How Amazon Bungled The Sony Playstation 4 Launch

Nov.18.13 | About: Amazon.com, Inc. (AMZN)

Something weird just happened. The Sony (NYSE:SNE) Playstation 4 launched this weekend and the devices are now failing by the thousands. As I write this, a full 1/3 of the Playstation 4 reviews are 1 star, and these as overwhelmingly due to DOA (dead on arrival) Playstation 4s, or Playstation 4s which failed early (Source: Amazon product review).

With just this information it would seem that Sony would have a problem on its hands. However, a bit more research turns up something even more interesting. It seems that the problem is affecting mostly Amazon.com (NASDAQ:AMZN)-supplied Playstation 4s. For instance, one of the reviewers, with an Amazon.com verified purchase, had this to say:

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And digging a bit further, we find out why, from another two Amazon.com verified purchasers:

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Basically Amazon.com blundered with the packaging, a theme which gets repeated over and over in the reviews. Also, Sony now seems to be aware that Amazon.com did something wrong:

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Implications

While Amazon.com might be able to plug this hole by changing the packaging procedure going forward, there seems reason to believe that this particular launch is already doomed. Amazon.com is facing thousands of returns, will have to refund those and eat the shipping both ways. And Amazon.com will probably either have its relationship with Sony sour, or have to eat the repair costs as well.

This "weak packaging" episode is happening in the context of a continued attempt to contain costs which has included, among other measures:

  • A greater reliance on USPS instead of FedEx or UPS;
  • Changed terms on Amazon Prime leading to many items being classified as "add on" items which can't benefit from free shipping unless bundled with other items;
  • A higher threshold for free shipping, moving from $25 to $35.

And even with all these measures, Amazon.com is still barely profitable. It's incredible that the market turned this particular company into the 17th largest market capitalization, at $170 billion, in light of the very obvious difficulties the company is showing in keeping itself profitable.

This event can mean, for thousands of consumers, that Amazon.com is not the best of sources for sensitive electronics. This is especially true when the electronics are priced at the same price everywhere, as is the case with the Playstation 4. This is a common thread among the hundreds of reviewers hitting the Playstation 4 with 1-star rankings.

0.4% failure rate

It's possible that people will come across Sony's claim that only 0.4% of the shipped were damaged. This is misleading, in the sense that this was stated on November 14, well before the sudden outburst of Amazon.com failures started being reported (November 15-16). Also, the 0.4% - which is likely very understated - applies to all failures over all consoles, whereas the failures are concentrated (but not exclusive) in Amazon.com-shipped systems.

Conclusion

At first sight, it seems like Sony has a black eye from the failure of thousands of Playstation 4s right on their launch weekend. But further research shows that most of the failures came from units shipped by Amazon.com and seemingly had to do with poor packaging of the product.

One wonders if there will be a blame game between Sony and Amazon.com. Either way Amazon.com stands to eat the costs of shipping, return shipping and perhaps also the costs of repairs on thousands of units if Sony decides that the problem was focused on Amazon.com.

This also stands to produce some bad will amongst Amazon.com customers, especially if the media highlights the fact that the problem seems concentrated on Amazon.com. It's still early to know if that will happen, though.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have option positions which stand to gain from an AMZN drop.