Is There Still Hope for Sony?

Includes: MSFT, NTDOY, SNE
by: Bruce Everiss

Because of what I have written about Sony (NYSE:SNE), I have been accused many times of being a Nintendo (OTCPK:NTDOY) or a Microsoft (NASDAQ:MSFT) fanboy. Nothing could be further from the truth. I only report what I see, and what I see is a Sony that has lost its way.

The facts are very, very simple. In the Playstation one generation Sony had massive global domination, nobody came anywhere near it. In the Playstation two generation Sony was hugely dominant again. Nintendo and Microsoft were minnows in comparison. Then we come to the Playstation three (PS3) generation and suddenly the wheels fall off. Sony is running third and it very much looks like it is going to stay that way. Analysts and fanboys continually promise or hope that a revival in fortunes is just around the corner, but it never comes. So what went wrong?

  • The cell processor. This was a huge mistake in many ways. Firstly it cost a fortune in development and putting into production, which is money that needs to be recovered. Secondly it delayed getting the PS3 to market, giving away huge competitive advantage. Thirdly, whilst very powerful, it is a very long way from being optimised for the job of running a console. Overall the company would have been better buying an off the shelf generalised processor as it did for previous models and as its competitors did.
  • The graphics processor is a lot less powerful than the one in its main competitors machine. This effectively limits what the PS3 can do, no matter what the CPU and memory are doing. Fanboys blame the developers for being lazy and not putting enough work into PS3 games when the reality is that it is the machine itself that is holding the games back.
  • BluRay. The Playstation 3 was used as a Trojan horse to get this technology standard accepted by the world. And at this it has succeeded, but at a terrible cost. It forced the price of the PS3 up sufficiently to stifle consumer demand whilst forcing Sony to absorb massive losses. It is strange that Sony nearly bet the company on this at a time when physical delivery of content is in steep decline. A phyrric victory indeed. If this were not enough, difficulties in putting BluRay into production contributed to the delays in getting PS3 to market.
  • The complex architecture of the PS3 makes it very difficult to develop content for. A lot more difficult than for its main competitors. This wasn’t helped by Sony releasing development tools that were also greatly weaker than those from its competitors. A double whammy that caused huge problems for games developers worldwide. Many games were delayed because the problems were so great, costing the game developers a fortune and depriving the marketplace of product.
  • Sony totally misread the way the market was going. It has clung to its hardcore gamer base and squandered the lead in casual gaming that it had with EyeToy and SingStar. Nintendo has come along with a simpler machine that has massively outsold the Sony PS3 with the simple tactic of providing entertainment that is accessible to a lot more people. With hindsight it looks so obvious, but Sony missed it completely. As a result Nintendo made a fortune and Sony lost a fortune.
  • Sony have been stretched for cash. It has made losses. The technology in the PS3 has cost a fortune and it is almost certainly still making a loss on every machine sold. The company has been forced to raise new capital and to sell off bits of the company. So it has little room to manoeuvre. It cannot throw money at the PS3 problem. This whilst its two main competitors are rolling in money which they are both using to reinforce their positions.
  • Lack of exclusive content. Both competing machines have a lot more exclusive AAA content. This is a massive USP when the reason for buying these machines is to play content on them. Microsoft have invested heavily into a very impressive catalogue of exclusives and have managed to seduce some former major Sony exclusives into becoming cross platform. This alone has caused an immense shift in competitive advantage.
  • Sony has messed up very badly with online. This is a real killer and comes from it being a hardware company whilst Microsoft is a software company. So Microsoft understood the importance of online and invested massively in Live, and that investment is paying it back enormously. So it continues to invest and Live is becoming one of the biggest phenomenons ever in gaming. Giving customers a massive USP whilst generating a lot of revenue for Microsoft. And it is growing with almost unbelievable impetus, both in content and in users. The Sony competitor, Home, is still not released after multiple delays and is now several years behind. It will be nearly impossible for Sony to pull back such a huge lead.
  • Sony has huge, world class, divisions in many areas. Telephones, Film making, Portable Music (it invented this) and Console Gaming. Yet these divisions appear not to talk to each other. So a potential huge strength has become a weakness. The film division isn’t used to place all its unique IP on the consoles for instance. And outsiders who are less constrained can enter Sony’s markets and win. Hence the iPhone which could and should have been a Sony product yet instead has come from a company, Apple (NASDAQ:AAPL), that just a few years earlier had no stake whatsoever in consumer electronics.

With all that against the company, it is amazing that Sony has sold as many PS3s as it has. The reason it has done so is because of the impetus of the brand and the loyalty of a large section of its user base. The majority of console users have yet to upgrade to this generation, there is still a huge untapped market of non console households and we have yet to reach the $199 sweet spot when the bulk of sales occur.

So there is still hope for Sony, which is what the analysts are grasping for. The problem for Sony now is that the sheer weight of USPs is against them. A gulf that further widened this E3 where Nintendo and Microsoft forged ahead, whilst Sony were distinctly lacklustre.

Disclosure: None