Sony Admits It Made the PS3 Too Expensive

We have commented before on how Sony’s (SNE) tried to bite off more than it could chew with the PS3 gaming system. Now, a bizarre statement from one of their executives leads us to wonder what, exactly, they were thinking. According to ArsTechnica:

In an interview with MTV, Sony executive Phil Harrison talked about the PlayStation 3 and where his company was planning on taking their latest game console. Harrison saved his most interesting comment for last. In discussing the future of the PS3, he stressed that developers are not currently using the machine to its full capacity. In fact, he stated that the current crop of games are using “less than half” of the machine’s power, and that “nobody will ever use 100 percent of its capability.” Of course, it is common at the beginning of a new console’s life for games to not make full use of the power of the hardware: it takes some time for developers to learn the best tricks and techniques for squeezing every last bit of calculating power from any new platform. But to claim that nobody could ever make full use of the system’s power, ever, seems a bit hyperbolic. Some developers, at least, will be wanting to tap the full power of the Cell, such as IBM’s high-end customers in the HPC market. Some of this knowledge is bound to leak over to the game development world.

If Sony doesn’t think developers will use the machine’s capability, then why on earth did they put all of the capability in the machine? All they have done, apparently, is make it later to arrive and more expensive.

Comments

[carleast:]

To me this could just be some very clever marketing. It is laying down the gauntlet to the developers by saying some on let's see what you've got. And these developers are not stupid. They'll start to understand from a very early stage how much of the Cell processing power they are using. They may not have the time or resources at this stage to use it to it's potential but they will understand what the need to do in the future to get there.

Secondly, it's not just the cost of the Cell processor that has contributed to the high cost of the PS3 so it's a bit naive to blame it just on that. By putting in a cheaper processor it may only have saved $50-75. And the delays were mainly caused by the Blu-Ray drive and not the processor so it is also naive to suggest that we would have got the PS3 any sooner had Sony opted for a cheaper and slower processor.

2006 Dec 21 07:28 AM

[Scott Berry:]

These guys never read "The Innovator's Dilemma". They (and MSFT) are listening to the shrinking high end of the market, with the latest bleeding edge tech/features. Nintendo came out with a product more for the lower end, with features that are "just good enough" at significantly lower cost. Brilliant move for Nintendo. For Sony, not so much.

2006 Dec 21 08:12 AM

[carleast:]

Shrinking high end of the market Scott?!!! Where have you been for the past ten years? The high end technology market is booming. How else could you explain that millions are buying flatscreen tv for many more times the price that they would have previously paid for a crt tv? And here's the thing. Technology gets cheaper by the day. So while Sony may be losing $300 per machine right now in 18 months time it will be making a profit. And in 18 months time people will have got bored of the Wii long ago. In 18 months time developers will still be improving the PS3 games rapidly. Every year with the PS3 will be like owning a new console because every year the games will improve significantly. On the other hand it won't take long before the games developers will have reached a dead end with the Wii and then soon after with the Xbox 360.

Games consoles wars and anything in Technology are not sprints. That's what the average consumer seems to think. They think oh wow this is going to kill the other thing because it's cheaper and does everything we need it to right now. And that's the thing, the Wii does everything anyone wants it to right now. But what about in a years time?

I have a feeling this is the last true great console war as we know it. When the next one comes round in 4 years time things will have changed. In fours years time I do not expect anything other than the PS3 to be standing on the podium and the other two to be "also rans" who were simply guilty of sprinting the first mile of a marathon.

2006 Dec 21 08:54 AM

[William Trent_:]

Carl,

Sony could also have upgraded the capabilities over time by making smaller, more frequent advances rather than trying to cram everything into one spot.

As to buying millions of flat screen tvs, you hit the nail on the head. They buy them when they come down in price (and they get no-interest terms until 2011.) As the price of the technology comes down, it is unlikely Sony will turn to profit, but instead will lower the price to consumers to try to spur sales.

There were many components contributing to the delays and high price. We've talked most often about the Blu-Ray. It is all a symptom of this "build it and they will come" mentality that was proven not to work during the dot-com bubble (if not countless times before that.) They may come, but the company could go bankrupt first.

Trent

2006 Dec 21 09:18 AM

[carleast:]

Hi William,

I'm not sure of your background or knowledge into the industry but I am sure it is many times more layered and experienced than myself but I do find your comments astonishing. Do you actually believe that Sony will bankrupt themselves over this? I've seen that mentioned on this site before which is just silly. I can't remember how much surplus cash Sony have but I seem to remember it being something like $18 billion. So let's put things into perspective. Sony could fail to sell any more PS3's and still not go bankrupt. The only way they could lose all of that cash would be if they sold 60 million PS3's tomorrow at a loss of $300 a piece. But even then they'd be laughing because they would reap the rewards of selling games to the owners of these 60 million consoles.

And Sony won't be lowering the price any time soon. I'll almost guarantee it. Maybe next Christmas they'll reduce the price by $100 but by that time the technology will have come down in price by $200-300. The three most expensive things in the PS3 (the Blu-Ray drive, the Cell processor, and the Graphics Card) make up a huge proportion of the unit cost and each one will come down in cost price significantly over the next year.

As far as upgrading the PS3 over time then I think you're really missing the point here and I find this just as astonishing that an electronics blogger would suggest that this would be possible. Why didn't they just upgrade the PS1 and PS2 over time? Because it amounts to a whole new console that's why. They can't just upgrade the processor and graphics card willy nilly. It then means that all the games developed to the new processor/graphics card power standard will not be playable on the older PS3 consoles. I'm actually still struggling to believe that you suggested such a thing so I'm going to stop there.

2006 Dec 21 10:59 AM

[carleast:]

Just one more thing. Your comment about the "build it and they will come". How can you compare the small time start ups of the dot com boom bust to Sony?!!! The dot coms didn't have strategies based on historical sales. They had never sold anything before but were building these websites thinking that people would quickly come on board and buy them. You could maybe liken the dot com boom bust to the Xbox 1 in a way but it would still be a bad example.

With the PS3 you are looking at a brand that has a huge world wide following that has been built by selling the two of the biggest selling consoles of all time (only behind the snes I think). Playstation vs Dot Com start ups? Erm... Taxi!!!

2006 Dec 21 11:19 AM

[William Trent_:]

Actually I was comparing Sony's build it and they will come attitude to that of WorldCom, which also supposedly had tons of cash and wouldn't go bankrupt.

As to the possibility Sony will follow in their footsteps, it is certainly unlikely any time soon. However, they don't have any "surplus cash." Their cash and investments (some of which could be converted to cash quickly, others not) total $10.5 billion, just a smidgeon more than their total debt.

Meanwhile, sales have fallen 10% over the last three years and cash flow from operations has been cut in half. In the fiscal year that ended in March 2006 they used half-a-billion more to buy the equipment needed to run their business than they actually generated from the business - and that after spending less than they had spent the prior two years.

Such a trend would be one thing for a fast-growing startup. But for a mature (and actually declining) business it is poison. If the trend continues to get worse, or even simply stays the same, the company will either go bankrupt or be forced to sell more of its stock - which will only increase supply and lower the stock price if there is no business foundation for it. It's only a question of how long it would take.

2006 Dec 21 06:51 PM

[carleast:]

Fair point William. As I said I probably don't have as much insight as you. I do remember reading a blog that they do have $18 billion though. I didn't know that they also have a lot of debt. Seem quite a large amount to have $10.5 billion in debt though.

I think that the last three years has been very tough for Sony. It was only last year that I was actually predicting their death. This was due to a number of problems. They severely failed in the mp3 and flatscreen markets in terms of getting in there early enough. That was one of the biggest mistakes in corporate history on both accounts as far as I'm concerned. And due to the constant interference from their media division they have properly messed up their chances in the mp3 market. They must try and come back though. But as far as the LCD division is concerned they are finally flying. I'd say they'll probably crown themselves kings of the LCDs next year with their current line up supposedly being the best looking LCD pictures ever.

This next year sees Sony moving back to the top of the world as far as tvs are concerned and also maintain their number one spot with the new PS3 as far as games consoles concerned. Add to that the probably that Blu-Ray will succeed in the next gen format wars and you've got a probable very successful year for Sony. I doubt it will show in their 07/08 profits too much but it will show in their sales figures.

2006 Dec 22 07:11 AM

[Dharmesh Vyas:]

Carl,

I live in Southern California and the local EB games just got some PS3's. They are not moving as expected. Strong demand for the Wii. By the time you leave the store you will be out of $800 for the PS3.
I think it should hurt some game makers as well EA for example. Please revist story and update us.

thanks

dhar

2006 Dec 28 12:36 PM

[carleast:]

Hi Dharmesh,

I understand that PS3 games probably aren't flying off the shelves. But that's only to be expected less than two months after it's tentative release. The US didn't get as many PS3's as expected and therefore there aren't as many owners to buy games. Add to that the lack of quality games around at the moment and the cost of them then I'm sure some of the poorer quality games are sticking to the shelves. The Wii has had a much better start selling far more machines. But this isn't because it's more popular. It's simply because it's more widely available.

Sony are not going to be judging the PS3's success based on the next 12 months so neither should anyone else. Conversely Nintendo probably will judge the success of the Wii on the next 12 months because I don't expect the "Wii factor" to last much longer than that.

The Wii will be a short term success. But wii all know that it's long term success that counts and Sony has the specs necessary to ensure that success. Already we're talking about 49% market penetration in flatscreen tv's and that's enough for me. These flatscreen tv owners will be disappointed with the graphics of the Wii. The HD pictures of the PS3 is the only long term winner.

2006 Dec 29 09:44 AM