Sony Drops PSP Price: Nominal Upside For Publishers

Key points from Kaufman Bros. analyst Todd Mitchell's recent note to clients (for a full-length .pdf version of this report, click here):

Sony (SNE) dropped the price of the PSP to $170. This represents a $30 price reduction from the previous price of $200. The high-end PSP offering will be dropped to $200 from $250.

We think Sony is clearing inventory before launching a new version of the PSP later this year. It has been broadly speculated in the video game industry that a new model of the PSP is in the works. We expect the new PSP will be in a slimmer form factor and have an enhanced communication and community features, highlighted by enhanced connectivity to the PS3. We do not expect Sony to offer the new PSP at a lower price point, which could prove problematic.

So far, the PSP has been a disappointment to Sony and the publishers. The Nintendo (NTDOY.PK) DS continues to outsell the PSP nearly 3:1 in virtually every market. We would attribute this to the DS's lower price point and popular and easy-to-use games, which give it a more mass market appeal. Basically, the PSP turned out to be too much money for kids and too much machine for adults. In fact, we think the publishers were instrumental in pressuring Sony to reduce the PSP's price point.

We see this as only nominally positive for the publishers. While we expect a slight boost in PSP hardware and software sales, we think greater PSP volume at this stage of the game offers only marginal upside to the publishers. Many of the publishers have already been adjusting their release slate to account for the lackluster sales of the PSP. Nevertheless, we believe the handheld market will be a key segment going forward. We note out of the four companies we cover, EA and Take-Two have the most exposure to the PSP. However, much of Take-Two's PSP sales were driven by iterations of its GTA franchise on PSP and we do not expect GTA IV to be on PSP at the earliest until its fiscal 2008.