Did Sony Botch The Playstation 4 Launch? A Different Opinion

| About: Sony Corporation (SNE)

Since Sony's (NYSE:SNE) launch of the Playstation 4, I have seen a couple of articles on Seeking Alpha that I would like to comment on and offer my opinion (the first by contributor Paulo Santos, and the second by contributor Jacob Steinberg).

Mr. Santos's Article and Negative Reviews of The Playstation 4 Launch

In his article, Mr. Santos theorizes that poor packing and shipping has lead to a rash of negative feedback regarding Playstation 4 complaints.

This screen capture of Amazon (NASDAQ:AMZN) reviews is taken from Mr. Santos's article.

To illustrate a point, the above screen capture was taken at approximately 2:20 PM, PST. Around 2 days or so elapsed between my screen capture and Paulo's, and we see that the number of 1 star reviews as a percentage dropped ~700 bps.

Looking at reviews from other retailers, we can see that the reviews on Amazon do not appear to be the norm.

Wal-Mart, out of only 5 ratings, has four 5 star ratings, with one 1 star rating, at the time of writing.

GameStop rates the PS4 an 8.6 out of 10, based on 112 reviews at the time of writing. And of the 112 reviews, only 7 reviews were rated at a 1 of 10, and of those seven reviews, only 3 of them sounded legitimate.

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Three major differences between Amazon and Wal-Mart/GameStop are that typically the latter 2 retailers are used for in-store pickup vice shipping, there are many more Amazon reviews, and Amazon provides insight as to whether or not the reviewer has been verified to actually have purchased the hardware.

Why Shipping Matters

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Luckily I have a PS4 handy, and can say first hand that it ships with a minimal amount of packing material. Rather than good ole' trusty Styrofoam, heavy duty cardboard is used to suspend the PS4 inside its carton, with another cardboard insert beside the PS4 to house cords and the controller and prevent the unit from shifting. There is not a lot of shock absorption offered by the packing materials.

If you read through Sony's troubleshooting guide on the forums, one of the fixes indicates trying to reseat the HDD to ensure it is connected properly. This indicates that the HDD could be jarred loose during shipping.

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So yes, I do agree that the packing for the PS4 was minimal, and the unit could benefit from some additional protection while shipping. However, in this regard I feel Sony also has some of the blame here, if it is found that improving packing material substantially decreases failure rates.

Scope of Problems

I am including this section in order to give a quick rundown of various problems users have reported. To quote the forum troubleshooting guide linked to above:

Here are some of the symptoms associated with blinking blue lights issue:

  • blue indicator light blinking
  • no video/audio output to television
  • console powering off after blinking blue

This blinking light issue could indicate any number of causes including but not limited to:
  1. TV compatibility
  2. Issues with PS4 power supply
  3. Issues with PS4 hard drive
  4. Issues with other PS4 hardware

Regarding the "BLOD" (blue light of death), the problems may be remedied by updating a TV's firmware, ensuring the female HDMI connector on the PS4 itself is in good shape, all wires are connected properly, and the HDD is properly seated. If these work, some of the HDDs have been found to be corrupt out of the box. If these fail and the consumer is unable to boot the PS4 in "safe mode," this is when the PS4 needs to be returned to Sony for repair.

The other issue is the "RLOD" (red light of death). This comes from overheating, and can be an issue if the fan on the PS4 is malfunctioning and the unit is unable to cool itself, or if the PS4 is operated in a poorly ventilated area. If the PS4 overheats and the indicator light on top turns red, it is recommended to turn the unit off, let it cool down, and ensure the area it is operating in is properly ventilated to remove waste heat, and then resume operation. If the unit continually overheats, contact Sony.

Mr. Steinberg's Article And The Issue With Drawing Hard Conclusions From Reviews

Looking at review data and drawing hard conclusions can lead to false assumptions. In order to explain why, I will review a few statistic definitions and look at a research report regarding consumer reviews.

According to Investopedia, a "representative sample" is defined as:

A subset of a statistical population that accurately reflects the members of the entire population. A representative sample should be an unbiased indication of what the population is like.

Again, according to Investopedia, "statistically significant" is defined as:

The likelihood that a result or relationship is caused by something other than mere random chance. Statistical hypothesis testing is traditionally employed to determine if a result is statistically significant or not. This provides a "p-value" representing the probability that random chance could explain the result. In general, a 5% or lower p-value is considered to be statistically significant.

Mr. Bruce Temkin of Temkin Data Group published a research report regarding consumer feedback (Source: Temkin Group via Wordpress).

Based on the chart above, you can see his research illustrates that consumers are more likely to report negative experiences over positive ones.

So to tie this all together, in order for a sample to be even remotely representative, you would first have to go through and weed out the "fanboy reviews." If you do not follow tech, for whatever reason some individuals feel inclined to either bash or promote certain products or companies. Reviews made by individuals that do not actually own the product would also have to be excluded.

Further, in order to prove statistical significance, after it has been determined that the sample is representative, there should be some sort of way to gauge a departure from a norm, and it would have to be shown that the deviation from that norm could not be accounted for simply by random variance.

And lastly, based on research reports that point to a tendency for reviewers to be more likely to leave negative feedback over positive, it becomes even harder to rely on initial reviews to judge long-term potential for a product. I believe this is evident in the increasing Amazon rating of the PS4 as more time elapses.

To establish a trendline, an article on Forbes shortly after the PS4 launch captured some of the Amazon customer review data, and states that of about 600 reviews, 260 carried a 1 star rating (43%; although I do not have a screenshot, this is inline with what I observed). When Mr. Santos gathered data for his article, 33% of the reviewers assigned a 1 star review. When I began writing this article, the percentage of 1 star reviews had further declined to 26.2%.

While simply writing this article (approximately 2 hours have elapsed since the screen capture I posted earlier in the article), the 26.3% has further declined to 25.9%.

In this light, I would be remiss if I didn't point out that there is not enough data from Wal-Mart and GameStop for those reviews to serve as anything more than anecdotal evidence.


Regarding the rash of negative reviews for the PS4 at launch, it looks like initially many of the problems could be corrected via better shipping and packing processes, and tighter quality control during assembly.

In my opinion, Sony smashed it out of the park with this launch. It has been stated that this is Sony's most successful launch ever. At a price of $399, it is far more accessible than the $600 PS3 was at launch. Sony's goal is 3 million units by year's end, and 5 million units sold by March of 2014, and the company has met 33% (or 20%, respectively) of this goal during the first 24 hours of sales.

An article on Wall Street Journal, which references TechInsights, claims Sony will gross about $100 in profit per unit, based on initial teardown (which is subject to change).

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While I believe the $100 per console may prove to be optimistic, (for example, $100 assumes that Sony is selling these units for $399, which leaves no room for retail markup) even if cut to $25 per console, this is a drastic departure from taking a substantial loss on each console sold when the PS3 launched. Unlike the PS3, the PS4 requires a subscription to Playstation+ in order to access online multiplayer features for games, which could drive incremental revenue growth for Sony. A year subscription for PS+ is $50.

I was initially alarmed by the number of negative reviews for the PS4, but only slightly. As an AMD (NASDAQ:AMD) long, I wanted to know the cause of the failures and ensure it wasn't anything detrimental. Using the Temkin report described above as a frame of reference, my game plan was to monitor reviews to find the reason for the negativity, as well as see if the trend improved (which it has). The article linked to earlier on Forbes details the difficultly in trying to accurately gauge a console's success due to the rise of social media.

To illustrate a point, here is part of my favorite 1 star review from Amazon (by an individual that is not a verified purchaser):

Everything was working great until it exploded and burnt my house down. According to the fire department they had a bunch of calls on launch day consoles blowing up and catching fire. My poor cat named Master Chief seems too have died a fiery death in the inferno. Rest in peace Master Chief you will be missed.

The above review is one of the ~660 1 star reviews received for the PS4 at time of writing, and shows that some of the reviews (both positive and negative) cannot be thrown out and will skew the data. And this is even more true of technology companies due to brand loyalty.

Pundits that claim this generation of consoles offer little reason to upgrade based on arguments such as resolution are only speaking in partial truths.

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To prove a point, the screenshots above are respectively of Battlefield 4 and Counter-Strike: Source (taken from my PC). The BF4 screenshot is taken at the lower resolution of 720p, whereas the CS:S screenshot is at 1080p. You'll notice much more detail in the textures and lighting in the lower resolution BF4 screenshot. Here is a video that further demonstrates the differences in graphical fidelity and gameplay. The extra processing power and memory of the new generation of consoles allows developers to add back in many of the effects that had to be taken out of the prior generation of consoles in order to make the games playable. Anecdotally, the first thing I noticed when playing the PS4 was more realistic lighting, and effects such as wind.

Both Sony and Microsoft, via AMD, have chosen to use less customized hardware this generation in order to try and not take a loss on each unit sold. The new consoles offer greater amounts of processing power and memory over the generation they replace, and are also built using standard PC hardware IP blocks, making the learning curve for developers more familiar.

This round of consoles is just getting started, so to declare victory or defeat for either the PS4 (or Microsoft's (NASDAQ:MSFT) Xbox One for that matter) so soon after launch seems short-sighted. One million units sold within the first 24 hours is nothing to scoff at. The Wii U has been used as an analogy to attempt to claim that console gaming is dying. The reasoning was that the Wii U had a fairly unsuccessful launch, and the PS3 and Xbox 360 sales were falling. I maintain that PS3/Xbox 360 sales were falling in preparation of this generation of consoles, and the Wii U appeals to a much smaller audience. The fact that the PS4 has sold 1 million units in the first 24 hours speaks to the pent up demand for new consoles.

I believe the more prudent stance is to monitor PS4 reviews and news to ensure that the number of units reported defective out of the box trends downward, and ensure failure rates do not rise as more hours get logged on the units. Regarding the Xbox One, a similar launch strength to the PS4 would be good news for AMD and both next generation console makers. With both Sony and Microsoft shooting to break even or profit at a per console level, and Sony's requirement to make a PS+ subscription mandatory for online gameplay, the revenue models for this generation will be different from the last, where profit came more from licensing of software sales on the backend. Also, similarly to my belief that the console should not be judged based on initial consumer reviews, I also believe launch strength could skew long-term projections. A strong launch and continued demand are both required to judge the success, and the later can only be done over time.

Disclosure: I am long AMD. 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 am long AMD both shares and options, and actively trade my position. I may add/liquidate shares/options at anytime.

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