3 Causes Heartache for Sony

Includes: MSFT, NTDOY, SNE
by: Bruce Everiss

The business model for console games in this generation is not a good one. Games are very expensive to develop but most make a loss, it is only the occasional hits that keep the industry going.

The reason the games cost so much to make is that the consoles are far more content hungry than previous generations of machines yet are not powerful enough to use the large swathes of middleware necessary to reduce production costs.

And the market has changed. Increasingly each product niche is owned by just one title, which can sell massively. All the competitors to that dominant title sell in far smaller numbers than they did in previous generations. Making a “me too” title is no longer a good idea, now you have to try and ensure that each title you release dominates its niche, something EA (for instance) have failed to do.

In this generation the Wii is by far the cheapest to develop for because it is not HD. However game sales are dominated by Nintendo (OTCPK:NTDOY) first party titles and much that has come from third parties has been shovelware dross that is a waste of everyone’s time. Here, once again, are the rules for Wii game development:
1) Don’t do shovelware. You are just damaging your brand[s].
2) Write Wii specific titles. Don’t port. You have to respect the interface difference.
3) Understand that most Wiis live in the lounge. And most other consoles live in the bedroom.
4) Polish, lots. Then polish some more.
5) Realise that you have to provide entertainment for the population at large. FPS titles are not a good idea.
6) You need to market completely differently. PR in women’s magazines will work a lot better than adverts in game magazines.
7) Talk to your wife/girlfriend. They understand the Wii better than you do.

The Microsoft (NASDAQ:MSFT) Xbox 360 has been a huge success as a platform to develop for. It has simple, elegant, architecture and Microsoft have supported it with good tools, as you would expect from a software company. No surprise then that Metacritic lists 645 games for the Xbox 360 against 425 for the Wii and only 351 for the Sony (NYSE:SNE) Playstation PS3.

The problems of the PS3 are multiple. It has a quirky new CPU architecture and a poor GPU which acts as a bottleneck, hobbling the capabilities of the machine. If this weren’t enough, there is the unavoidable fact that the PS3 isn’t selling very well. We are in mid cycle now, the point at which sales volumes should be ramping up. And for the PS3, they aren’t. The main reason for this is price, the PS3 is still vastly too expensive for the market and is cruelly exposed by the bargain that is the Xbox 360.

Sony are caught between a rock and a hard place. The PS3 design contained so many newly developed bits that it was, and remains, very expensive to manufacture. But Sony are not in good financial health so do not have the resources to subsidise a price reduction. Already they have lost billions on the PS3 project. It has proved to be probably the biggest loss maker in the history of video gaming.

And now things are getting even worse for Sony. Activision (NASDAQ:ATVI) is the biggest game publisher and their boss is Bobby Kotick. He is not happy with the PS3:

I’m getting concerned about Sony; the PlayStation 3 is losing a bit of momentum and they don’t make it easy for me to support the platform. It’s expensive to develop for the console, and the Wii and the Xbox are just selling better. Games generate a better return on invested capital on the Xbox than on the PlayStation”. And this unhappiness becomes a threat: “They have to cut the price, because if they don’t, the attach rates are likely to slow. If we are being realistic, we might have to stop supporting Sony.

In the real world very few games are actually developed for the PS3. They are mainly developed for the Xbox 360 and then converted to run on the PS3. So things are very bad when that conversion cost is becoming uneconomic.

Disclosure: No positions