Game Over For Sony In The Console Wars

There is no doubt that Sony (SNE) dominated the second generation of the console wars. Its PS2 platform had an early jump on the Xbox and Sony never looked back. Since it’s launch, the console has sold over 105 million units and has made Sony a video game powerhouse.

Given its footprint, Sony should have had an easy time convincing its customer base to upgrade, but as the latest generation of consoles has launched, Sony has lost its control over the market, after trying to force users to buy a Blu-Ray drive, along with the console. The inclusion of the drive has resulted in high prices, product delays, and limited supply during the launch. Even after Sony has agreed to sell the console at a loss, it still has not been able to get the device down to an acceptable price level for consumers.

As the latest generation of consoles has been hitting the market, Sony’s PS3 sales reflect some pretty troubling numbers. It may have recently celebrated its 1 millionth sale in Japan, but overall it has actually performed pretty miserably. According to the latest data from the NPD group, Sony sold a pitiful 98,500 PS3 consoles for the month of June.

Sony is quick to point out that these figures represent a 21% increase over its May sales, but even with the gain, if it continues at this pace, it will take it 83 years to hit 100 million console sales. If Sony was hoping to sell 100 million consoles over the next 5 and a half years, it would need to increase its sales from 98,000 units a month to 1.625 million.

Now to be fair, Sony’s latest price cut on the PS3 has improved sales. The company reports that it has seen a jump of 135% since lowering the price by $100. The problem is, though, that the price cut is really only temporary and perhaps even worse, it may have prompted Microsoft (MSFT) to consider slashing $50 off of the price of its own consoles.

With the Wii taking half of the market and Sony and Microsoft fighting for the rest, Nintendo (NTDOY.PK) has put itself in an enviable position in the console wars. It has not only been able to draw in non-core gamers without sacrificing profits, but it has also been able to convince consumers that the Wii can compliment an existing console system. With its innovative game play and its low price margins, it has been able to turn single platform households into dual console living rooms.

The addition of the Wii as a 2nd option creates big problems for Microsoft and Sony, because it eats into the profit centers of the video game industry. Because so much of the money on gaming is made on the software, having another competitor in the living room can have a significant impact on the profit margins for that customer. Nintendo’s ability to not only capture market share, but to also siphon off video game sales from the incumbents, will change the dynamics of the third stage in this battle.

Given Sony’s prices, it’s a lot harder for it to convince a Wii family to compliment its console by adding on a PS3 system. While the graphics are much nicer than what the Wii offers, the extra entertainment benefit isn’t worth the additional cost attached to its super computer.

When Sony could control the video game market, it was able to negotiate gaming exclusives, but now it’s Nintendo that has the pipeline of exclusive titles. There will be those who argue that less price sensitive customers would buy a PS3 over a Wii in a heartbeat, but if you look at the most recent Nielsen’s survey, high end households are actually more likely to choose Nintendo over the PS3.

If Sony is failing to sell its Blu-Ray infested video game console to the least price sensitive customers, it doesn’t make me very optimistic that price cuts will be a very good long term solution for competing against the Wii and the Xbox. While there is still plenty of time for Sony to retake its lead in this latest incarnation of the console wars, I believe that its missteps at the starting blocks have all but assured that it’ll never be able to outsell its PS2 console.

Comments

[jimmy.noriega:]

I must say this is the definition of a FUD (Fear Doubt and Uncertainty) article. Which is quite interesting, because SONY gaming division has been doing great this past month. Not only more than doubling it's sales since the price drop but according to the Gaming press, they won E3, the most important gaming conference in the world. However, you took the time to "troll" them, as internet geeks like to call it.

After reading your article I can only conclude math isn't your strength. In fact, you seem to know very little about the gaming industry.

First of all, your 83 year estimates for sales 100Million units are laughable. Video game companies sell most of their console hardware during the holiday season. This has been a fact since the industry started. Dragging your finger all over June's NPDs numbers and claiming "SONY IS DOOM" without taking into account it's sales in Europe where it sells considerably better than the Xbox 360. Or even Japan, where the 360 is DOA (dead on arrival), while the PS3 continues to chug along with it's much high er price.

Using NPD numbers which account s for US sales as a total of worldwide sales is plain pitiful. Also, the price cut isnt temporary, and you are spreading FUD with comments like these. They are clearing the channels and this is a well known strategy to do so. Here's a hint The new 80Gb PS3 is actually less expensive to manufacture but of course I wouldn't have expected you to know this.

Blu-Ray is definitely relavent. Blu-Ray is winning the format war by a considerable amount. As BD Drives reach economies of scale it's price curve is dropping much faster than DVDs. In Fact it's reasonable to believe that BD drives will be priced at little to no difference as their DVD counterparts.

You should not write articles based on speculations and mis information. Stick to your strengths. This seems more like an personal attack, and not a professionally written article.

2007 Jul 26 02:24 PM

[akindman:]

I googled "who won e3 2007" and every single article said "Nintendo".

2007 Jul 26 03:05 PM

[jimmy.noriega:]

I said gaming press. See Gamestop, IGN, 1up.com, gaming presss.... You know the ones most of their customers go to for advice.

2007 Jul 27 10:14 AM

[Davis Freeberg:]

Thanks for the thoughts Jimmy - First off, I'm not a professional writer and don't pretend to be. The article is merely my thoughts as a blogger on the console wars. If you want financial analysis, go contact one of the brokerage firms who pay big time money to have people look at this professionally. If you want the opinion of someone who actually loves and plays video games, than come to my blog. If you look back six months ago, you'll find that I basically said a lot of the same things, before the miserable sales hit. You can call it FUD if you want, but in another six months, I'll have another post blasting them, if they continue to perform at these levels.

I used the June number because it was the most current and because it demonstrates how difficult it will be for the PS3 to ever be as popular as the PS2. I'm not sure what to say about the E3 press "picking" Sony as the winner, but all the gamers I know are drooling over the Wii and not the PS3.

You're right about me not liking Blu-Ray. I personally, think it should be up to consumers to decide which next gen platform should win and not monopolistic companies. As long as Universal won't release their titles on Blu-Ray and Sony won't release theirs on HD-DVD, the entire next gen DVD market will be dead.

I had trouble getting current estimates on total PS3 sales, but if you want to argue that next December will be strong, I can understand that, however considering that they've sold a mere 2 million (my guesstimate) consoles after 9 months seems pretty pitiful considering the amount that Sony spent on this. Weren't they predicting that they'd sell 2 million in the first 2 months? What happen to the 6 million estimate from last March? The last 9 months includes a holiday season, including the highly anticipated launch and if you average this out it does bump up the average number of consoles sold to closer to 225K per month, but even at these levels, it'd take a lot longer than 10 years for Sony to replicate the ps2's success.

I used to be a hardcore PS2 fan, but they lost me when the Xbox 360 came out. I'm sorry if you disagree with my assessment on the console wars, but I think you are crazy if you think Sony has a snowball's chance of ending up on top of the 3 generation of consoles.

2007 Jul 26 03:12 PM

[Tom B:]

"You're right about me not liking Blu-Ray. I personally, think it should be up to consumers to decide which next gen platform should win and not monopolistic companies"

A little unrealistic, there. Did you personally "choose" the CD music format when CD's came out? No, some company did. But, I agree, it is regretable that all this HD DVD squabling has gone on.

They will probably BOTH lose. People will be downloading movies to their AppleTV's and sidestepping the whole format war issue.

For my part, I don't even like the current DVD format so much-- kind of buggy and fussy. When I share my movie efforts, I kind of like to compress them and put them on CD.

2007 Jul 26 04:38 PM

[jimmy.noriega:]

PS3 has sold 2+ million if you only count Japan and the US. Worldwide it's closer to ~3.5 mil which in fact is better than what the 360 was at exactly the same time frame.

The 6 million estimates is shipped not sold (similar to what MS uses). They shipped 5.9 systems worldwide and just missed their estimates. They now expect to sell to retailers 11 Million this fiscal year alone. Last holiday season they were supply constraint, I expect this holiday season to be much better worldwide.

If you look at hardcore forums and gaming sites you would see that the Wii was a huge disapointment. The new nintendo isn't targetting gamers anymore, they want your grandma and they are being quite successful at it.

As for reaching 100Mil, price doesn't stay up on gaming consoles. The price differential of 360, PS3 and Wii will decrease as time goes on. Nintendo was slick with this as they started on the lower price end of the curve by using gamecube hardware. However many believe it will be short lived for this same reason.

Most of the PS2's were sold at $199 and bellow. For examples, SONY recently stated that they would break even this fiscal year as the manufacturing cost of the PS3 dropped considerably. So yes if you expect the system to stay at this price it will take them more than 10 years.

Sony Aims for PS3 Break-Even This Year:
www.next-gen.biz/index...;task=view&id=...

2007 Jul 27 10:34 AM

[pheonixservant:]

While i agree with what you have said, there is something that is bugging me. You do realize that the PS2 was part of the 6th generation of game systems, and that console wars do go back to the time of the NES, right?

2007 Jul 27 01:01 PM

[Davis Freeberg:]

Phoenix, I think we could argue that the the console wars go back even further than that, but it's been the last three that have turned this into a global mega business . Was it the commodore or the Atari that is considered the 1st, I'm not sure, but I think we both can agree that by the term 3rd generation, I'm referring to the most recent consoles.

2007 Jul 27 01:12 PM